Another Private Fund Registration Bill

I'm just a bill from Schoolhouse Rock

As expected, Senator Dodd introduced a comprehensive bill for revising the regulatory system for the U.S. financial services industry.
Restoring American Financial Stability Act of 2009.

You can tell its comprehensive because the discussion draft weighs in at 1,136 pages. I have not read all of it, but I did focus in Title IV: Regulation of Advisers to Hedge Funds and Others, also labeled as the Private Fund Investment Advisers Registration Act of 2009. This is apparently the Senate counter-proposal to the House version passed by the House Financial Services Committee at the end of October: Private Fund Investment Advisers Registration Act is Passed by House Committee.

What are some of the differences between the House bill and the Senate bill:

Exemption level. The Senate bill has a threshold of $100m assets under management, the House bill an exemption for “small” funds under $150m.

Venture Capital. The Senate bill exempts both venture capital and private equity funds, the House bill only venture capital funds. Neither bill makes any attempt to define a “venture capital fund” or a “private equity fund.”

Reporting Requirements. Both bills contain similar requirements for funds to regularly report in certain basic information to the SEC, including information about the amount of assets under management, the use of leverage, counter-party risk exposure etc.

Investor Qualifications. The Senate bill contain provisions to continually update the accredited investor qualification standard to keep pace with inflation.

Further Study. The Senate bill provides for a further study regarding the feasibility of a hedge fund self-regulatory agency, the state of short-selling in the market, and the appropriate level for the accredited investor standard.

Independent Custodian Requirement. The Dodd bill calls for an independent custodian to be used by hedge funds to hold client assets.

The Restoring American Financial Stability Act of 2009 would also create a single bank regulator, provide for self-funding the SEC, and establish a new consumer financial protection agency and install plethora of other changes.

What does this mean for the likelihood of mandatory registration of private investment funds? It’s much more likely. But the venture capital exception and private equity exception are potentially very big. Of course that will depend on how the SEC defines these terms. It also shows that the House and Senate are taking very different approaches to financial regulation. The House is looking at a series of small bills to fix some of the holes. The Senate is looking for a comprehensive change.

(Not to be a cynic, but Senator Dodd is up for re-election in 2010. I would guess that he is looking for a big new law to tie to his name and his re-election campaign. Not that it is bad. Just politics. Critics Question Dodd’s reform proposal.)

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