Tag: Private Fund Investment Advisers Registration Act

SEC Extends Deadline and Adopts Rules for Advisers and Private Funds

At an open meeting on June 22, the Securities and Exchange Commission adopted new rules under the Investment Advisers Act of 1940 aimed at investment advisers, private fund managers, venture capital funds, and family offices.

Based on the statements at the meeting, there will be three new rules would:

Delay Registration Deadline and a New Form ADV. The new registration/reporting deadline for new Advisers Act registrants and “exempt reporting advisers” will be March 30, 2012. Previously exempt private advisers, particularly those to hedge funds and private equity funds, will not be required to register until March 30, 2012. All advisers will be required to make a filing in the first quarter of 2012. Those previously registered advisers who no longer qualify for SEC registration will be required to withdraw by June 28, 2012.

The SEC staff pointed out that 2012 is a leap year, so the 90 day deadline is March 30 instead of March 31 in 2012.

Form ADV is going to change. No surprise. Under the amended adviser registration form, advisers to private funds will have to provide:

  • Basic organizational and operational information about each fund they manage, such as the type of private fund that it is (e.g., hedge fund, private equity fund, or liquidity fund), general information about the size and ownership of the fund, general fund data, and the adviser’s services to the fund.
  • Identification of five categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).
  • More information about conflicting or potential conflicting relationships.

Define Venture Capital Funds. Under the definition, a venture capital fund is a private fund that:

  • Invests primarily in “qualifying investments” (generally, private, operating companies that do not distribute proceeds from debt financings in exchange for the fund’s investment in the company); may invest in a “basket” of non-qualifying investments of up to 20 percent of its committed capital; and may hold certain short-term investments.
  • Is not leveraged except for a minimal amount on a short-term basis. Borrowing is limited in time as well.
  • Does not offer redemption rights to its investors.
  • Represents itself to investors as pursuing a venture capital strategy.
  • Is not registered under the Investment Company Act.

There will be a rule on grandfathering substantially as proposed in November, with the three conditions that the fund had been represented to be a “venture capital fund,” that the first closing was prior to December 31, 2010 and that no new capital commitments are made after July 21, 2011.

The new category of venture capital fund advisers and other “exempt reporting advisers” will file portions of Part 1 of Form ADV. Commissioner Schapiro noted that there was no current intention to subject exempt reporting advisers to routine examinations, while also noting that the SEC retains the authority to examine those advisers in its discretion. The Staff noted that the Form ADV will include a uniform calculation for “assets under management.”

Family Office Exemption. This exemption should be consistent with no-action relief previously provided and the proposed rule. It sounds like there will be some expansion to address a broader universe of permitted family clients and ta longer transition period (through December 31, 2013) for the termination of relationships with charitable entities that were not exclusively funded by the family.

These rules will have completed most of the rulemaking required under Title IV of Dodd-Frank, the Private Fund Investment Advisers Registration Act.

My printer is still cranking out the text of the new rules and I need to dive deeper into the details.

Sources:

Possible Extension to Registration for Private Fund Managers

Dodd-Frank put enormous pressure on the Securities and Exchange Commission to create dozens of new rules. Tile IV of the law, the Private Fund Investment Advisers Registration Act of 2010, shifts thousands of mid-sized investment advisers from federal to state registration. It also repeals the private adviser exemption, causing most private fund managers to register with the SEC.

Section 419 of Dodd-Frank pegs the transition period at one year. That means there is July 21, 2011 registration deadline. The SEC may be bending on that deadline for the registration of private fund advisers.

In an April 8, 2011 letter to the president of the North American Securities Administrators Association, the SEC indicated it may try to push back that July 21 deadline to the first quarter of 2012.

The letter states that the SEC intends to have the necessary rulemaking done by July 21. Of course, that means the subjects of the rules need to get in line. Since there is only three months until that deadline, the clock is ticking very loudly.

The SEC also needs to get the computer systems in place. Once the rules and forms are finished, they need to update the Investment Adviser Registration Depository System. Back in November, the SEC proposed big changes to the Part 1 of Form ADV to address these new registration and reporting requirements. The final form has not been released. I thought the release may have been because they were re-programming IARD to deal with the new form, allowing them to release the final Form ADV and the registration at the same time. According to this letter, that is not the case. The SEC does not expect IARD to be re-programmed until the end of 2011.

Obviously, this letter merely indicates that at least one person inside the SEC thinks the deadline could be extended. That is a long way from actually extending the deadline. I still have a question about whether the SEC can extend the deadline without some sort of legislative action.

Sources:

The Changing Standard for an Accredited Investor

As financial reform has made its way through Congress there have been several proposed changes to the standard of what it takes to be an accredited investor.

In 1982, the SEC prescribed the standard in Rule 501 of Regulation D:

5. Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;

6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

The Senate version of the bill would have increased both amounts. If you use the CPI index, the amounts would more than double.

Although the bill has not passed yet, but it looks like the accredited investor standard is going to change. Section 413 of the bill is Adjusting the Accredited Investor Standard.

The net worth standard will stay at $1 million for at least the next four years, but the value of the primary residence will be excluded from net worth. Otherwise the SEC will be tasked with a review of the definition of “accredited investor” and has a clean slate to develop its own definition. The SEC can revisit the definition every four years. The only standard is that the definition be “appropriate for the protection of investors, in the public interest, and in light of the economy.”

Looking into my crystal ball, I expect the SEC to adjust the income standards based on inflation. That would put them at around $459,000 if single and $688,000 if married. I would also expect the standard to include some sort investment expertise and knowledge standard. Having a big pile of cash or a big paycheck will likely no longer be the only standard.  At least that’s my guess.

Sources:

Updated pdf file with text of the Private Fund Investment Advisers Registration Act of 2010

Image: three horsemen of the apocalypse, greenspan, et al by daveeza

Final Text of the Private Fund Investment Advisers Registration Act of 2010

There is a lot happening in the Dodd-Frank Wall Street Reform and Consumer Protection Act. (Yes, that appears to be the agreed upon name of the financial reform bill.)

I’m most interested in its Title IV: Private Fund Investment Advisers Registration Act of 2010(.pdf).

The act will remove the current exemption from SEC registration for “small” investment advisers. If you have more than $30 million under management and fewer than 15 clients, you were exempt from registration with SEC under section 203(b)(3).

If the bill is enacted, that exemption will be removed and private fund managers will have to register. If the manager has more than $150 million under management they will register with SEC.

The final text of the Private Fund Investment Advisers Registration Act of 2010has been released.

The Senate-House Conference Committee has released all 2319 pages of the the final text of its conference report: Dodd-Frank Conference Report. I’ll get to the rest of it at some point.

As of this morning, it sounds like the bill is still short of the votes necessary to get it passed in the Senate. One of my Senators, Scott Brown, is unhappy with the new tax imposed by the too-big-to-fail regime. He would be vote 41 and could prevent a filibuster from stopping the bill from a final vote in the Senate.

Sources:

  • Conference Report on Private Fund Investment Advisers Registration Act of 2010.
  • Dodd-Frank Wall Street Reform and Consumer Protection Act conference report and votes from the House Financial Services Committee

Updated pdf file with text of the Private Fund Investment Advisers Registration Act of 2010

Accredited Investors under the Restoring American Financial Stability Act

Senator Dodd

One of the surprises in the Restoring American Financial Stability Act of 2010 is that it proposes to raise the standard for being an accredited investor. Section 412 of the bill would require the SEC to increase the dollar thresholds to be qualified as an accredited investor. Section 413 would require the GAO to study the appropriate criteria.

The current standards come from Section 2(a)15 of the Securities Act of 1933

ii. any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor under rules and regulations which the Commission shall prescribe.

In 1982, the SEC prescribed the standard in Rule 501 of Regulation D:

5. Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;

6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

If you adjust for inflation from 1982, those levels could increase to $459,000 if single and $688,000 if married, with the net worth requirement becoming $2.29 million. The bill is not clear on what to use as an inflation index. I used the Consumer Price Index for All Urban Consumers (CPI-U) comparing March 1981 (94.5) to February 2010 (216.741).

The Private Fund Investment Advisers Registration Act passed by the House in the Wall Street Reform and Consumer Protection Act of 2009 (H.R.4173) required the SEC to start increasing the asset levels. The Dodd bill (still not in the Thomas system) takes the issue on more forcefully.

The result is that there will be fewer investors for private investment funds. Under and , you are limited to 35 non-accredited investors in a private fund offering, with an unlimited number of accredited investors.

Sources:

Dodd’s Solo View on Private Investment Funds

Senator Dodd

Senator Dodd did not forget about private investment funds. Tucked into page 366 of his 1366 page Restoring American Financial Stability Act of 2010 is the Private Fund Investment Advisers Registration Act.

This is largely the same language in the Private Fund Investment Advisers Registration Act of 2009 contained in Dodd’s draft Restoring American Financial Stability Act of 2009. He circulated that draft back in November to start negotiations with Republicans.

Venture Capital Fund Advisers

There is an exemption from registration for the “provision of investment advice relating to a venture capital fund.” The bill gives the SEC the responsibility for defining a “venture capital fund.”

Private Equity Fund Advisers

Unlike the bill passed by the House, Dodd proposes an exemption from registration or reporting requirements with respect to advice given to private equity funds. The SEC is tasked with defining the term “private equity fund.”  Unlike venture capital funds, private equity funds will be subject to SEC record-keeping requirements to the extent the SEC determines it is “necessary and appropriate in the public interest and for the protection of investors.”

State versus Federal Registration of Investment Advisers

Section 410 of the bill raises the federal registration level to $100 million from $25 million. So investment advisers and funds of less than $100 million will be subject to state regulators instead of federal regulators. David Tittsworth, executive director of the Investment Adviser Association, said the change would shift about 4,200 of the 11,000 money managers now registered at the SEC to state regulation.

Accredited Investors

The Dodd bill would change the threshold for “accredited investor.” Currently, the threshold is $200,000 income for a natural person (or $300,000 for a couple) or $1,000,000 in assets. The SEC would have the power to increase those levels  as “appropriate and in the public interest, in light of price inflation since those figures were determined.”

The Comptroller General is also directed to study the financial thresholds for investor eligibility in private funds.

Regulation D Offerings

Separately in the bill, Senator Dodd is proposing to tinker with exemption from registration under Rule 506. Section 926 of his bill, gives the SEC the power to designate certain Rule 506 offerings to not be “covered securities.”  That would get the states more involved in the review and regulation of private offerings, including private fund offerings.

Now What?

This bill still has a long way to go in the Senate. Most reports indicate that private funds are not one of the hotly contested issues in the bill. Assuming the Senate passes the bill, they will need to negotiate the differences between the House and Senate. Assuming it passes, it looks like a big chunk of work would be dropped onto the SEC to define the fund types.

Sources:

House Passes Far-Reaching Bill Tightening Financial Rules

I'm just a bill from Schoolhouse Rock

Today, the House passed the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173 ), a week after it was introduced.

It looks it is a mashup of other bills that were being tossed around in the House to regulate the financial industry. According to Carl Husle of the New York Times, “After three days of floor debate, the House voted 223 to 202 to approve the measure. It creates a new agency to oversee consumer lending, establishes new rules for transactions that contributed to the meltdown, and seeks to reduce the threat that one or two huge companies on the verge of collapse could bring down the economy.”

Most likely, this bill will go up against the Dodd bill (in whatever form it ends up) in Congressional committee.

I looked at Title V of Wall Street Reform and Consumer Protection Act of 2009and found the Private Fund Investment Advisers Registration Act tucked neatly inside. It looks like it kept the all the Amendments to the Private Fund Investment Advisers Registration Act as it was passed by the House Financial Services Committee.

———————————–

TITLE V–CAPITAL MARKETS

Subtitle A–Private Fund Investment Advisers Registration Act

SEC. 5001. SHORT TITLE.

This subtitle may be cited as the ‘Private Fund Investment Advisers Registration Act of 2009’.

SEC. 5002. DEFINITIONS.

Section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)) is amended by adding at the end the following new paragraphs:

‘(29) PRIVATE FUND- The term ‘private fund’ means an issuer that would be an investment company under section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) but for the exception provided from that definition by either section 3(c)(1) or section 3(c)(7) of such Act.

‘(30) FOREIGN PRIVATE FUND ADVISER- The term ‘foreign private fund adviser’ means an investment adviser who–

‘(A) has no place of business in the United States;

‘(B) during the preceding 12 months has had–

‘(i) fewer than 15 clients in the United States; and

‘(ii) assets under management attributable to clients in the United States of less than $25,000,000, or such higher amount as the Commission may, by rule, deem appropriate in the public interest or for the protection of investors; and

‘(C) neither holds itself out generally to the public in the United States as an investment adviser, nor acts as an investment adviser to any investment company registered under the Investment Company Act of 1940, or a company which has elected to be a business development company pursuant to section 54 of the Investment Company Act of 1940 (15 U.S.C. 80a-53) and has not withdrawn such election.’.

SEC. 5003. ELIMINATION OF PRIVATE ADVISER EXEMPTION; LIMITED EXEMPTION FOR FOREIGN PRIVATE FUND ADVISERS; LIMITED INTRASTATE EXEMPTION.

Section 203(b) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(b)) is amended–

(1) in paragraph (1), by inserting ‘, except an investment adviser who acts as an investment adviser to any private fund,’ after ‘any investment adviser’;

(2) by amending paragraph (3) to read as follows:

‘(3) any investment adviser that is a foreign private fund adviser;’;

(3) in paragraph (5), by striking ‘or’ at the end;

(4) in paragraph (6)–

(A) in subparagraph (A), by striking ‘or’;

(B) in subparagraph (B), by striking the period at the end and adding ‘; or’; and

(C) by adding at the end the following new subparagraph:

‘(C) a private fund; or’; and

(5) by adding at the end the following:

‘(7) any investment adviser who solely advises–

‘(A) small business investment companies licensed under the Small Business Investment Act of 1958;

‘(B) entities that have received from the Small Business Administration notice to proceed to qualify for a license, which notice or license has not been revoked; or

‘(C) applicants, related to one or more licensed small business investment companies covered in subparagraph (A), that have applied for another license, which application remains pending.’.

SEC. 5004. COLLECTION OF SYSTEMIC RISK DATA.

Section 204 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-4) is amended–

(1) by redesignating subsections (b) and (c) as subsections (c) and (d), respectively; and

(2) by inserting after subsection (a) the following new subsection:

‘(b) Records and Reports of Private Funds-

‘(1) IN GENERAL- The Commission is authorized to require any investment adviser registered under this Act to maintain such records of and file with the Commission such reports regarding private funds advised by the investment adviser as are necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk as the Commission determines in consultation with the Board of Governors of the Federal Reserve System. The Commission is authorized to provide or make available to the Board of Governors of the Federal Reserve System, and to any other entity that the Commission identifies as having systemic risk responsibility, those reports or records or the information contained therein. The records and reports of any private fund, to which any such investment adviser provides investment advice, maintained or filed by an investment adviser registered under this Act, shall be deemed to be the records and reports of the investment adviser.

‘(2) REQUIRED INFORMATION- The records and reports required to be maintained or filed with the Commission under this subsection shall include, for each private fund advised by the investment adviser–

‘(A) the amount of assets under management;

‘(B) the use of leverage (including off-balance sheet leverage);

‘(C) counterparty credit risk exposures;

‘(D) trading and investment positions;

‘(E) trading practices; and

‘(F) such other information as the Commission, in consultation with the Board of Governors of the Federal Reserve System, determines necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.

‘(3) OPTIONAL INFORMATION- The Commission may require the reporting of such additional information from private fund advisers as the Commission determines necessary. In making such determination, the Commission, taking into account the public interest and potential to contribute to systemic risk, may set different reporting requirements for different classes of private fund advisers, based on the particular types or sizes of private funds advised by such advisers.

‘(4) MAINTENANCE OF RECORDS- An investment adviser registered under this Act is required to maintain and keep such records of private funds advised by the investment adviser for such period or periods as the Commission, by rule or regulation, may prescribe as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.

‘(5) EXAMINATION OF RECORDS-

‘(A) PERIODIC AND SPECIAL EXAMINATIONS- All records of a private fund maintained by an investment adviser registered under this Act shall be subject at any time and from time to time to such periodic, special, and other examinations by the Commission, or any member or representative thereof, as the Commission may prescribe.

‘(B) AVAILABILITY OF RECORDS- An investment adviser registered under this Act shall make available to the Commission or its representatives any copies or extracts from such records as may be prepared without undue effort, expense, or delay as the Commission or its representatives may reasonably request.

‘(6) INFORMATION SHARING- The Commission shall make available to the Board of Governors of the Federal Reserve System, and to any other entity that the Commission identifies as having systemic risk responsibility, copies of all reports, documents, records, and information filed with or provided to the Commission by an investment adviser under this subsection as the Board, or such other entity, may consider necessary for the purpose of assessing the systemic risk of a private fund. All such reports, documents, records, and information obtained by the Board, or such other entity, from the Commission under this subsection shall be kept confidential in a manner consistent with confidentiality established by the Commission pursuant to paragraph (8).

‘(7) DISCLOSURES OF CERTAIN PRIVATE FUND INFORMATION- An investment adviser registered under this Act shall provide such reports, records, and other documents to investors, prospective investors, counterparties, and creditors, of any private fund advised by the investment adviser as the Commission, by rule or regulation, may prescribe as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.

‘(8) CONFIDENTIALITY OF REPORTS- Notwithstanding any other provision of law, the Commission shall not be compelled to disclose any report or information contained therein required to be filed with the Commission under this subsection. Nothing in this paragraph shall authorize the Commission to withhold information from the Congress or prevent the Commission from complying with a request for information from any other Federal department or agency or any self-regulatory organization requesting the report or information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section.’.

SEC. 5005. ELIMINATION OF DISCLOSURE PROVISION.

Section 210 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-10) is amended by striking subsection (c).

SEC. 5006. EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3) is amended by adding at the end the following new subsection:

‘(l) Exemption of and Reporting by Venture Capital Fund Advisers- The Commission shall identify and define the term ‘venture capital fund’ and shall provide an adviser to such a fund an exemption from the registration requirements under this section (excluding any such fund whose adviser is exempt from registration pursuant to paragraph (7) of subsection (b)). The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.’.

SEC. 5007. EXEMPTION OF AND REPORTING BY CERTAIN PRIVATE FUND ADVISERS.

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3), as amended by section 5006, is further amended by adding at the end the following new subsections:

‘(m) Exemption of and Reporting by Certain Private Fund Advisers-

‘(1) IN GENERAL- The Commission shall provide an exemption from the registration requirements under this section to any investment adviser of private funds, if each of such private funds has assets under management in the United States of less than $150,000,000.

‘(2) REPORTING- The Commission shall require investment advisers exempted by reason of this subsection to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.

‘(n) Registration and Examination of Mid-sized Private Fund Advisers- In prescribing regulations to carry out the requirements of this section with respect to investment advisers acting as investment advisers to mid-sized private funds, the Commission shall take into account the size, governance, and investment strategy of such funds to determine whether they pose systemic risk, and shall provide for registration and examination procedures with respect to the investment advisers of such funds which reflect the level of systemic risk posed by such funds.’.

SEC. 5008. CLARIFICATION OF RULEMAKING AUTHORITY.

Section 211 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-11) is amended–

(1) by amending subsection (a) to read as follows:

‘(a) The Commission shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as are necessary or appropriate to the exercise of the functions and powers conferred upon the Commission elsewhere in this title, including rules and regulations defining technical, trade, and other terms used in this title. For the purposes of its rules and regulations, the Commission may–

‘(1) classify persons and matters within its jurisdiction based upon, but not limited to–

‘(A) size;

‘(B) scope;

‘(C) business model;

‘(D) compensation scheme; or

‘(E) potential to create or increase systemic risk;

‘(2) prescribe different requirements for different classes of persons or matters; and

‘(3) ascribe different meanings to terms (including the term ‘client’, except the Commission shall not ascribe a meaning to the term ‘client’ that would include an investor in a private fund managed by an investment adviser, where such private fund has entered into an advisory contract with such adviser) used in different sections of this title as the Commission determines necessary to effect the purposes of this title.’; and

(2) by adding at the end the following new subsection:

‘(e) The Commission and the Commodity Futures Trading Commission shall, after consultation with the Board of Governors of the Federal Reserve System, within 12 months after the date of enactment of the Private Fund Investment Advisers Registration Act of 2009, jointly promulgate rules to establish the form and content of the reports required to be filed with the Commission under sections 203(l) and 204(b) and with the Commodity Futures Trading Commission by investment advisers that are registered both under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) and the Commodity Exchange Act (7 U.S.C. 1 et seq.).’.

SEC. 5009. GAO STUDY.

(a) Study Required- The Comptroller General of the United States shall carry out a study to assess the annual costs on industry members and their investors due to the registration requirements and ongoing reporting requirements under this subtitle and the amendments made by this subtitle.

(b) Report to the Congress- Not later than the end of the 2-year period beginning on the date of the enactment of this title, the Comptroller General of the United States shall submit a report to the Congress containing the findings and determinations made by the Comptroller General in carrying out the study required under subsection (a).

SEC. 5010. EFFECTIVE DATE; TRANSITION PERIOD.

(a) Effective Date- This subtitle, and the amendments made by this subtitle, shall take effect with respect to investment advisers after the end of the 1-year period beginning on the date of the enactment of this title.

(b) Transition Period- The Securities and Exchange Commission shall prescribe rules and regulations to permit an investment adviser who will be required to register with the Securities and Exchange Commission by reason of this subtitle with the option of registering with the Securities and Exchange Commission before the date described under subsection (a).

SEC. 5011. QUALIFIED CLIENT STANDARD.

Section 205(e) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-5(e)) is amended by adding at the end the following: ‘With respect to any factor used by the Commission in making a determination under this subsection, if the Commission uses a dollar amount test in connection with such factor, such as a net asset threshold, the Commission shall, not later than one year after the date of the enactment of the Private Fund Investment Advisers Registration Act of 2009, and every 5 years thereafter, adjust for the effects of inflation on such test. Any such adjustment that is not a multiple of $1,000 shall be rounded to the nearest multiple of $1,000.’.

Private Fund Investment Advisers Registration Act Status

OpenCongress allows you to create custom widgets for the status of bills in Congress. I decided to play around and create one for the House version of the Private Fund Investment Advisers Registration Act.


I’ll create one for the Senate version once they formally introduce the Restoring American Financial Stability Act of 2009.

Fund Registration Act Will Cost the SEC $140 Million

CBO Congressional budget office

The Congressional Budge Office released a cost estimate of H.R. 3818, the Private Fund Investment Advisers Registration Act of 2009. Obviously, there will be an additional cost to fund managers that need to register with the SEC and operate under the SEC rules and oversight. There is also a real cost to the SEC (and therefore the taxpayers) for supervision of the newly regulated fund advisers.

The CBO estimates that the SEC will need an additional $140 million over the 2010-2014 period to implement the provisions of H.R. 3818. That means 150 employees new SEC employees by fiscal year 2011 to write regulations and undertake the additional examination and enforcement activities required by the bill. That’s about a 4 percent increase over the SEC’s 2009 staffing levels. The $140 million is to cover the cost of salaries and benefits, overhead, preparation of reports, and upgrades to information technology systems for the new employees.

The CBO report estimates that H.R. 3818 would result in 1,300 new registrations. That excludes venture capital funds which are exempted under this bill, but does include private equity firms that are exempted under the Senate version of the Private Fund Investment Advisers Registration Act. Doing the math, that results in $108,000 in additional costs for each new fund manager that registers.

On the manager side, the CBO estimates that it will only cost $30,000 for each fund manager to comply with Private Fund Investment Advisers Registration Act of 2009.

References:

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.pdf-icon

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.)

References: