Tag: Private Fund Investment Advisers Registration Act

Amendments to the Private Fund Investment Advisers Registration Act

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Enacting legislation is often compared to making sausage. I don’t think that the Private Fund Investment Advisers Registration Act is exception. I spent some time watching the House Financial Services Committee hearing on passing the Private Fund Investment Advisers Registration Act.

There were 13 proposed amendments, 8 of which were agreed to by the Committee. I tried incorporating these amendments into the text to see what happened earlier this week.

You can see my attempt hosted on JD Supra

Here are some quick thoughts:

  • The exemption for venture capital funds was retained.
  • There is a new exemption for investment advisers of private funds with less than $150 million. (There was a rejected amendment trying to have this level at $500 million.)
  • There is a one year transition rule, postponing the registration requirement until one year after the Act is passed.

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Private Fund Investment Advisers Registration Act is Passed by House Committee

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The House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 by a vote of 67-1.

The press release summarizes the bill as “Everyone Registers. Sunlight is the best disinfectant.” But the text of the bill appears to still have an exclusion from registration for venture capital firms.

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Capital Markets Regulatory Reform: Enhancing Oversight of Private Pools of Capital

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Today, the House Committee on Financial Services heard testimony on Enhancing Oversight of Private Pools of Capital. This seems to be is response to the draft Private Fund Investment Advisers Registration Act. Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released a discussion draft of the bill.

This was likely to be a battle over who gets regulated. Congressman Kanjorski opened that door by including a registration exemption for “Venture Capital” funds, with no definition of what that means.

Panel Two—Enhancing Oversight of Private Pools of Capital

Rep. Paul E. Kanjorski emphasized that the committee wanted to works with the industry to impose regulations that would not burden the industry with lots of compliance costs.  His audience of fellow Congressmen was limited. There were more empty seats than Congressmen.

The panelists emphasized that the full burden of the Investment Advisers Act would inhibit the private fund industry. They also pointed out that many of the types of private pools of capital (other than hedge funds) do not have systemic risk and were not part of the cause of the financial industry issues.

The hearing did include a battle over whether there should be registration and who should be registered. “We only deal with sophisticated investors, we think we should be treated differently than retail investments.”

More on the Private Fund Investment Advisers Registration Act of 2009

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There are three and half bills in Congress for regulating private investment funds. The Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009 are all sitting in committee. The half is the proposal from the Obama administration: Private Fund Investment Advisers Registration Act of 2009. The Obama bill has not yet been submitted.

The National Venture Capital Association has been lobbying hard (or at least effectively) to get some changes in the bill before it is submitted. There is now new language in the bill that reads:

(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. 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.

Of course that still defers the very difficult task of defining a “venture capital fund” from the various types of private investment funds.

In a statement from Mark G. Heesen, president of the National Venture Capital Association:

“This proposal recognizes that venture capital firms do not pose systemic financial risk and that requiring them to register under the Advisers Act would place an undue burden on the venture industry and the entrepreneurial community. The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk.”

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Private Fund Investment Advisers Registration Act of 2009

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The Department of Treasury released its proposed legislation in increase the regulatory oversight on private investment funds: Private Fund Investment Advisers Registration Act of 2009. The Administration’s legislation would require that all investment advisers with more than $30 million of assets under management to register with the SEC.

This is presumably the Obama plan and becomes the fourth piece of legislation proposed this year to regulate private investment funds. It joins the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009.

Disclosures to the SEC:

The legislation would grant broad power to the SEC to require the disclosure of information about the fund “as are necessary or appropriate in the public interest and for the assessment of systemic risk by the Board of Governors of the Federal Reserve System and the Financial Services Oversight Council, . . ” This includes:

  • amount of assets under management
  • use of leverage (including off-balance sheet leverage)
  • counterparty credit risk exposures
  • trading and investment positions, and
  • trading practices

Of course is also requires the private fund to allow examinations by the SEC.

Disclosures to Investors:

The legislation would grant broad power to the SEC about the disclosures that need to made by private funds to investors, prospective investors, counterparties, and creditors, of any private fund.  The SEC would be able to require disclosure “as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”

Defining Clients (updated)

The legislation would all the SEC to “ascribe different meanings to terms (including the term ‘client’) used in different sections” of the Investment Advisers Act. This is an attempt to address the demise of the Hedge Fund Rule and allow the SEC to define the investors in private investment funds as “clients” of the fund manager. The courts had ruled that the SEC overstepped their authority when they tried this definition on their own.

I am not a big fan of this approach. The Act would better amending 203(b)(3) to exclude the new term “private fund” from the 15 client rule exemption. I don’t like the idea that a limited partner investor in a private fund could be deemed a “client” of the adviser in addition to the fund itself.

CFTC

The legislation calls for the SEC and CFTC to establish joint rules for investment advisers who are already subject to the CFTC and would now also be regulated by the SEC.

Summary

This legislation is very similar to the Private Fund Transparency Act of 2009 proposed by Senator Reed. It pushed most of the decision-making onto the SEC for the Commission to come up with the disclosure requirements. At this point, it is not clear which of the competing acts will end up becoming law, if any.

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