There has obviously been a lot of talk lately about hedge fund registration.  There are several bills that are currently pending in congress right now, so we thought that we would take this opportunity to summarize those bills and give you an idea of where things might ultimately land.  Additionally, we have provided links to more in-depth Summary Memo’s which provide more details on each bill.

Let’s start off with the bills in the U.S. Senate:

Hedge Fund Transparency Act of 2009, Senators Charles Grassley and Carl Levin

This bill would require hedge funds, private equity funds and VC funds with greater than $50M AUM to register with the SEC.  Such hedge funds would not be subject to all of the rules and regulations applicable to publicly offered registered investment companies (mutual funds), but they will be required to file an annual disclosure form with specific and detailed information about the fund that will be made publicly available, to maintain books and records required by the SEC, and to cooperate with any SEC information request or examination.

The Grassley-Levin Bill would dramatically change the application of the Investment Company Act of 1940, as amended (the “ICA”) to currently unregistered private investment funds relying on the exclusions from the definition of an investment company provided in Sections 3(c)(1) and 3(c)(7) — including funds whose investment managers are registered as investment advisers with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) — by making it clear that all such funds are “investment companies” within the meaning of the ICA; and, accordingly, are subject to the ICA’s requirements and SEC oversight absent an exemption.

Summary:

• Greater than $50M AUM would have to register with SEC
• The funds themselves would have to register under the Investment Company Act (limited registration)
• Funds would have to maintain books and records and file an annual disclosure form
• Read full Summary Memo

The Private Fund Transparency Act of 2009, Senator Jack Reed

The Private Fund Transparency Act of 2009 would amend Section 203(b)(3) of the Advisers Act.  Section 203(b)(3), which is more commonly known as the “private adviser exemption,” is the exemption upon which most (if not all) unregistered hedge funds managers currently rely to avoid registration with the SEC.

If passed, Senator Reed’s bill would delete Section 203(b)(3) in its entirety and replace it with the phrase “any adviser that is a foreign private adviser”, thus rendering the private adviser exemption unavailable for all private fund advisers unless they fit within the narrow definition of “foreign private adviser”. Under Senator Reed’s bill, a “foreign private adviser” is defined as an adviser that does not have a place of business in the United States, has had fewer than fifteen clients who are U.S. persons within the past twelve months, and have less than $25 million of assets under management attributable to client in the United States.

Summary:

• Greater than $30M AUM would have to register with SEC
• Exemption for foreign private advisers
• Provides the SEC with authority to collect risk-related information and to require advisers to maintain and share information
• Read full Summary Memo

Next, let’s take a look at the bill in the U.S. House of Representatives:

The Hedge Fund Adviser Registration Act of 2009, Representatives Michael Castle and Michael Capuano

The Hedge Fund Adviser Registration Act of 2009 contains only one sentence, striking in its entirety Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (the“Advisers Act”); however, if passed, the impact of this bill would be as significant as its text is brief.

Summary:

• All investment advisers would have to register with SEC
• No exemption for foreign private advisers
• Read full Summary Memo

The Obama administration also created their own proposed legislation (drafted by the U.S. Treasury Dept) that they delivered to Capitol Hill on July 16th.

Private Fund Investment Advisers Registration Act of 2009, Obama Administration

The main elements of this proposal are similar to the other congressional proposals outlined above.  It would remove the private adviser exemption and thereby require investment advisers with more than $30M AUM to register with the SEC.  This proposal defines what a “private fund” is and lays out specific areas that registered investment advisers would be subject to including periodic, confidential reporting requirements with respect to: assets, leverage, borrowing, counter-party risk and  off-balance sheet exposure of their private funds.

Summary:

• Investment advisers with greater than $30M AUM would have to register with SEC
• They would be subject to periodic, confidential reporting
• Disclosure and monitoring requirements
• Read the full Summary Memo

As you can see, there has been quite a bit of activity in regards to regulating hedge fund and other private fund managers.  Although no one knows for certain, based on the interest that Washington has shown in this area, most experts agree, that registration is now a matter of “when” not “if.”   The important thing for unregistered managers to do now is start thinking about the registration process and how they will build out and implement a solid compliance program.