US Regulatory Developments

As you will be aware, AIMA has recently reiterated its support for the proposed registration of hedge fund managers in the US in the interests of financial stability. The move comes as the Private Fund Investment Advisers Registration Act of 2009 won support from the House Financial Services Committee.

In its initial form, the bill, should it have become law, could have had implications for UK fund managers responsible for funds that have U.S. investors or that have a business relationship with the U.S. Various subsequent amendments have diluted the potential impact, although some U.K. managers could still be affected. As such, a summary of where matters currently stand may be useful.

Legislation was proposed mid July. At that time, proposed amendments to the Investment Advisers Act 1940 included removal of an exemption that allowed U.S. investment advisers to not register with the SEC if they had less than 15 clients; removed the ‘same State’ exemption for investment advisers to a private fund; and introduced to that Act the definition of a ‘private fund’.

The latter captured entities that previously would not have been categorised as investment companies under the Investment Company Act 1940. The existing $30m assets under management level for mandatory registration with the SEC would remain.

However an exemption was put in place for ‘foreign private fund advisers’ who: have no place of business in the U.S.; have fewer than 15 U.S. clients; assets under management attributable to U.S. clients are less than $25m; and do not hold themselves out as investment advisers in the U.S.

A concern at the time was the power being given to the SEC to define ‘client’ i.e. up to now (based on the Goldstein decision) ‘client’ was at fund level; the bill would allow the SEC to regard investors in a fund as a ‘client’.

By the time it had been approved by the House Financial Services Committee, on a 67 to 1 majority vote, in October, 8 out of 13 proposed amendments had been made to the Bill.

Amendments to note:

The very first amendment was perhaps crucial to the success of the Bill; the Bill had quoted the non-existent Investment Advisers Act of 1934.

The amendment to section 8 confines the definition of ‘client’ to fund level not investor level.

Section 10 would allow a 1 year transitional period for affected investment advisers from the date of enactment.

Arguably the most important amendment is the introduction of section 7. In this, the requirement to register with the SEC would not apply for advisers with assets under management in the U.S. of less than $150m – the threshold seems to apply per fund managed and not per fund manager. Note that there would be a requirement to maintain records and to provide the SEC with annual or ‘other reports’.

To complicate matters, Senator Chris Dodd, Chairman of the Senate Banking Committee, issued a 1,136 page financial regulatory reform bill. Page 291 looks familiar as it cites ‘Title IV’ as the ‘Private Fund Investment Advisors Registration Act 2009’. However differences include (page 301) an exemption from the registration and reporting requirements being given to investment advisers relating to a private equity fund.

The message for now is that it seems likely that ‘something’ will be passed to become law that will concern private funds/private fund advisers/venture capital fund advisers, but there is still some way to go before the final detail is known.

This link illustrates the Bill with the agreed amendments inserted:

If you want to see Senator Dodd’s discussion paper then please use the following link: