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Private Fund Investment Advisers Registration Act of 2009 Passes House Committee Vote

October 28, 2009

On October 27, the U.S. House of Representatives Committee on Financial Services approved the Private Fund Investment Advisers Registration Act of 2009 (to be reported as H.R. 3818) by a bipartisan vote of 67 to 1 (Rep. Ron Paul (R-TX) opposing). Although the passing of the bill brings the anticipated required registration for private fund advisers closer to reality, yesterday's amendments to the bill also bring the comfort of a one-year transition period before the bill becomes effective and certain limited exemptions. The material provisions of the bill are discussed below. 

If enacted as proposed, the bill would require investment advisers of certain unregistered investment companies to register with and provide information to the SEC. Rep. Paul Kanjorski (D-Pa.), Chairman of the House Financial Services Committee’s Capital Markets Subcommittee, introduced the bill on October 1, 2009. Similar to the Treasury bill introduced on July 15, 2009 (discussed in our July 16th Alert), Rep. Kanjorski's bill would eliminate the exemption currently in Section 203(b) of the Investment Advisers Act of 1940, as amended (Advisers Act), for investment advisers who during the course of the preceding 12 months have had fewer than 15 clients. In addition, the bill would impose additional ongoing requirements on registered private fund advisers, including:

  • Maintaining books and records and submitting reports regarding the private funds themselves;
  • Making certain disclosures to investors, prospective investors, counterparties, and creditors; and
  • Sharing information with the Board of Governors of the Federal Reserve System for the purpose of assessing the systemic risk of a private fund. 

Expanding on the Treasury bill, Rep. Kanjorski's bill would also:

  • Exempt from registration investment advisers to "venture capital funds," as such term is to be defined by the SEC, although investment advisers to such funds still would be required to maintain such records and provide to the SEC such annual or other reports as the SEC determines necessary or appropriate in the public interest or for the protection of investors. 
  • Authorize the SEC to require reporting of such additional information from private fund advisers as the SEC determines necessary—not just as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk. 
  • Authorize information sharing with any entity identified by the SEC as having “systemic risk responsibility”—rather than referring specifically to the Financial Services Oversight Council.

Before approval, the bill was amended multiple times in full Committee Markup as follows: 

  • Inclusion of Offshore Funds—The bill was amended to expand the definition of "private fund" to include offshore funds. Rep. Kanjorski, who offered the amendment to his own bill, stated that the point of the bill is to get an understanding of the total amount of capital—who has it and where it is—for assessing systemic risk. Rep. Kanjorski said including offshore funds would significantly increase the amount of capital for which the SEC would have systemic risk information. 
  • One-year Transition Period—As discussed above, the bill includes a one-year transition period before the bill's amendments to the Advisers Act become effective—meaning, private fund advisers would need to register and be compliant with all provisions of the Advisers Act within 1 year of the bill's enactment. The bill also directs the SEC to prescribe rules and regulations to permit voluntary registration prior to the effective date.
  • Exemption from Registration for Advisers to Funds with AUM of less than $150,000,000—The bill was amended by a compromise to provide an exemption from registration to any investment adviser of private funds, if each of such private funds has assets under management (AUM) in the U.S. of less than $150,000,000, although investment advisers to such funds still would be required to maintain such records and provide to the SEC such annual or other reports as the SEC determines necessary or appropriate in the public interest or for the protection of investors. The bill also directs the SEC when prescribing rules and regulations to carry out the bill's requirements, to take into account the size, governance, and investment strategy of mid-sized funds (those larger than $150,000,000) to determine whether they pose systemic risk, and must provide for registration and examination procedures with respect to advisers to such funds that reflect the level of systemic risk posed by such funds.  
  • GAO Study—The bill requires the Comptroller General of the U.S. to carry out a study to assess the costs on industry members and investors due to the registration and ongoing reporting requirements. Within the 2-year period of the bill's enactment, the Comptroller General must submit a report to Congress containing findings and determinations.
  • Exemption for SBICs—The bill provides an exemption from registration for small business investment companies licensed under the Small Business Investment Act of 1958. Unlike the exemptions provided for advisers to funds with AUM of less than $150,000,000 and venture capital funds, advisers exempt as SBICs would not be required to maintain records or provide reports to the SEC. Rep. Capito (R-W.Va.), who offered the amendment, stated that its intent is to alleviate SBICs from dual regulation—not to provide a loop hole.
  • Inflation Adjustment to Qualified Client Status—The bill provides for an inflation adjustment on any dollar amount test used for exempting certain persons from the compensation prohibition of Advisers Act Section 205(a)(1), such as the qualified client test. The adjustment must be made not later than 1 year after the bill's enactment and every 5 years thereafter. 

The bill now moves to the House floor for consideration.