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Proposed Legislation: Hedge Fund Transparency Act of 2009
February 19, 2009
On January 29, 2009, Senators Charles Grassley and Carl Levin introduced the Hedge Fund Transparency Act of 2009 (the “Bill”). The stated intent of the Bill is to remove any uncertainty that hedge funds are subject to regulation by the SEC. However, as drafted, the Bill would apply not just to hedge funds but also to venture capital funds and private equity funds.
Investment Company Act of 1940
Currently, most hedge, venture capital and private equity funds rely on exemptions under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 (the “Company Act”) in order to avoid registration under the Company Act. Company Act registration is the complex regulatory scheme that applies to the mutual fund industry, which is generally not a practical option for a private fund. Section 3(c)(1) of the Company Act exempts any issuer (i) that has less than 100 beneficial owners and (ii) that did not make or does not propose to make a public offering of securities. Section 3(c)(7) of the Company Act exempts any issuer that sells securities only to “qualified purchasers.”
If the Bill is passed in its current form, any hedge fund, venture capital fund or private equity fund with “assets, or assets under management,” of at least $50 million would be required to (i) register with the SEC, (ii) maintain books and records as required by the SEC, and (iii) disclose certain information to the SEC, which, as drafted, would include the valuation of the fund and the name and address of each person with a beneficial interest in the fund.
Investment Advisers Act of 1940
Similarly, advisers to venture capital funds and private equity funds (such as a general partner of a limited partnership investment fund) avoid regulation under the Investment Advisers Act of 1940 (the “Advisers Act”) by relying on Section 203(b)(3) of the Advisers Act. Section 203(b)(3) exempts an adviser if such adviser (i) advises less than fifteen (15) clients and (ii) does not advise a company that is registered under the Company Act.
If the Bill is passed in its current form, this exemption would no longer be available to advisers that advise a company with “assets, or assets under management,” of at least $50 million.
Status of the Hedge Fund Transparency Act of 2009
Please note that the Bill is proposed legislation that may or may not be enacted, and could undergo significant changes as it is debated and goes through the legislative process. However, it seems clear to us that over the next year, at least some sort of disclosure regulations will be imposed on hedge funds. Further, given the difficulty in making legal distinctions between hedge funds and other types of private investment funds, it would not surprise us if all such funds above a certain size are regulated in the future.