Key Senator Circulates Discussion Draft of Bill Requiring Investment Advisers to Register and Report

On November 10, 2009, Sen. Christopher Dodd, chairman of the Senate Committee on Banking, Housing and Urban Affairs, circulated an 1136-page discussion draft proposing financial reform legislation.  The discussion draft contains legislation relating to many of the focus areas originally contemplated by the Obama administration’s white paper on financial regulatory reform earlier in the year, including a proposed Senate version of the Private Fund Investment Advisers Registration Act (the “Dodd Discussion Draft”). 

Like the earlier investment adviser registration legislation proposed by the Obama administration (the “Obama Version”) and the version of the Private Fund Investment Advisers Registration Act of 2009 introduced in the U.S. House of Representatives and approved by the House Financial Services Committee (the “House Version”) in October, the Dodd Discussion Draft would, if enacted, (1) require many investment advisers to register with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 (“Advisers Act”) by removing the exemption for investment advisers to fewer than 15 clients in the preceding 12 months that do not hold themselves out publicly as an investment adviser (the “15 Client Exemption”), (2) broaden reporting requirements for investment advisers to private funds and (3) expand the SEC’s discretion to interpret the Advisers Act.  The Dodd Discussion Draft, however, differs from the House Version and the Obama Version in several of its details, such as SEC reporting requirements for side letters and disclosure requirements to third parties.  The Dodd Discussion Draft would exempt several categories of investment advisers from some or all requirements, including certain foreign investment advisers and investment advisers to venture capital funds (as with the House Version) and also private equity funds and family offices.  The Dodd Discussion Draft would raise the minimum threshold for federal registration of investment advisers that are subject to state regulation from $25 million to $100 million of assets under management (AUM).

Comparison to Other Versions

The Dodd Discussion Draft differs from the Obama Version (previously discussed in our alert here) and the House Version (previously discussed in our alert here) in many of its significant details, which are set out in the chart below.

Comparison of Significant Differences Among Proposed Financial Reform Legislation

  Obama Version House Version Dodd Discussion Draft

Exemptions from registration

* No exemption provided from record keeping or reporting requirements

 

Would provide exemption for investment advisers with no office in the United States that would meet the current criteria for the 15 Client Exemption and have less than $25 million in AUM related to clients in the U.S. (“Foreign Private Advisers”)

Would provide exemptions for (i) advisers only to small business investment companies, (ii) advisers to venture capital funds (to be defined by the SEC),* (iii) advisers to “private funds” with less than $150 million in AUM* and (iv) Foreign Private Advisers

Would provide exemptions for (i) advisers to venture capital funds, (ii) advisers to private equity funds (to be defined by the SEC),[1] (iii) advisers to family offices (to be defined by the SEC), (iv) advisers that are regulated or required to be regulated by a state authority in which they are domiciled with less than $100 million in AUM and (v) Foreign Private Advisers[2]

Information required to be disclosed to the SEC for each “private fund”

Would require reporting of (i) AUM of the private fund, (ii) use of leverage, (iii) counterparty credit exposure, (iv) trading and investment positions, (v) trading practices and (vi) other information determined by the SEC 

Would require reporting of information in the Obama Version but also expressly allows the SEC to set different filing types for different private funds

Would require reporting of information in the Obama Version and (i) valuation methodologies of the private fund, (ii) types of assets held and (iii) side arrangements or side letters

Disclosure to investors, prospective investors, counterparties and creditors

Would require disclosures of reports, records and other documents as the SEC determines

Same as Obama Version

No requirements

Investor qualification standards

None required

Would require inflation adjustment for the financial thresholds in Rule 205-3 under the Advisers Act (the “qualified client” threshold for charging compensation based on capital appreciation) and every five-year period going forward

Would require adjustment for the financial thresholds for accredited investors that are natural persons in accordance with the rate of price inflation since the date those figures were last determined and every five-year period going forward

Flexibility of the SEC to define terms used in the Advisers Act

Would permit the SEC to classify persons and matters as within its jurisdiction and to “ascribe different meanings to terms (including the term ‘client’) used in different sections. . . ” of the Advisers Act

Would permit the SEC to classify persons and matters as within its jurisdiction based on (i) size, (ii) scope, (iii) business model, (iv) compensation scheme or (v) the potential to create or increase systemic risks and to “ascribe different meanings to terms (including the term ‘client’) used in different sections. . . ” of the Advisers Act; but would prohibit the SEC from defining “client” to include an investor in a private fund

Same as Obama Version

Transition period

None provided

New requirements would be effective one year after enactment

None provided

Changes to custody requirements

None provided

Companion legislation (the Investor Protection Act of 2009) would require the SEC to prohibit a registered investment adviser from having custody of assets in excess of $10 million unless the assets are maintained with a qualified custodian that does not provide investment advice with respect to those assets

Would require the SEC to promulgate rules requiring registered investment advisers to hold assets with an independent custodian

Definition of “private fund”[3]

Would include issuers that would be an investment company under the Investment Company Act of 1940 if it were not for Sections 3(c)(1) or 3(c)(7) (i.e., hedge funds, private equity funds and venture capital funds) if either the issuer is organized in the United States or is owned 10 percent or more by U.S. persons

Would include all issuers that would be an investment company under the Investment Company Act of 1940 if it were not for Sections 3(c)(1) or 3(c)(7)

Same as Obama Version

 

Conclusion

Now that the Senate Committee on Banking, Housing and Urban Affairs has distributed its draft of the Private Fund Investment Advisers Registration Act, required SEC registration for many investment advisers seems likely in the near future.  We will continue to monitor and provide updates as significant developments occur in the legislative process.

To view a comparison of the House Version to the Dodd Discussion Draft, please click here.  To view a comparison of the Obama administration’s version of registration legislation to the Dodd Discussion Draft, please click here.

 


[1] Advisers to private equity funds would be subject to separate record keeping and reporting requirements.

[2] The 12-month look back for determining the number of clients for Foreign Private Advisers does not apply in the Dodd Discussion Draft.

[3] Under all versions of the Private Funds Investment Advisers Registration Act, the additional record keeping and reporting requirements relate only to advisers to private funds.

CONTACT INFORMATION

If you have any questions regarding this alert, please contact—

Mark H. Barth

mbarth@akingump.com 212.872.1065 New York
David M. Billings dbillings@akingump.com 44.20.7012.9620 London

Barry Y. Greenberg

bgreenberg@akingump.com 214.969.2707 Dallas
Prakash H. Mehta pmehta@akingump.com 202.887.4248 Washington, D.C.
Eliot D. Raffkind eraffkind@akingump.com 214.969.4667 Dallas
Simon Thomas swthomas@akingump.com 44.20.7012.9627 London
Stephen M. Vine svine@akingump.com 212.872.1030 New York