Senator Will Reintroduce in 111th Congress Bill Requiring SEC Registration of Hedge Fund Advisers
Sen. Charles Grassley said that he would reintroduce in the 111th Congress a bill requiring hedge fund advisers to register with the SEC, effectively providing a legislative override of the federal appeals court Goldstein ruling. He said that the bill would be modeled on the Hedge Fund Registration Act, S. 1402, that the senator introduced in May of 2007. That legislation was referred to the Senate Banking Committee but never brought up for consideration.
The Grassley bill would authorize the SEC to require all investment advisers, including hedge fund managers, to register with the SEC. The bill would, however, exempt investment advisers who manage less than $50 million, have fewer than fifteen clients, do not hold themselves out to the public as investment advisers, and manage the assets for fewer than fifteen investors, regardless of whether investment is direct or through a pooled investment vehicle, such as a hedge fund.
Specifically, the bill would amend section 203(b)(3) of the Investment Advisers Act to narrow the current exemption from registration for certain investment advisers. This exemption is used by large, private pooled investment vehicles, commonly referred to as hedge funds. According to Sen. Grassley, who is the Ranking Member on the Finance Committee, hedge funds are operated by advisors who manage billions of dollars for groups of wealthy investors in total secrecy. They should at least have to register with the SEC, he emphasized, like other investment advisers do.
Currently, the exemption applies to investment advisers with fewer than fifteen clients in the preceding year and who do not hold themselves out to the public as an investment adviser. The Hedge Fund Registration Act would narrow this exemption and close a loophole in the securities laws these hedge funds use to avoid registering with the SEC and operate in secret.
According to Sen. Grassley, Congress needs to act because of the appeals court decision, which struck down as arbitrary an SEC rule that required registration of hedge fund advisers. The appeals panel rejected the SEC’s suggestion of counting the investors in the hedge fund as clients of the fund’s adviser within the statute’s meaning of clients in order to get over the statutory client level. (Goldstein v. SEC, CA DofC 2006). That decision effectively ended all registration of hedge funds with the SEC, unless and until Congress acts.
Sen. Grassley explained that the Hedge Fund Registration Act would respond to that court decision by narrowing the current registration exemption and bringing much needed transparency to hedge funds. He views the Act as a first step in ensuring that the SEC simply has clear authority to do what it already tried to do, adding that Congress must act to ensure that federal securities law is kept up date as new types of investments appear. Noting estimates that these pooled investment vehicles account for nearly 30% of the daily trades in U.S. financial markets, the legislator emphasized that Congress must ensure that the SEC knows who is controlling these massive pools of money in order to ensure the integrity and security of the markets.