Wednesday, June 09, 2010

House-Senate Conference Must Reconcile Differing Versions of Hedge Fund and Private Fund Adviser Regulation

As House-Senate conferees begin meeting this week to reconcile two different versions of financial reform legislation, there are a number of important differences in the regulation and registration of hedge fund and private equity fund advisers to reconcile. Both bills would require advisers to hedge funds to register with the SEC, making them subject to record keeping, examination, and disclosure requirements. But the House bill carves out an exemption for smaller funds with assets under management of less than $150 million.

House and Senate bills bring the hedge fund advisers under SEC regulation by eliminating the exemption in section 203(b)(3) of the Investment Advisers Act for advisers with fewer than fifteen clients. Under current law, a hedge fund is counted as a single client, allowing hedge fund advisers to escape the obligation to register with the SEC. Both bills create an exemption for foreign private advisers with assets under management of less than $25 million, but the House bill has a 12-month look back requirement. Both bills add a limited intrastate exemption.

A major difference to be reconciled is that the Senate bill exempts private equity fund advisers, but the House bill includes such advisers in the registration requirement. The Senate does require private equity fund advisers to maintain records and provide reports to the SEC as the Commission determines necessary in the public interest for investor protection. Similarly, the House requires private fund advisers exempt under the $150 million assets under management test to maintain records and provide reports to the SEC.

Both the Senate and House bills grant a registration exemption to advisers to venture capital funds. But the House, not the Senate, requires such advisers to maintain records and provide reports to the SEC.

Both bills require the SEC to direct the investment advisers to maintain and report on certain information, including the amount of assets under management, the use of leverage, counterparty credit risk exposures, trading and investment positions, and trading practices. The Senate bill adds valuation policies of the fund and side arrangements or side letters to the list of required information. Both bills include a catchall for such other information that the SEC determines necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk. In making such a determination, the House bill directs the SEC to consult with the Fed, while the Senate bills directs consultation with the Financial Stability Oversight Council.

Both bills erect a confidentiality regime for proprietary information. Both bills define proprietary information to include sensitive, non-public information regarding the investment adviser’s investment or trading strategies, analytical or research methodologies, trading data, computer hardware or software containing intellectual property, and any additional information that the Commission determines to be
proprietary.

In a major difference, the Senate bill, but not the House, exempts family offices, which generally provide investment advice in the course of managing the investments and financial affairs of one or more generations of a single family. Since the enactment of the Investment Advisers Act, the SEC has issued orders to family offices declaring that those family offices are not investment advisers within the intent of the Act and thus not subject to registration. The legislation essentially codifies the SEC position by excluding family offices from the definition of investment adviser under Section 202(a)(11) of the Advisers Act.

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