Tuesday, June 21, 2011

NASAA Questions Registration Exemption for Private Equity Fund Advisers

The North American Securities Administrators Association (NASAA) has questioned provisions of the proposed Small Business Capital Access and Job Preservation Act (H.R. 1082) that would exempt private equity fund advisers from registration under the Investment Advisers Act of 1940. In the organization's recent comment letter to leaders of the House Financial Services Committee, NASAA observed that the bill would exempt advisers to private equity funds from registration or reporting requirements, while at the same time requiring these advisers to maintain records and provide reports as the SEC deems necessary and appropriate. Although acknowledging the congressional desire to facilitate job creation, NASAA believes that fundamental components of the bill are so vague as to undermine any purported benefits to small businesses.

First, NASAA noted that the legislation does not define the term "private equity fund" but rather delegates this task to the SEC, an undertaking which the SEC is required to complete within six months after the legislation's enactment. Although the bill appears to provide treat "private equity funds" similar to venture capital funds for exemptive purposes, without more specificity and a clear definition it is unknown what types of entities are covered by the exemption, NASAA stated. Accordingly, any assessment of risk to financial stability posed by these investments would be invalid absent clarification of what constitutes the universe of "private equity." In any event, NASAA wrote, it would be unwise to establish an exemption before defining what is covered by the exemption.

Second, NASAA stated that the bill is unclear as to what, if any, reporting requirements would be required for private equity fund advisers. NASAA referenced the language in the title of Section 2, "Registration and Reporting Exemptions Relating to Private Equity Fund Advisers," which appears to suggest that an adviser to a "private equity fund" would be exempt from both registration and reporting requirements, regardless of the adviser's assets under management. NASAA also believes that the proposed exemption contained in Section 203(o)(1) would likely have the unintended consequence of depriving the SEC of regulatory information critical for assessing risk and protecting investors.

Finally, NASAA observed that the bill's scope appears to cover all investment advisers who advise undefined "private equity funds." The exemption, therefore, would differ from exemptions established in the Dodd-Frank Act for advisers to private funds, which are limited to advisers who solely advise one type of fund. Accordingly, as drafted, the exemptions contained in the bill for advisers to private equity funds would exceed the limitations of the exemptions available to private funds and venture capital funds, NASAA wrote.