Proposed SEC Registration For Investment Advisers

Proposed SEC Registration For Investment Advisers

September 9, 2009

CHICAGO - “ As part of its financial regulatory reform efforts, the Obama Administration on July 15, 2009 proposed legislation that would effectively require all U.S.-based investment advisers with more than $30 million in assets under management to register with the Securities & Exchange Commission (SEC). Registration could trigger detailed record keeping and reporting.

The proposed Private Fund Advisers Registration Act of 2009 would affect managers of hedge, private equity and venture capital funds. Amending the Investment Advisers Act of 1940 in a number of ways, the proposed bill provides very narrow exemptions to registration for - œprivate advisers-  and investment advisers who manage a - œprivate fund- . Unless a U.S.-based investment adviser falls under one of these narrowly crafted exemptions or has less than $30 million under management, it would be required to register with the SEC regardless of whether it is managing one or many private funds or advising one or many clients.

The proposed legislation also provides the SEC with the authority to require reports from registered investment advisers. The information contained in these reports is to be determined by the SEC through its rulemaking process. Additionally, the proposal would require registered investment advisers to provide reports, records and other information (as determined by the SEC through rulemaking) to investors, prospective investors and others.

The proposed bill is part of the Obama Administration's regulatory reform efforts designed to address significant systemic risk to the stability of financial markets following the economic meltdown in 2008. Most observers believe that regulation of the larger private equity and hedge funds is a political fait accompli. Perhaps conceding the inevitable, the Private Equity Council (PEC) (which represents 12 of the largest private equity firms) supports the registration proposal. While it acknowledges that private equity does not pose a systemic risk to financial markets, it believes that excluding any asset class from the new regulatory regime could diminish confidence in its effectiveness.  In testifying before a U.S. Senate subcommittee, Mark Tresnowski (managing director and general counsel of Madison Dearborn Partners) articulated why private equity is not a systemic risk factor and cautioned that SEC registration would impose significant compliance costs (especially on smaller firms). Accordingly, he testified that any new registration requirements should be carefully calibrated - œ- ¦so the burdens are tailored to the nature and size of the individual firm and the actual nature and degree of systemic risk it may pose- .

Many in the venture capital industry, however, question the administration's effort to subject venture capital firms to SEC registration and corresponding compliance requirements. They cite the enormous compliance costs to smaller firms relative to any market risk they might pose. While the SEC initially estimated the cost of compliance at less than $10,000 per firm, firms commenting on the proposed registration estimate that costs will be closer to $200,000 per firm.

The National Venture Capital Association (NVCA) is opposed to including venture capital firms in regulation intended for other investment vehicles. Among other reasons for opposing the SEC registration for venture capital firms, the NVCA states that: - œ- ¦these firms are not interdependent with the world's financial system; the VC industry is insignificant in size relative to other alternative asset classes; VC firms do not use long-term leverage nor do they generally rely on short-term funding; and households, businesses and governments do not rely on VC firms as a source of credit or liquidity.- 

Many mid-sized private equity firms also question the need for SEC registration. They cite many of the same reasons noted by the NVCA. While the larger private equity firms appear to be supportive of the proposed registration, others may argue for a higher assets-under-management threshold as a trigger for SEC registration. Still others (most notably in the VC community) are likely to argue for a continued exemption from registration.

For more information on this and other key federal issues, please visit the IVCA's government affairs page. The following legal firms have provided links for information on federal issues:  Burke, Warren, MacKay & Serritella, P.C.; Katten Muchin Rosenman LLP; Kaye Scholer LLP; Kirkland & Ellis LLP; Latham & Watkins LLP; Mayer Brown LLP; Sonnenschein Nath & Rosenthal LLP; and Winston & Strawn LLP.