The full text of the Private Fund Transparency Act of 2009 has now been published (S. 1276). The press release from Senator Reed was nice, but I prefer to see the ink on the paper. So here is what I see n the Act:
The Act deletes the exemption from registration in Section 203 (b)(3) of the Investment Advisers Act and replaces it with an exemption for foreign investment advisers. The (b)(3) exemption was for investment advisers with fewer than 15 clients and did hold themselves out as investment advisers. This was the exemption most often used by private investment funds.
“The Commission is authorized to require any investment adviser registered under this title to maintain such records and submit such reports as are necessary or appropriate in the public interest for the supervision of systemic risk by any Federal department or agency, and to provide or make available to such department or agency those reports or records or the information contained therein.”
This is a broad empowerment of the SEC to demand any report that they feel may be a systemic risk. The act fails to define “systemic risk.”
Identity of Clients
The Act would strike subsection (c) of Section 210 of the Investment Advisers Act. That subsection prohibits the SEC from requiring the disclosure of an investment advisers clients (except in a SEC proceeding or enforcement action). So Senator Reed wants investment advisers to disclose their client lists and private investment funds to disclose their investors.
The Act would all the SEC to “ascribe different meanings to terms (including the term ‘client’) used in different sections” of the Investment Advisers Act. I am not sure what this change would do. I suspect it is an attempt to address the demise of the Hedge Fund Rule and allow the SEC to define the investors in private investment funds as “clients” of the fund manager. The courts had ruled that the SEC overstepped their authority when they tried this definition on their own.
This Act seems much more intrusive to private investment funds than the Hedge Fund Adviser Registration Act of 2009 or the Hedge Fund Transparency Act of 2009.
At this point, it is not clear which of these competing acts will end up becoming law, if any.