Scorecard on Hedge Fund Registration Legislation
We’re not sure what inning it is, but the hits are coming in fast and furious when it comes to bill proposals for hedge fund registration. Just today, Chris Dodd released the discussion draft of the “Restoring American Financial Stability Act of 2009’’, which contains within it the ‘‘Private Fund Investment Advisers Registration Act of 2009’’. This follows the bipartisan bill actually passed by the House Financial Services Committee at the end of October entitled the “Private Fund Investment Advisers Registration Act”.
Some of the significant highlights, and key differences, are listed below. Note that there are other provisions of both bills that not addressed here.
1. Everyone registers? The Dodd proposal has a threshold of $100m assets under management, the House FSC bill an exemption for “small” funds under $150m. The Dodd proposal exempts both venture capital and private equity funds, the FSC bill only venture capital funds. Both contain similar language for capturing certain offshore advisers, however the Dodd proposal is broader in that it includes any offshore adviser with 10% or more of its securities owned by US persons. This 10% requirement does not appear in the FSC bill.
2. Reporting Requirements. Both bills contain similar requirements for funds to regularly report in certain basic information to the SEC, including information about the amount of assets under management; the use of leverage; counterparty credit risk exposures; trading and investment positions; and trading practices.
3. Update of Investor Qualifications. The Dodd bill contains provisions to continually update the “accredited investor” qualification standard to keep pace with inflation.
4. Further Study. The Dodd bill provides for the Comptroller to do a further study regarding the feasibility of a hedge fund “self-regulatory” agency, the state of “short-selling” in the market, and the appropriate level for the accredited investor standard.
5. Independent Custodian Requirement. The Dodd bill calls for an independent custodian to be used by hedge funds to hold client assets.
In addition, the Dodd proposal creates an entirely new agency, the “Agency for Financial Stability”, which would be charged with identifying and removing systemic risks from the system, including presumably, those presented by hedge funds (the House bill vests this responsibility with Federal Reserve). Like the House bill, the Dodd bill also calls for the creation of a consumer protection agency which would have oversight over financial products, also presumably including hedge funds.
We can’t really call a “winner” at this point, however we do see that all involved are extremely motivated to pass a piece of legislation in the near future. The Dodd bill can be viewed at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf. The Kanjorski bill can be viewed at: http://www.govtrack.us/congress/billtext.xpd?bill=h111-3818
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