Obama Administration to Increase Regulation of Private Equity and Venture Capital Funds
In the aftermath of the capital market, credit market and banking crises that have gripped the U.S. economy, President Obama and his administration have called for broad reforms of the American financial system. President Obama recently suggested that a “more vigorous regulatory regime” would restore confidence in the American financial system and attract foreign capital to U.S.-based investments. To that end, three notable bills have been introduced since Obama’s inauguration on January 20, 2009.
First, the Hedge Fund Transparency Act of 2009 (the “HFTA”) was introduced on January 29, 2009. The HFTA proposes to amend the Investment Company Act of 1940 (the “ICA”) to require funds with assets under management of $50 million or more to register with the Securities and Exchange Commission (the “SEC”), which could lead to mutual fund level disclosure and regulation for such funds. In addition, the HFTA would amend the ICA to impose more stringent anti-money laundering obligations on funds.
In its present form, the HFTA appears to apply not only to hedge funds, but also to private equity and venture capital funds and other types of funds that are currently deemed not to be “investment companies.”
Second, the Hedge Fund Adviser Registration Act of 2009 (the “HFARA”) was presented to the U.S. House of Representatives on January 27, 2009 and proposes to amend the Investment Advisers Act of 1940 (the “IAA”) in such a way as to require managers of private equity, venture capital and hedge funds with at least $30 million in assets under management to register with the SEC as investment advisers, regardless of the length of the fund’s lock-up period or how many clients the respective fund manager has.
Third, the Pension Security Act of 2009 (the “PSA”), also introduced on January 27, 2009, would amend the Employee Retirement Income Security Act of 1974 (“ERISA”) to require that defined benefit pension plans disclose the identity of the funds they have invested in as well as the amount invested in each. As presently written, this PSA requirement would apply to investments in hedge funds as well as private equity and venture capital funds.
In contrast to the proposed legislation, the final rule amending the IAA adopted by the SEC in 2005 in its efforts to regulate hedge funds by requiring managers of hedge funds with fifteen or more investors to register as investment advisers contained specific language excluding private equity and venture capital funds from the scope of the regulations.(1) It is unclear whether a similar carve-out will find its way into the respective final forms of the foregoing proposed legislation.
Coupled with the legislation proposed since President Obama’s inauguration, Treasury Secretary Timothy Geithner’s March 26, 2009 testimony to Congress has redoubled speculation with respect to the extent of the Obama administration’s plans to regulate the private equity and venture capital industries. In relevant part, Secretary Geithner stated:
Accordingly, we recommend that all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) with assets under management over a certain threshold be required to register with the [Securities and Exchange Commission][“SEC”]. All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements.
Most recently, in an April 28, 2009 speech at a North American Securities Administrators Association event, Representative Paul Kanjorski (D-Pa), a leading Democrat on the House Financial Services Committee and the Chairman of the Subcommittee on Capital Markets, Insurance and Governmental Sponsored Enterprises (the “Subcommittee”), stated that hedge funds, private equity funds and venture capital funds cannot “go totally uncontrolled.” Representative Kanjorski’s comments were further fleshed out in his opening statement at the hearing on perspectives on hedge fund registration held by the Subcommittee on May 7, 2009 in which he stated that while it is his “current view [that] hedge funds deserve a narrowly tailored regulatory treatment,” the fact that the Subcommittee’s current focus is on hedge fund regulation “should not be taken to mean that [the Subcommittee] will not revisit the need for oversight of other pools of unregulated capital, including private equity and venture capital.”
While the foregoing comments made by Secretary Geithner and Representative Kanjorski have yet to lead to proposals to specifically regulate private equity or venture capital funds, Troutman Sanders LLP has launched its Reregulation of Banking and Financial Services Team to actively monitor any future developments and to provide periodic updates in light of the Obama administration’s announcement that it intends to “re-regulate the way U.S. financial markets work.”
1 Registration Under the Advisers Act of Certain Hedge Fund Advisers, Release No. IA-2333; File No. S7-30-04. This rule was found to exceed the authority given to the SEC by Congress by the United States Court of Appeals for the D.C. Circuit in Goldstein v. U.S. Securities and Exchange Commission, 451 F.3d 873, Fed. Sec. L. Rep. (CCH) P 93890 (D.C. Cir. 2006).