Obama Administration proposes investment adviser legislation to US Congress | Practical Law

Obama Administration proposes investment adviser legislation to US Congress | Practical Law

Obama Administration proposes investment adviser legislation to US Congress

Obama Administration proposes investment adviser legislation to US Congress

Practical Law UK Legal Update 7-422-1914 (Approx. 3 pages)

Obama Administration proposes investment adviser legislation to US Congress

by Nathan J. Greene and Steven R. Blau, Shearman & Sterling LLP
Published on 11 Aug 2009 • USA (National/Federal)
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The Obama Administration has submitted to Congress a six-page amendment to the Investment Advisers Act of 1940, proposing, among other things, removing or narrowing exemptions to registration for certain investment advisers and granting the SEC broad new powers. This article examines the key provisions of this proposed legislation.
On 15 July 2009, the Obama Administration continued its push to have its financial regulatory reform proposals enacted into law, submitting to Congress a six-page amendment to the US Investment Advisers Act of 1940 (Advisers Act). The proposed amendment, entitled the Private Investment Fund Advisers Registration Act of 2009 (Proposed Legislation), would, on its adoption, enact the Administration's proposed investment adviser reforms.
A principal effect of the Proposed Legislation would be to require advisers to private investment funds to register as investment advisers with the Securities and Exchange Commission (SEC). However, equally far reaching could be the Proposed Legislation's effect on other unregistered investment advisory businesses, especially those operated by non-US firms, and—depending on how it is used by the regulator in the future—the Proposed Legislation's grant of a broad interpretive and rule-making authority to the SEC.
Key provisions of the Proposed Legislation include:
  • Elimination of "private adviser" and other registration exemptions. The Proposed Legislation amends the Advisers Act to eliminate entirely the "private adviser" exemption (widely relied on by advisers to fewer than 15 clients).
    The Proposed Legislation also establishes that the "intrastate adviser" exemption and the exemption for certain registered commodity trading advisors should not be available to any firm that acts as an investment adviser to a "private fund" (the term is defined by the legislation).
    The effect of the changes as they relate to the private fund industry would not be limited to advisers to hedge funds and would also apply to advisers to venture capital funds and private equity funds (among others). The Proposed Legislation does not require private funds themselves to register with the SEC under the US Investment Company Act of 1940, as amended.
  • Effect on certain non-US investment advisers. The Proposed Legislation would retain only a narrow registration exemption for non-US investment advisers. An adviser will not qualify for the exemption if they:
    • have any place of business in the US;
    • have had 15 or more US clients within the last 12 months; or
    • have had assets under management for US clients worth more than US$25 million.
    It is not clear whether these counting clients and AUM thresholds will be measured on a "look-through" basis so as to count investors in private funds. However, if so, the Proposed Legislation could require SEC registration of non-US firms solely because they have US investors in non-US funds they manage.
  • Private investment fund reporting. The Proposed Legislation grants the SEC the authority to require any registered investment adviser to maintain records regarding the "private funds" it advises and submit reports to the SEC, as is necessary or appropriate in the public interest. The SEC also could require the registered adviser to provide such reports to a fund's investors, prospective investors, creditors, and counterparties.
    Because the scope of reporting would be left to the regulator, this is a potentially sweeping grant of authority.
  • Expanded SEC interpretive authority. The Proposed Legislation would expand the SEC's interpretive authority, including giving it the authority to ascribe a different meaning to any term used in different sections of the Advisers Act. The Proposed Legislation specifically grants the SEC authority to ascribe different meanings to the term "client".
    The provision is probably partly a response to Goldstein v SEC (Goldstein), the decision of a US Court of Appeals striking down the SEC's previous attempt to impose registration requirements on hedge fund advisers. The Goldstein court reasoned that the SEC prior hedge fund rulemaking wrongly would have ascribed different meanings to the term "client". The Proposed Legislation's broad grant of interpretive authority to the regulator indicates, however, that far more is at stake here than the mere overturning of Goldstein.
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