Publications

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The proposed Hedge Fund Transparency Act, introduced by Senators Carl Levin (D-Michigan) and Charles Grassley (R-Iowa) on January 29, 2009, would subject funds holding at least $50 million in assets, including hedge funds, private equity, venture capital and other private funds, to increased regulation and oversight by the US Securities and Exchange Commission.

If enacted by Congress in its current form, the Transparency Act would require each hedge fund with assets under management of $50 million or more to:

a) Register with the SEC;

b) Maintain books and records as the SEC may require;

c) Cooperate with any request for information or examination by the SEC; and

d) File an electronic information form with the SEC annually, which would be made available to the public and would provide:

(i) the name and address of

(A) each natural person who is a beneficial owner of the fund;

(B) each company with an ownership interest in the fund; and

(C) the primary accountant and primary broker used by the fund;

(ii) an explanation of the ownership structure of the fund;

(iii) information on any affiliations between the fund and other financial institutions;

(iv) the total number of investors and the minimum investment commitment required of each such investor; and

(v) the current value of the assets of the fund or under management by the fund.

However, the scope of the registration and disclosure requirements may expand substantially beyond the items enumerated above, because the language of the proposal grants the SEC the broad authority to promulgate such rules and forms as it feels are needed to carry out the Transparency Act.

The Transparency Act would also require each hedge fund subject to registration as an investment company to establish an anti-money laundering program in compliance with applicable US law, including rules to be adopted by the Treasury Secretary.

Currently, hedge funds that qualify for an exemption from the definition of an “investment company” are not required to register with the SEC. The two exemptions most commonly relied upon by hedge funds that are not publicly offered are found in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940. Section 3(c)(1) exempts any such fund that has no more than 100 beneficial owners, and Section 3(c)(7) exempts any such fund in which all of the investors are “qualified purchasers.”

Support for the Hedge Fund Transparency Act and the chances for its passage by Congress are difficult to gauge at this time. Similar legislation proposed by Senator Grassley in 2007 failed even to be taken up for consideration by the Senate Banking Committee. More recently, however, leading members of President Barack Obama's economic team, most notably Treasury Secretary Timothy Geithner and SEC Chairman Mary Schapiro, have publicly expressed their support for a registration regime for hedge funds. That being said, we believe the likelihood of the Act passing in its current form is low.

The mandatory anti-money laundering program prescribed by the Transparency Act, however, appears less likely to be included in any final legislation that may be enacted. In November 2008, the Treasury Department formally withdrew its proposal for such programs for hedge funds and stated that further study of potential money-laundering risks with respect to hedge funds would be needed before any such regulations should be implemented. At that time, Representative Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, commented that many financial institutions were overly burdened by anti-money laundering regulations.

Please read the full text of the Transparency Act here.

We will alert you to further developments in the status of the Transparency Act as they occur.