On January 29, 2009, Senators Chuck Grassley (Iowa) and Carl Levin (Michigan) introduced the Hedge Fund Transparency Act of 2009 (the "HFTA," S. 334 of the 111th Congress). The bill is aimed at closing a loophole in securities law that allows hedge funds to operate without considerable supervision. If passed, it will have a significant effect on not only hedge funds but also many private equity buyout funds, venture capital funds, structured finance vehicles and even some real estate funds.
The proposed legislation recommends an amendment to the Investment Company Act of 1940 ("ICA"), with the purpose of modifying current exceptions to authorize SEC registration of hedge funds and require hedge funds to implement anti-money laundering programs as well as report suspicious transactions. Ultimately the goal is to clarify that the SEC has legislative authority to oversee and supervise these private funds. This proposed legislation is being considered by the Senate Committee on Banking, Housing and Urban Affairs.
SEC Registration of Hedge Funds
Definition of an "InvestmentCompany" Hedge funds have avoided SEC registration by claiming to be exceptions from the definition of an "investment company" in Section 3(c) of the ICA. The legislation proposes deleting the relevant provisions of Section 3(c), which removes the asserted bases for excluding hedge funds from the registration requirements. Instead, the Section 3(c) provisions in question would be relocated in the ICA to Section 6(a), where they will be transformed into "exemptions" that must be maintained by meeting specific requirements.
The New ICA Exemptions The HFTA proposes creating new ICA Section 6(a)(6) and Section 6(a)(7), which will track the deleted provisions of Section 3(c) that would exempt investment companies from the standard filing and registration requirements if certain conditions are met. For large investment companies covered by Section 6(a) with managed assets of $50,000,000 or more, the exemption would only apply where the investment company:
registers with the SEC
files an information form with the SEC
maintains Books and Records as the SEC may require
cooperates with any request for information or examination by the SEC
The New Information Form The requirements of the SEC information form will include:
a filing at least once every year
name and current address of the beneficial owners of the investment company
name and current address of companies with ownership interests in the investment company
name and current address of the primary accountant and primary broker used by the investment company
an explanation of the structure of ownership interests in the investment company
information on affiliations by the investment company with any other financial institution
a statement of minimum investment commitments required of a limited partner, member or other investor
total number of limited partners, members or other investors
current value of the investment of the investment company and any assets managed by the investment company
Anti-Money Laundering Obligations
General Purpose Investment companies exempted under Sections 6(a)(6) and (7) are required to establish an anti-money laundering program and report suspicious transactions under 31 U.S.C.A. Section 5318(g) and (h).
Rulemaking The Secretary of the Treasury is authorized to create a Rule establishing policies, procedures and controls of the anti-money laundering program. The contents of the rule must include that the exempted investment company:
employs risk-based due diligence procedures and control to identify and evaluate any foreign person, corporation, partnership or other foreign entity supplying or planning to supply funds to be invested with the advice or assistance of the investment company
complies with the requirements on financial institutions to produce records, as is required by 31 U.S.C.A. Section 5318(k)(2)
Publication Date The Secretary of the Treasury must propose the Rule at least 90 days after enactment of the HFTA and issue the Rule at least 180 days after enactment of the Act.