Senators Grassley and Levin Introduce Hedge Fund Transparency Bill

Senators Charles Grassley (R-Iowa) and Carl Levin (D-Mich) have introduced S. 344, “The Hedge Fund Transparency Act of 2009.” The legislation seeks to close a loophole in securities law that allows hedge funds to operate under a cloak of secrecy. The bill would subject hedge funds managing $50 million or more to the same requirements under the Investment Company Act (“ICA”) as mutual funds, unless they comply with various requirements.

The bill would clarify current law to remove any doubt that the Securities and Exchange Commission (“SEC”) has the authority to require hedge funds to register, so the government knows who they are and what they’re doing. It would close the loophole previously used by hedge funds to escape the definition of an “investment company” under the ICA. Hedge funds that want to avoid the requirements of the ICA would be exempt only if they file basic disclosure forms and cooperate with requests for information from the SEC.

The senators said their legislation is needed because of a 2006 decision by the D.C. Circuit Court of Appeals in Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006 which overturned a regulation imposed by the SEC requiring hedge funds to register. The court in that case held that the SEC was going beyond its statutory authority and effectively ended all mandatory registration of hedge funds with the SEC unless and until Congress takes action.

This bill is a revised version of S. 1402, which Sen. Grassley introduced in the 110th Congress. While the previous bill amended the Investment Advisers Act of 1940, this bill amends the ICA. However, the purpose is the same: to make it clear that the SEC has the authority to require hedge fund registration. This version also adds a provision authored by Sen. Levin to require hedge funds to establish anti-money laundering programs and report suspicious transactions.

According to the senators, hedge funds typically avoid regulatory requirements by claiming the exceptions to the definition of an investment company contained in §3(c)(1) or §3(c)(7) of the ICA. This bill would remove those exceptions to the definition, transforming them to exemptions by moving the provisions, without substantive change, to new sections §6(a)(6) and §6(a)(7) of the ICA.

An investment company that satisfies either §6(a)(6) or §6(a)(7) will be exempted from the normal registration and filing requirements of the ICA. Instead, a company that meets the criteria in §6(a)(6) or §6(a)(7) but has assets under management of $50,000,000 or more, must meet several requirements in order to maintain its exemption. These requirements include:

•        1. Registering with the SEC.

•        2. Maintaining books and records that the SEC may require.

•        3. Cooperating with any request by the SEC for information or examination.

•        4. Filing an information form with the SEC electronically, at least once a year. This form must be made freely available to the public in an electronic, searchable format. The form must include:

a. The name and current address of each individual who is a beneficial owner of the investment company.

b. The name and current address of any company with an ownership interest in the investment company.

c. An explanation of the structure of ownership interests in the investment company.

d. Information on any affiliation with another financial institution.

e. The name and current address of the investment company’s primary accountant and primary broker.

f. A statement of any minimum investment commitment required of a limited partner, member, or investor.

g. The total number of any limited partners, members, or other investors.

h. The current value of the assets of the company and the assets under management by the company.

The SEC must issue forms and guidance to carry out this Act within 180 days after its enactment. The SEC also has the authority to make a rule to carry out this Act.

An investment company exempt under §6(a)(6) or §6(a)(7) must establish an anti-money laundering program and report suspicious transactions under 31 U.S.C.A 5318(g) and (h). The Treasury Secretary must establish a rule within 180 days of the enactment of the Act setting forth minimum requirements for the anti-money laundering programs. The rule must require exempted investment companies to “use risk-based due diligence policies, procedures, and controls that are reasonably designed to ascertain the identity of and evaluate any foreign person that supplies funds or plans to supply funds to be invested with the advice or assistance of such investment company.” The rule must also require exempted investment companies to comply with the same requirements as other financial institutions for producing records requested by a federal regulator under 31 U.S.C. 5318(k)(2).

Also See:

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