Proposed US law would force fund disclosures

A Senate bill sponsored by Chuck Grassley and Carl Levin would require all private funds to publicly disclose the identities of their LPs, as well as the value of their assets under management, if the bill passes.

Last week Senators Chuck Grassley and Carl Levin introduced the Hedge Fund Transparency Act, a bill that would require private funds with $50 million or more in assets – including hedge funds, private equity funds and venture capital funds – to register with the Securities and Exchange Commission.

The bill would affect funds that rely on Sections 3(c)1 or 3(c)7 of the Investment Company Act. In order to remain exempt from registering as an investment company, such funds would have to register with the SEC, maintain such books and records as the SEC may require, and cooperate with any request for information or examination by the SEC.

Under the proposed law, funds would also have to file an information form including the name and address of each owner of the fund, the primary accountant and primary broker used by the fund, an explanation of the structure of ownership in the fund, information on any affiliation that the fund has with another financial institution, a statement of any minimum investment commitment required of a limited partner, the total number of any limited partners, and the current value of the assets of the fund and any assets under management by the fund. The SEC would make this publicly available in an electronic, searchable format.

It is unclear to what extent the bill would require performance disclosure. Public US institutions, such as public pensions, are already typically required to disclose the fund-level performance of their GP relationships.  

The bill would also require that funds establish an anti-money laundering programme and report suspicious transactions. Funds would also have to comply with the same requirements as other financial institutions for producing records requested by a federal regulator under the USA Patriot Act.

The new bill would require registration of the fund rather than the management company, and so is separate from the process of registering the management company as an Investment Advisor. As law firm Paul, Weiss, Rifkind, Wharton & Garrison noted in a recent client alert, some firms may need to register both the management company and the funds the management company forms.

The hedge fund and private equity industries are likely to lobby against certain provisions of the bill which would be “difficult to live with” says Marco Masotti, co-head of Paul Weiss’s  private equity practice. LPs often prefer to keep their names out of the public domain, for instance.

There are technical issues to be worked out as well, including how the bill would interact with other regulations governing private placements of interests in private funds.
“There are parts of it that don’t gel well with other securities laws, like the laws relating to how to privately offer securities, privacy laws because it requires disclosure of who the investors are,” Masotti said. “A lot of those issues are going to have to be worked out.”