On Friday the US House of Representatives passed the Private Fund Investment Advisers Act as a part of the Wall Street Reform and Consumer Protection Act of 2009. The legislation passed by a vote of 223-202.
The bill requires all private equity and venture capital funds managing more than $150 million to register as investment advisers with the Securities and Exchange Commission no later than one year after it becomes law. The bill also increases the disclosure requirements for such advisers, stipulating that they share, at a minimum, the amount of their assets under management, their use of leverage (including off-balance sheet leverage), counter-party credit risk exposures, trading and investment positions, and trading practices.
The bill includes an exemption for Small Business Investment Companies (SBIC) and venture capital firms. Those firms would not have to go through the formal registration process, but still must maintain such records that the SEC deems necessary, as well as provide annual reports.
The costs of compliance are estimated to amount to around $50,000. For those firms who have to hire a chief compliance officer, that number could rise to $300,000.
But for fund managers caught in the registration requirements, there is some hope that the SEC will note their size and strategy when formulating disclosure requirements: The bill directs the agency to take into account the size, scope, business models, investment strategies and compensation schemes of private funds when prescribing regulations. The bill also specifically directs the SEC to consider how much systemic risk mid-sized fund managers truly pose to the overall financial markets when establishing registration and examination procedures.
The bill will now face a vote in the Senate. Christopher Dodd, chairman of the US Senate Committee on Banking, Housing, and Urban Affairs, has begun crafting a version of the legislation that is similar to the House bill in many ways, but, critically, includes a carve-out for private equity. Market sources say there is no way to know which version will prevail in the end.