On May 4, a bill that would exempt private equity ("PE") fund managers from adviser registration under the Investment Advisers Act of 1940 (the "Advisers Act") was approved by the House Subcommittee on Capital Markets and Government Sponsored Enterprises.  It was then sent to the House Financial Services Committee that has the power to send it to the House of Representatives for a full vote.  H.R. 1082, The Small Business Capital Access and Job Preservation Act (the "Bill"), could have far reaching impact on managers of a wide variety of private nontrading funds, such as certain types of private real estate funds, timber and other natural resource funds, infrastructure funds and life settlement funds.

The Subcommittee's vote was along strict party lines with all Republican members approving the Bill and all but one of the Democratic members opposing the Bill. Even if the Bill passes the full House, it would face the Democratic-led Senate and the President's potential veto power.  For a copy of the marked up Bill, click here.  The Bill is a repudiation of certain changes made to the Advisers Act by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") that did not include any exemption for private equity fund managers.  The Dodd-Frank Act did include such a class exemption for all venture capital fund managers (the "VC Exemption").  In its approval of the Dodd-Frank Act, Congress rejected a proposed exemption for private equity fund managers that was similar to the VC Exemption.

The Bill provides the following:

  • Exemption:  Private equity fund managers (of any size) would be exempt from registration with the Securities and Exchange Commission (the "SEC") under the Advisers Act.  This would presumably be available to both US and non-US based private equity fund managers.
  • Reporting and Recordkeeping:  Exempt managers would be subject to recordkeeping and annual and other SEC reporting obligations to be determined by the SEC, taking into account such factors as fund size, investment strategy and risks. 
  • Definition of PE Fund:  The SEC would have considerable power to determine the impact of the exemption, defining a "private equity fund." Although the SEC has not defined a "private equity fund" in the past, there may be some hints of the SEC's possible approach in its hedge fund adviser registration rule adopted in 2004 and later invalidated by court action.  Under this rule, the SEC exempted from registration managers to private funds that imposed at least a two year lockup on investors, except in extraordinary circumstances beyond the adviser's control, and met certain other conditions.  

Key issues to watch if the Bill becomes law include, among others:

  • Availability of Exemption for Variety of Fund Managers:  If the definition of a private equity fund is not linked to a specific type of portfolio asset, this exemption could be valuable for managers for a wide variety of nontrading funds that do not offer liquidity, such as certain types of private real estate funds, timber and other natural resource funds, infrastructure funds and life settlement funds.  The exemption could provide a clear exemption without the issues currently raised relating to the registration status of managers to some of these types of funds.
  • Registration "Lite":  The SEC's proposed interpretation of the very similar VC Exemption provides some insight into how the SEC would likely interpret the private equity fund manager exemption.  The SEC has proposed that the venture capital fund managers file a portion of the adviser registration form ADV at the public IARD site used by registered advisers, in effect an adviser registration "lite."  This involves a level of public exposure in order to rely on the exemption.  The SEC has not yet defined the reporting and recordkeeping obligations for managers relying on the VC Exemption.
  • SEC Examination:  Although the Bill is silent on the right of the SEC to conduct examinations of managers relying on the PE Exemption, it is likely that the SEC will take the same position that it has announced with respect to managers relying on the VC Exemption—the SEC has the right to examine these managers because of their recordkeeping obligations.

Although the Bill, if enacted, would bring many benefits, its schedule and prospects for passage are unknown and involve some considerable hurdles.  It is important, therefore, that PE managers stay focused on the SEC's ongoing implementation of the Dodd-Frank Act which imposes deadlines on the SEC and the managers.

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