This article was originally published 12 February, 2009
The massive volatility and turbulence in the financial markets and domestic and global economies that was experienced in 2008 and that is continuing in 2009 will result in significant shifts in the regulatory landscape for private investment funds, including hedge funds, private equity funds, venture capital funds, real estate funds, and many collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) (collectively, private investment funds). One of the first steps in that direction came on January 29, 2009, when Senators Charles Grassley (R-IA) and Carl Levin (D-MI), citing a "a lack of transparency" and well publicized fraud investigations involving hedge funds, introduced the Hedge Fund Transparency Act (HFTA).
If enacted, the proposed legislation would amend the Investment Company Act of 1940 (ICA) to make clear that hedge funds, private equity funds and other private investment funds that trade or hold securities as a significant part of their assets are "investment companies" under the ICA, and that the SEC can require those funds to register with the SEC and disclose their size and the identities of their investors (although the Senators have since noted that the proposed legislation would not require the disclosure of clients who are merely investors in a fund). The funds also would be required to establish anti-money laundering programs and report suspicious transactions.
Although the title of the proposed legislation only references hedge funds, it would affect an array of private investment funds, including private equity, venture capital, real estate and similar funds, many CDOs, CLOs and other structured products and certain family partnerships. The SEC had previously adopted Rule 203(b)(3)-2 under the Investment Advisers Act of 1940 (IAA), which rule required hedge fund managers to register with the SEC. That rule was vacated in June 2006, however, by a decision from the U.S. Court of Appeals for the District of Columbia Circuit in Goldstein v. S.E.C.
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