New Rules of the Road for Advisers to Private Funds

Kimberly V. Mann, Partner, Corporate & Securities at Pillsbury Winthrop Shaw Pittman LLP


On July 15, 2009, the Obama administration delivered to Capitol Hill the much anticipated proposed legislation that would require domestic advisers of private pools of capital to register with the U.S. Securities and Exchange Commission (the "SEC"). The new legislation, which is titled the "Private Fund Investment Advisers Registration Act of 2009" (the "Act"), would amend the Investment Advisers Act of 1940, as amended (the "Advisers Act"), to eliminate for domestic advisers to private funds the long-standing exemption currently available to advisers with fewer than 15 U.S. clients. The Act would subject many previously unregistered advisers to SEC oversight and conflict-of-interest prohibitions, and would require them to maintain records, submit reports, establish and maintain a compliance program and make such disclosures as may be determined by the SEC from time to time.

Applicability to Advisers of Private Funds

The Act generally would apply to investment advisers of any "private fund," but would not apply to "foreign private advisers." The term "private fund" is proposed to be defined in section 202(a)(29) of the Advisers Act as any investment fund that falls within the exception of the definition of investment company provided under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940, as amended (the "Investment Company Act") and either (i) is organized under U.S. laws or the laws of any state in the U.S., or (ii) has 10 percent or more of its outstanding securities owned by U.S. persons. Therefore, any domestic adviser to a U.S.-organized private equity, venture capital or hedge fund with more than $30 million of assets under management would be subject to regulation under the Advisers Act. Further, any domestic adviser of a fund with more than $30 million of assets under management would be subject to the Advisers Act, even if the fund is domiciled offshore and 90 percent of the interests in the fund are owned by non-U.S. persons.

No Applicability to Foreign Private Advisers

The Act would expressly exclude from the mandates of the Advisers Act any "foreign private adviser." The term "foreign private adviser" would be defined in Section 202(a)(30) of the Advisers Act to include any investment adviser who, (i) has had no place of business in the U.S., (ii) during the preceding 12 months has had fewer than 15 clients in the U.S. and has had assets under management attributable to clients in the U.S. of less than $25 million,[1] and (iii) neither holds itself out generally to the U.S. public as an investment adviser, nor acts as an investment adviser to any investment company registered under the Investment Company Act, or any company which has elected to be a business development company under the Investment Company Act and has not withdrawn that election. It is unclear whether new attribution rules will be created to determine whether assets under management are attributable to a U.S. person. It is also unclear how "client" will be defined for purposes of the definition of foreign private adviser, inasmuch as the Act permits the SEC to ascribe different meanings to terms (including, the term "client") used in different sections of the Advisers Act, to carry out the intended purposes of the Act. It remains to be determined whether investment funds, rather than the investors in such funds, will continue to be deemed the advisory clients in the adviser-client relationship, pursuant to the holding of the DC Court of Appeals in Goldstein v. Securities and Exchange Commission.[2]

Requirements under the Act

If the Act is adopted, any adviser of a private fund that has assets under management in excess of $30 million and is not a "foreign private adviser" would be required to register with the SEC. Such an adviser would be required to register with the SEC even if it is registered with the Commodity Futures Trading Commission as a commodity trading adviser. In addition, the adviser would be subject to stringent conflict-of-interest prohibitions and would be required to establish and maintain a compliance system, maintain records, and submit to the SEC and provide or make available to the Board of Governors of the Federal Reserve System and the Financial Services Oversight Council reports regarding the private funds that it advises.

The records of any private fund advised by a registered investment adviser would be deemed to be records of the investment adviser. Among the records and reports required to be filed with the SEC would be those relating to (i) the amount of assets under management, (ii) use of leverage (both on and off-balance sheet), (iii) counterparty credit risk exposures, (iv) trading and investment positions and (v) trading practices. The SEC also would be entitled to receive any other information as it determines, in consultation with the Board of Governors of the Federal Reserve System, to be necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk. Any information provided by a registered investment adviser would be confidential, subject to the information and oversight rights of Congress.

Records maintained by a registered investment adviser would be subject to periodic or special reviews by the SEC. Accordingly, the investment adviser must make such records available to the SEC upon reasonable request. Registered investment advisers also would be required to provide to investors, prospective investors, counterparties and creditors of the private funds they advise the reports, records and other documents that the SEC determines by rules and regulations to be necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk. Within six months following the enactment of the Act, the SEC and the Commodity Futures Trading Commission would be required to jointly promulgate rules to establish the form and content of the reports required to be filed with the SEC and with the Commodity Futures Trading Commission by investment advisers that are registered under the Advisers Act and the Commodity Exchange Act.


The Act is the latest in a series of legislative proposals calling for the regulation of private funds.[3] If enacted, it would grant broad authority to the SEC to oversee private funds and their advisers, and to require registered advisers to submit reports to the SEC and other governmental authorities, curtail conflicts of interest, maintain records and compliance programs and provide disclosure to investors and others. To be sure, the Act and other statutory regimes that will be implemented in the U.S. and abroad will have a significant effect on private investment funds and their advisers. Funds and their advisers will need to design and implement procedures and processes to comply with the very broad mandates of the Act and any other statutes, rules and regulations that may follow, which may be costly in time and other resources, at least in the short term.

Kimberly Mann, Partner, Corporate & Securities,

Kimberly Mann is the leader of Pillsbury's Private Equity team, a vital contributor to the Firm's 300-lawyer Corporate & Securities practice. Based in Washington, DC, Ms. Mann focuses her practice on investment fund formation and maintenance and represents domestic and international fund sponsors, general partners and fund managers in structuring, organizing and negotiating the terms of private equity, venture capital, mezzanine debt and real estate funds. A significant aspect of her practice also involves representation of large institutional investors in connection with their alternative investments. Ms. Mann has substantial experience and expertise representing clients in all aspects of private equity, venture capital, leveraged buyout, mezzanine debt, distressed asset and fund of fund investing, including restructurings and workouts. She is a member of the ALI-ABA faculty and serves on the Regulation D Offerings and Private Placements panel and the Business/Corporate Law Advisory Panel.Ms. Mann is also a Certified Public Accountant.

Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP is a full-service law firm with market-leading strengths in the energy, financial services, real estate and technology sectors. Our Private Equity team offers a wide breadth of experience counseling on both US and international fund matters and is well-versed in regulatory, financial, tax and other issues that typically arise during the life of a fund. From fund formation to organizing, purchasing, structuring, financing and advising portfolio companies that the funds acquire or in which funds invest, we work collaboratively with our clients and each other to anticipate business and legal trends-helping clients to take greater advantage of new opportunities and better mitigate risks. We also advise on venture capital, leveraged buy outs, mezzanine debt and hedge funds and other private investments in mature companies, representing management groups and a variety of financial institutions.

[1] The SEC would have authority to promulgate rules to increase the amount of assets that a foreign adviser would be permitted to manage and still remain exempt from regulation under the Advisers Act. State laws generally would apply to advisers with assets under management of less than $25 million.

[2] See Goldstein, 451 F.3d 873 (D.C. Cir. 2006). The statute at issue in Goldstein would have required investment advisers to count each owner of a private fund toward the 14-client limit for purposes of determining the availability of the de minimis exemption under Section 203 of the Advisers Act. The court rebuffed the SEC's assertion that the owners of a private fund were the advisory clients. The court made clear that an investment adviser owes a fiduciary duty to the fund it advises, not to the investors in that fund.

[3] See also the Hedge Fund Transparency Act and the Hedge Fund Adviser Registration Act, which were introduced earlier this year.