As widely reported in the financial press, the Senate Banking Committee recently approved financial services reform legislation proposed by Senator Dodd (the "Dodd Bill"), containing a number of significant differences from the House bill approved at the end of 2009 (the "House Bill"), including a potentially broadened exemption from federal investment adviser registration for private equity and venture capital fund managers.
The Dodd Bill would eliminate the existing Investment Advisers Act exemption from registration for advisers with fewer than 15 clients. Without an exemption based on a limited number of clients, most managers of certain types of private funds (e.g., hedge funds) with $100 million or more of assets under management ("AUM") would be required to register with the Securities and Exchange Commission ("SEC") as an investment adviser within a one-year transition period. However, the Dodd Bill would:
The Dodd Bill also includes the so-called "Volcker Rule," previously announced by the Obama administration, which would restrict insured depository institutions, bank holding companies and their subsidiaries from engaging in proprietary trading, (i.e., trading for their own account), owning, sponsoring or investing in private funds, or entering into certain transactions or relationships (e.g., custodial or brokerage relationships) with private funds advised by such banks.
The scope of the final legislation remains uncertain. As with the House Bill, the Dodd Bill may change significantly during the amendment process, with approximately 400 amendments currently under consideration. Moreover, even if private equity and venture capital fund advisers are ultimately exempted from investment adviser registration, there could be renewed calls at the state level for registration of such advisers. In addition, ongoing uncertainty as to how narrowly the SEC would define terms such as "private equity fund" or "venture capital fund" leaves open the possibility that even advisers that might classify themselves as private equity or venture capital may not qualify for the new exemptions.
E.U. Alternative Investment Fund Managers (AIFM) Directive
Numerous revised versions of the AIFM directive have been proposed over the last few weeks in an attempt to reach E.U. inter-governmental agreement. It was thought that E.U. finance ministers would vote on revised legislation at a recent meeting; however, the vote has been postponed until June, indicating significant political disagreement.
Depositary and valuation requirements are still sources of disagreement, but the agenda's key issue is the treatment of funds managed by non-E.U. fund managers, and by U.S. fund managers in particular. The most recent proposal would have allowed non-E.U. fund managers to continue marketing to institutional investors within the European Union under the private placement regime in each country, but on the condition that such firms comply with the directive's new transparency and disclosure rules in the same way as an E.U.-based fund manager. These new requirements would include:
However, it is now clear that E.U. finance ministers have not reached agreement on this proposal and further changes are likely. In the meantime, the European Parliament continues to debate the directive, so the next key development is expected to be the publication of the Parliamentary Committee's final report, expected in April. It is still anticipated that there will be a two-year implementation period after the directive is agreed at the E.U. level, so any new rules are highly unlikely to come into force before mid-2012.
Scott A. Moehrke, P.C., Partner, firstname.lastname@example.org
A partner in Kirkland's Corporate Practice Group, Scott A. Moehrke leads the Firm's Investment Management Practice Group, where he practices in securities and corporate law with significant experience representing financial services companies, such as investment advisers, investment companies, business development companies and broker-dealers. His practice focuses on complex business transactions, including registered and exempt fund formations and ongoing operations, mergers, acquisitions and joint ventures of funds and fund managers, public and private securities offerings, novel product design and structuring, SEC compliance, board of directors and governance matters and institutional shareholder rights matters.
Lisa Cawley, Partner, email@example.com
Lisa is a regulatory partner in the London office of Kirkland & Ellis International LLP. Lisa has extensive experience in financial regulation and corporate matters, including the establishment of new investment, banking and insurance businesses in the UK, the negotiation of regulatory approval for changes of control, the management of regulatory issues in connection with funds and the provision of investment, banking and insurance services on a cross-border basis.
Stephanie Biggs, Partner, firstname.lastname@example.org
Stephanie is a partner in the private equity team in Kirkland's London office. Stephanie has wide-ranging experience in private equity fund formation, with particular expertise in regulatory and compliance issues affecting private equity firms. She also has extensive knowledge of corporate and partnership law, and has advised on matters ranging from the establishment of limited liability partnerships as vehicles for fund managers to complex share capital reorganisations for UK portfolio companies. Stephanie is a member of the BVCA Legal and Technical Committee.
Joshua Westerholm, Associate, email@example.com
Josh Westerholm is an associate in the Investment Management practice group of the corporate department of Kirkland & Ellis LLP, where he focuses his practice on the representation of private investment funds, investment advisers, broker-dealers, commodity pool operators and commodity trading advisors. Josh has significant experience forming and representing various private funds, including both domestic and offshore hedge funds, commodity pools, funds of funds, private equity funds, real estate funds, managed account structures, ERISA funds and Exchange Act-registered funds, and in forming and representing their registered and unregistered investment adviser sponsors in documentation, structuring and compliance matters.
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