Financial Regulatory Reform Proposal: Hedge Funds, Private Equity Funds, Venture Capital Firms May Be Required to Register with SEC

On June 17, the Obama administration released its recommendations to reform the financial regulatory system: Financial Regulatory Reform—A New Foundation: Rebuilding Financial Supervision and Regulation. The recommendations provide a blueprint for the administration's sweeping reform of the federal regulation and supervision of the financial system.

One of the primary components of this reform is to "implement heightened consolidated supervision and regulation of large, interconnected financial firms." Of particular relevance to hedge funds, private equity funds, and venture capital firms is the proposal that "all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold amount should be required to register with the SEC under the Investment Advisers Act." Although the administration's proposal does not quantify what is meant by "a modest threshold," its language is similar to that of a bill introduced in the Senate on June 16, 2009, by Senator Jack Reed, chairman of the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment, which proposes a $30 million threshold for SEC registration, with smaller funds being subject to state regulation.

The administration's rationale for the need for SEC registration is twofold. In the first instance, the proposal cites the government's need for "reliable, comprehensive data with which to assess" the market activity of private investment funds that may place undue strain on financial markets. Additionally, the administration states that "it has also become clear that there is a compelling investor protection rationale to fill the gaps in the regulation of investment advisors and the funds that they manage." It is unclear at this point if there will be a call for general partners of private investment funds to register as broker-dealers as well.

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