Consensus in Financial Services Committee Hearing on Castle and Capuano Bill (Hedge Fund Adviser Registration Act of 2009) Suggests Support for Comprehensive Overhaul, Increased Transparency and Exemption from Registration for Smaller Advisers

On May 7, 2009, the Subcommittee on Capital Markets of the House Committee on Financial Services conducted a hearing on the Hedge Fund Adviser Registration Act of 2009 (HFAR), a bill proposed on January 27, 2009 by Reps. Michael Castle (R-Del.) and Michael E. Capuano (D-Mass.).  The HFAR (H.R. 711) would remove Section 203(b) from the Investment Advisers Act of 1940.  The removal of Section 203(b)(3) would effectively require many currently unregistered hedge fund managers to register with the SEC as investment advisers, thereby subjecting them to the various obligations of registered investment advisers, including annual disclosure requirements, advertising and marketing restrictions and recordkeeping requirements.  (Under current law, hedge fund managers generally would have to register with the SEC as investment advisers but for the “private adviser” exemption in Section 203(b)(3), which exempts an adviser from the obligation to register if it: (1) had fewer than 15 clients during the preceding 12 months; (2) does not hold itself out generally to the public as an investment adviser; and (3) does not advise any registered investment companies.)  As Rep. Capuano previously explained to the Hedge Fund Law Report, in discussing his rationale for proposing the change: “No one can look me in the eye and tell me they know how many hedge funds there are or how many assets they manage.”  The consensus among both the members of Congress and the witnesses at the hearing was summed up by the Chairman of the Subcommittee, Paul E. Kanjorski (D-Pa.), who said that he considers it important to “put in place a system to obtain greater transparency for the hedge fund industry” and to make  decisions “about who will monitor them and how.”  We offer details of testimony from representatives of the Government Accountability Office, Managed Funds Association, Alternative Investment Management Association, Coalition of Private Investment Companies and Teacher Retirement System of Texas, relate the details of a lively exchange and offer insights from industry participants on the substance of the testimony.

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