< Browse > Home / Financial Literacy, Management, Private Equity, Venture Capital / Blog article: The Hedge Fund Transparency Act or “We have to Disclose WHAT to the SEC!!”

| Mobile | RSS

The Hedge Fund Transparency Act or “We have to Disclose WHAT to the SEC!!”

An inevitable outcome of our current financial crisis will be increased regulation and oversight of the private equity community.  The dramatic increase of bankruptcies in 2008 of PE-backed firms is a harbinger of just how over-leveraged private equity has become.  As more and more PE-backed firms fail, the demands for increased oversight and transparency will increase.

As the Wall Street Journal’s Peter Lattman noted in his article in this Wednesday’s Journal:

The nation’s private-equity firms could be forced to register with the Securities and Exchange Commission, while also divulging the value of their funds and names of all investors, in a new Senate bill titled “The Hedge Fund Transparency Act.”  Introduced late last week by Michigan Democrat Sen. Carl Levin and Iowa Republican Sen. Charles Grassley, the bill has attracted the most attention from hedge funds. Lost in the debate has been the fact that private-equity firms, which buy and sell corporations using borrowed money, also would be covered under its provisions.

Senate Bill 344 “The Hedge Fund Transparency Act of 2009” would clarify current law to remove any doubt that the Securities and Exchange Commission has the authority to require hedge funds to register, so the government knows who they are and what they’re doing. It would close the loophole previously used by hedge funds to escape the definition of an “investment company” under the Investment Company Act of 1940. Hedge funds that want to avoid the requirements of the Investment Company Act would be exempt only if they file basic disclosure forms and cooperate with requests for information from the Securities and Exchange Commission.  Additionally, the bill would “require hedge funds to establish anti-money laundering programs and report suspicious transactions.”

One goal of the legislation is to bring practically all hedge funds, private equity firms, and venture capitalists into the sunlight of SEC regulation.  As Senator Grassley noted in his remarks about the bill:

“There wasn’t much of an appetite for this sort of legislation before the financial crisis. I hope attitudes have changed and that Congress takes up this important legislation without delay,” Grassley said. “A major cause of the current crisis is a lack of transparency. The wizards on Wall Street figured out a million clever ways to avoid the transparency sought by the securities regulations adopted during the 1930s. Instead of the free flow of reliable information that markets need to function properly, today we have confusion and uncertainty fueling an economic crisis.”

As Senator Levin noted in his remarks when he introduced the bill:

“The bill imposes these requirements on all [private funds]. A wide variety of entities invoke those sections to avoid those requirements and SEC oversight, and they refer to themselves by a wide variety of terms – hedge funds, private equity funds, venture capitalists, small investment banks, and so forth. Rather than attempt a futile exercise of trying to define the specific set of companies covered by the bill . . ., the bill applies to any investment company that has at least $50 million in assets or assets under its management.”

Hedge funds, private equity firms, and venture capitalists face a difficult choice under this bill.  They can either register as an ‘investment company’ under the Investment Company Act of 1940 (a very onerous process that has very high disclosure requirements or they could choose to file basic disclosure forms and cooperate with requests for information from the SEC.  Under either scenario the disclosure of this level of information would lift the huge veil of secrecy regarding fund performance that exists in today’s private equity and venture capital world.  With the SEC’s move towards significantly enhanced electronic filing (Interactive XBRL) anyone with a web browser and Excel will be able to calculate their own ratings and rankings.

A key aspect of the regulation would require firms to file an Information Form with the SEC every twelve months.  This filing would contain:

  • The name and address of (i) each natural person who is a beneficial owner of the fund, (ii) any company with an ownership interest in the fund, and (iii) the fund’s primary accountant and primary broker;
  • An explanation of the structure of ownership interests in the fund;
  • Information on any affiliation that the fund has with another financial institution;
  • A statement of any minimum investment commitment required of investors;
  • The total number of investors; and
  • The current value of (i) the assets of the fund and (ii) any assets under management by the “investment company.”

Another aspect of the bill would be to require hedge funds, private equity firms, and venture capitalists to comply with the anti-money laundering regulations currently imposed on all financial institutions.  As SB 344 states that covered firms shall:

“use risk-based due diligence policies, procedures, and controls that are reasonably designed to ascertain the indentity of and evaluate any foreign person (including, where appropriate, the nominal and beneficial owner or beneficiary of a foreign corporation, partnership, trust, or other foreign entity) that supplies or plans to supply funds to be invested with the advice or assistance of such investment company”

Investments from extremely high net worth foreigners and sovereign wealth funds in the private equity world make this provision an extremely interesting one.

Tracking the progress of SB 344 will be fun.  Listening to the moaning and gnashing of teeth by the beaten down private equity marketplace will be even more fun.

Leave a Reply 7747 views, 2 so far today |
Follow Discussion

2 Responses to “The Hedge Fund Transparency Act or “We have to Disclose WHAT to the SEC!!””

  1. Automated Trading Canada Says:

    It was really nice posting and very informative. Also visit TradingSystems.ca, specializes in using the latest technologies and software development innovations, including its own unique algorithmic trading systems, to create the tools you need to take your business to the next level.

Trackbacks

  1. DevelopmentCorporate » Blog Archive » Does Venture Capital Pose a Systemic Risk to the Financial System? Tim Geithner Thinks So . . .  

Leave a Reply


Warning: fopen(/4255305384_8e90aec34c_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint3
Warning: fopen(/4255305348_5022eca28d_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint2
Warning: fopen(/4254540579_b296f43c7b_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint1
Warning: fopen(/4255305256_2b68d522d5_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
Money machine
Warning: fopen(/4254540331_8836e369cc_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
manrev2
Warning: fopen(/4255305016_138cd3d3eb_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ManRev1
Warning: fopen(/4255304954_48dd4292dd_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
idea2
Warning: fopen(/4255304438_ed7edfa4a2_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
chain-links2
Warning: fopen(/4254539541_30a19becda_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ipasplash
Warning: fopen(/4254539317_1e015d3629_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ipasplash