On January 29, 2009, the ?Hedge Fund Transparency Act? (the ?Bill?) was introduced by Senators Chuck Grassley (R-Iowa) and Carl Levin (D-Michigan). The Bill seeks to cause private funds with not less than US$50 million to register with the Securities and Exchange Commission (the ?SEC?), provide significant annual public disclosures, maintain books and records in accordance with SEC rules and cooperate with the SEC on any requests for information.

The Bill proposes to effect these changes by eliminating the exclusion from the provisions of the Investment Company Act of 1940 (the ?ICA?) enjoyed by private funds that rely on Section 3(c)(1) (for investment funds owned by no more than 100 beneficial owners) or Section 3(c)(7) (for investment funds owned exclusively by ?qualified purchasers?) thereof. By moving the current Sections 3(c)(1) and 3(c)(7) to Sections 6(a)(6) and 6(a)(7), respectively (such sections, the ?Private Fund Exemptions?), private funds such as private equity funds, hedge funds and venture capital funds that rely on the Private Fund Exemptions (each, an ?Investment Fund?) would be deemed to be investment companies falling within the purview of the SEC. The Bill, if enacted, will give the SEC the power to create all necessary rules, forms and guidance to effectuate the purposes of the Bill, including promulgating rules relating to SEC registration and the information that may be requested from an Investment Fund.

It is worth noting that although Senator Grassley has consistently called for the regulation of investment advisers,1 this Bill focuses on the regulation of fund entities not of advisers. However, by requiring the registration of certain Investment Funds, the Bill would have the effect of requiring the investment advisers of such Investment Funds to register with the SEC under the Investment Advisers Act of 1940 (the ?Advisers Act?) since such investment advisers would no longer be able to claim an exemption from registration under Section 203(b)(3) of the Advisers Act.2 Moreover, although the Bill's title ostensibly directs its regulatory reach solely towards hedge funds, the text of the Bill captures all private funds relying on a Private Fund Exemption. In addition, the text of the Bill, as submitted, is either silent or vague regarding the following points: (1) the effect of the Bill on offshore Investment Funds; (2) what constitutes ?assets? or ?assets under management;? and (3) whether an Investment Fund counts investments of non-US investors in determining the amount of its ?assets.?

As submitted, the Bill exempts an Investment Fund from the provisions of the ICA and from registration thereunder, provided that such Investment Fund:

(a)either complies with Section 6(a)(6) (the former Section 3(c)(1) exemption for 100 or fewer beneficial owners) or Section 6(a)(7) (the former Section 3(c)(7) exemption for qualified purchasers); and

(b)has assets, or assets under management, of less than US$50 million.

However, under Section 6(g) of the ICA, an Investment Fund that meets a Private Fund Exemption but has assets, or assets under management, of not less than US$50 million will only be exempt

from the provisions of the ICA if such Investment Fund:

(a)registers with the Securities and Exchange Commission (?SEC?);

(b)files an annual disclosure form containing the information listed below;

(c)maintains books and records as the SEC may require; and

(d)cooperates with any requests for information or examination from the SEC.

An Investment Fund that is required to register under Section 6(g) of the ICA will need to file with the SEC an electronic disclosure form at least once every 12 months. The disclosure form shall include the following information:

Names and current addresses of:

? each individual who is a beneficial owner of the Investment Fund;

? any company with an ownership interest in the Investment Fund; and

? the primary accountant and primary broker used by the Investment Fund;

- An explanation of the structure of ownership interests in the Investment Fund;

- Information on any affiliation that the Investment Fund has with another financial institution;

- A statement of any minimum investment commitment required of a limited partner, member, and any other investor;

- The total number of investors; and

- The current values of the Investment Fund's assets and any assets under management.

Anti-Money Laundering Program Must Be Established

In addition, a separate portion of the Bill requires all Investment Funds subject to SEC oversight to establish anti-money laundering programs similar to those of other financial institutions. It is expected that the Treasury Secretary will enact rules requiring Investment Funds to ?use risk-based due diligence policies, procedures, and controls that are reasonably designed to ascertain the identity of and evaluate any foreign person3 that supplies

or plans to supply funds to be invested with the advice or assistance of such investment company.?