Legislation to Repeal the Private Equity Fund Adviser Registration Requirement in the Dodd-Frank Act: In Brief - R43326

Gary Shorter
Specialist in Financial Economics

Hedge funds, private equity funds, and venture capital funds are pooled investment vehicles that channel capital from investors to emerging and mature corporations through outright acquisition or through the acquisition of partial stakes in the firms. From the standpoint of federal securities laws and regulations, historically these funds, which are known as private funds or private investment funds, have largely been defined by what they are not. From a regulatory perspective, they are different from another kind of pooled investment vehicle known as an investment company, of which mutual funds are perhaps the best known example. Investment companies are subject to extensive regulation under federal securities laws because they are generally open to anyone throughout the investing public.

By contrast, private funds have largely taken advantage of exemptions that are available in federal securities laws that enable them to face fewer regulatory requirements in return for restricting the number and the types of investors who can invest in them. The basic rationale is that because the funds’ securities are only available to select group of investors, they should not have to incur the regulatory burden and costs required of entities whose securities are publicly available without restrictions.

The Investment Advisers Act of 1940 (the Adviser Act; P.L. 76-768) generally requires any person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications, to register as an investment adviser with the Securities and Exchange Commission (SEC). Among other things, registration requires advisers to disclose information about their business, the persons who own or control the adviser, whether the adviser or certain of its personnel have been sanctioned for violating securities laws or other laws, and the adviser’s business practices, fees, and conflicts of interest that the adviser may have with its clients. Generally, advisers to private funds have been exempt from required registration as investment advisers under the Adviser Act. They often took advantage of a provision, which said that if during the preceding 12-month period, they had fewer than 15 clients (each client being essentially defined as one private fund) and did not present themselves to the public as an investment adviser, nor acted as such to a registered investment company or business development company, they could be exempted from the registration requirement, an exemption known as the private adviser exemption.

A commonly found generic definition of a private equity fund is an investment pool that funnels capital raised from institutional investors and wealthy individuals or families to a potentially wide range of commercial projects managed by investment professionals, the fund’s general partners. Private equity funds employ a variety of investment strategies, including leveraged buyouts (the acquisition of another company using a significant amount of borrowed money in which the assets of the acquired company are often used as collateral), and investing in companies, including distressed ones. The commercial assets that private equity funds invest in are often less liquid than those that hedge funds invest in. Private equity funds are open to a restricted universe of investors and require large initial minimum investments. Private equity firms often manage several separate private equity funds and may launch new funds every few years when existing ones become fully invested.

Date of Report: December 3, 2013
Number of Pages: 9
Order Number: R43326
Price: $19.95

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