Adviser Registration, Accredited Investors, Carried Interest, Insider Trading, Cap and Trade
Below are some thoughts on some of the major issues over the last couple of weeks.
Have a great Memorial Day Weekend!
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Hedge Fund Regulation and Registration – While the Private Fund Investment Advisers Registration Act of 2010 was passed this month in the Senate, there has not been as much discussion in the news about this issue and manager registration. I expected that we would hear more, especially with regard to the following issues:
- Section 407 – Exemption of VC Funds
- Section 408 – Exemption from Reporting Requirements for Private Equity Funds
- Section 410 – State Authority for Managers with AUM of up $100MM (this is generally a bad idea in my opinion and we will be writing a post about this soon…)
- Section 412 – Adjusting Definition of Accredited Investor (see also below)
I imagine we will hear more as the Senate and House begin to reconcile their two bills and before President Obama signs the final Financial Reform bill into law, which some think may happen before the July 4th holiday.
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Definition of Accredited Investor – The Senate version of the Financial Reform bill will change the definition of an “accredited investor” in the future. Generally “accredited investors” are those individuals with a net worth of $1,000,000. Under current regulations, individuals can include the equity in their private residence when determining their net worth. In the future, they will need to exclude the equity in their private residence when determining their net worth. This potentially may have a deleterious effect on the hedge fund industry, but also on other industries which rely on private placements.
According to some sources, at least one Senator is asking that the definition of accredited investor be expanded to include state and local governments. I agree with this approach – if the Senate is taking the time to mess with the definition right now then the Senate should spend a little time addressing other issues. For instance, the definition of accredited investor should also be expanded to include Native American Tribes. I have specifically talked with the SEC staff about this issue a couple of years ago and they have categorically refused to issue a no-action or other interpretive release on this issue – we believe that now is the time to include Native American Tribes in the definition of accredited investor.
For more information, please see the Native American Capital, LP policy briefing and the National Congress of American Indians letter to the SEC on this issue.
See also Perkins Coie discussion of this issue.
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Carried-Interest Issue -it looks like the carried interest tax laws will be changing in 2011. In addition to hedge fund managers, managers to other pooled investment vehicles will be greatly affected (such as VC and private equity fund managers, as well as real estate fund managers). The change in the laws will likely affect more VC and PE managers than hedge fund managers because of the nature of the underlying gains in the respective investment vehicles (VC and PE fund managers typically have mostly long term capital gains and hedge fund managers may have a combination of long term and short term capital gains). There is likely to be a large number of industry groups which come out in opposition to the changes in the next couple of weeks.
We do not agree with the proposed changes – it seems as though Congress is specifically attacking an easy target in the investment management community.
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Insider Trading Issue – just today the SEC announced an insider trading case brought against a hedge fund manager Pequot Capital Management, Inc., and its Chairman and CEO Arthur Samberg. This issue has been thoroughly discussed most recently after the Galleon affair. Hedge funds managers and compliance personnel need to be even more vigilant about establishing comprehensive compliance programs and making sure that traders are not engaging in insider trading. Please see our previous thoughts on Hedge Funds and Insider Trading.
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Green Tech/ Cap and Trade – clean and green tech continue to gain traction in the investment management industry as a bill which would create federal carbon cap and trade system was introduced recently. Next weekend the South Asian Bar in San Francisco will have a panel discussion. entitled “Green 2 Green: Carbon Credits, Renewable Energy Certificates and the New Markets driving the Clean Energy Economy”. According to the program,
Attendees will receive a quick primer on market-based regulatory responses to climate change designed to foster the development of renewable power plants and spur long term investment in clean and sustainable energy. Panelists will address state and federal legislation setting green house gas emission caps, establishing renewable portfolio standards, and creating new markets for carbon credits and renewable energy certificates. We’ll discuss the regulatory origins and key characteristics of these and other green commodities, as well as the structure and rules of markets created to transition industry and consumers from the present carbon economy toward tomorrow’s clean energy economy.
Mallon P.C. will be represented at the panel discussion so please come and talk to us there.
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Other related hedge fund law articles:
- Overview of the Securities Laws
- How to register as an Investment Advisor
- Important Information for Registered Investment Advisors
Cole-Frieman & Mallon LLP works with many managers who invest in various commodities and with groups who work in the clean tech space. Mallon P.C. is a top hedge fund law firm which provides comprehensive formation and regulatory support for hedge fund managers. Bart Mallon, Esq. can be reached directly at 415-868-5345.