Is Your Private Equity Fund Becoming a Section 6(a) Hedge Fund? A Review of the Proposed Hedge Fund Transparency Act

February 17, 2009

The Hedge Fund Transparency Act (“HeFTA”) was recently introduced in the United States Senate. If adopted, HeFTA could have a significant impact on a wide variety of funds including hedge funds, equity funds, venture funds, certain structured products and even family partnerships. Under the proposed HeFTA, most private funds would be required to register with the Securities and Exchange Commission (“SEC”) and comply with certain reporting, anti-money laundering programs and public disclosure requirements.

If adopted as proposed, HeFTA would eliminate the traditional Section 3(c)(1) and 3(c)(7) exemptions from the Investment Company Act of 1940 (“Investment Company Act”). Section 3(c)(1) exempts those entities which have 100 or less beneficial owners and have not publicly offered their securities. Section 3(c)(7) exempts companies that are composed entirely of “qualified purchasers” and which have not publicly offered their securities.

Under HeFTA, these previously excluded funds would be deemed investment companies, but still would be exempt from most, but not all, of the provisions of the Investment Company Act. These provisions would apply retroactively to funds currently operating under the Section 3(c)(1) or 3(c)(7) exemptions.

The new Section 6 Funds with assets or assets under management of $50 million or more would be required to register with the SEC, file and update a publicly available information form with the SEC, maintain such books and records as the SEC may require, and cooperate with any request from the SEC for information or examination. The annual reporting form for these new Section 6 Funds would be filed electronically with the SEC and would require disclosure of information that has previously been confidential including:

  • the name and current address of each natural person who holds a beneficial ownership interest, and each company which holds an ownership interest, in the fund;
  • the total number of investors;
  • the name and address of its primary accountant and broker;
  • an explanation of the structure of ownership interests;
  • information on all affiliations with other financial institutions;
  • a statement of the minimum investment commitment required of an investor; and
  • the current value of its assets and assets under management.

As HeFTA moves forward, there are a number of important issues yet to be resolved. These include the ability to obtain confidential treatment for information filed in the annual report form, the effect on investment adviser registration requirements, the impact of the proposal on offshore funds, and whether the HeFTA will be applied retroactively, as currently proposed, or prospectively.

The Private Equity practice at McGuireWoods LLP is dedicated to keeping our clients advised of new legislative and business developments as they occur. If you have any questions regarding these issues, please feel free to contact your primary attorney at McGuireWoods LLP or the authors