Hedge Fund Transparency Act - The Hedge Fund Transparency Act of 2009 Page 1

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The Hedge Fund Transparency Act of 2009

from the
International Association of Hedge Funds Professionals (IAHFP)

January 29, 2009

Grassley and Levin Introduce the The Hedge Fund Transparency Bill
On January 29, 2009 - Senators Chuck Grassley (R-Iowa) and Carl Levin (D-Michigan) introduced the Hedge Fund
Transparency Act of 2009 ("Transparency Bill""HFTA" - S. 334 of the 111th Congress).

Primarily affected: Funds having more than $50 million in assets ("large" investment companies) that meet the
requirements of Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 to avoid being an
"investment company"
The bill addresses what the two Senators describe as a loophole in securities law that allows hedge funds to operate
under a cloak of secrecy.
According to Senator Chuck Grassley: "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. A

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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".

According to Senator Carl Levin: "Hedge funds control massive sums of money, and although they can cause serious
damage to investors, other financial firms, and to the entire U.S. financial market, they are largely unregulated.
If the events of the last year have taught us anything, it’s that we need to regulate firms that are big enough to
destabilize our economy if they fail. It’s time to subject financial heavyweights like hedge funds to federal regulation
and oversight to protect our investors, markets, and financial system".
The bill will have a significant effect on hedge funds, private equity buyout funds, venture capital funds, structured
finance vehicles, and some real estate funds.
Before the Hedge Fund Transparency Act of 2009 most hedge funds, private equity funds, venture capital funds, and
structured finance vehicles relied upon exceptions under Section 3(c)(1) (funds with fewer than 100 beneficial owners)
or Section 3(c)(7) (funds made up solely of "qualified purchasers") of the Investment Company Act.
The Hedge Fund Transparency Act of 2009 has replaced Sections 3(c)(1) and 3(c)(7) with Sections 6(a)(6) and 6(a)(7)
, that change something important - from exceptions to the definition of investment company into exemptions from
certain requirements of the Investment Company Act.
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 US government knows who they
are and what they’re doing".

Hedge Fund Transparency Act of 2009

This bill is a revised version of S. 1402, which Sen. Grassley introduced in the 110th Congress.
While the previous bill amended the Investment Advisers Act of 1940, this bill amends the Investment Company Act of
1940 (“ICA”). However, the purpose is the same: to make it clear that the Securities and Exchange Commission has
the authority to require hedge fund registration.

This version also adds a provision authored by Sen. Levin to require hedge funds to establish anti-money laundering
programs and report suspicious transactions.

Hedge Fund Registration Requirements

Definition of an Investment Company: Hedge Funds typically avoid regulatory requirements by claiming the
exceptions to the definition of an investment company contained in §3(c)(1) or §3(c)(7) of the ICA.
This bill removes those exceptions to the definition, transforming them to exemptions by moving the provisions,
without substantive change, to new sections §6(a)(6) and §6(a)(7) of the ICA.

Requirements for Exemptions: An investment company that satisfies either §6(a)(6) or §6(a)(7) will be exempted
from the normal registration and filing requirements of the ICA.

Instead, a company that meets the criteria in §6(a)(6) or §6(a)(7) but has assets under management of $
50,000,000 or more, must meet several requirements in order to maintain its exemption.
These requirements include:

1. Registering with the SEC.

2. Maintaining books and records that the SEC may require.

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3. Cooperating with any request by the SEC for information or examination.

4. Filing an information form with the SEC electronically, at least once a year. This form must be made freely
available to the public in an electronic, searchable format. The form must include:
a. The name and current address of each individual who is a beneficial owner of the investment company.
b. The name and current address of any company with an ownership interest in the investment company.
c. An explanation of the structure of ownership interests in the investment company.
d. Information on any affiliation with another financial institution.

e. The name and current address of the investment company’s primary accountant and primary broker.

f. A statement of any minimum investment commitment required of a limited partner, member, or investor.
g. The total number of any limited partners, members, or other investors.
h. The current value of the assets of the company and the assets under management by the company.

Anti-Money Laundering Obligations:

An investment company exempt under §6(a)(6) or §6(a)(7) must establish an anti-money laundering program and
report suspicious transactions under 31 U.S.C.A 5318(g) and (h).

Exempted investment companies will "use risk-based due diligence policies, procedures, and controls that are
reasonably designed to ascertain the identity of and evaluate any foreign person that supplies funds or plans to supply
funds to be invested with the advice or assistance of such investment company."

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