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Private Equity Alert

    Special Edition
    September 15, 2009
                                          Registration	of...
Private Equity Alert	                                                                          Special Edition	September 2...
Private Equity Alert	                                                                                Special Edition	Septe...
Private Equity Alert	                                                                                                   Sp...
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Private Equity Alert


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Private Equity Alert

  1. 1. Private Equity Alert Special Edition September 15, 2009 Registration of Private Investment Funds and Advisers as Part of Financial Regulatory Reform In This Issue By Richard Ellenbogen n1 Registration of Private In remarks at the outset of summer on financial regulatory reform, President Obama Investment Funds and Advisers as Part of Financial Regulatory outlined general proposals for overhauling the regulation of the U.S. financial Reform services industry, which would include requiring all private fund managers to be n3 registered under the Investment Advisers Act of 940, as amended (the “Advisers SEC Proposes to Use Investment Act”). The Obama Administration has recently proposed legislation titled, Private Advisers Act to Stop Pay to Play Practices Involving Government Fund Investment Advisers Registration Act of 2009 (the “Proposed Legislation”). Pension Plans The Proposed Legislation would amend current Section 203(b)(3) of the Advisers Act (which provides a de minimis exception from the registration requirement for any Weil News investment adviser that has fewer than 5 clients), to require that any investment Weil Gotshal advised Advent n adviser to a “private fund” with at least $30 million in assets under management International in connection with its tender offer for women’s retailer (including, a hedge fund, private equity fund, venture capital fund or any other Charlotte Russe Holdings in a cash private pool of capital that would be an “investment company” as defined in the deal valued at $380 million Investment Company Act of 940 (the “Investment Company Act”), but for Section Weil Gotshal advised eTelecare and n 3(c)() or 3(c)(7) of that Act), register as an investment adviser with the Securities and its controlling stockholders, Provi- Exchange Commission (the “SEC”). The Proposed Legislation would exclude from dence Equity Partners and Ayala the registration requirement a “foreign private adviser,” which is defined to mean Corporation, in connection with the any investment adviser that (i) has no place of business in the US and during the business combination of eTelecare with Stream Global Services preceding 2 months has had fewer than 5 clients in the US, (ii) has assets under management attributable to clients in the United States of less than $25 million (or Weil Gotshal advised Macquarie n Group in connection with its $428 such higher amount as the SEC may by rule determine) and (iii) neither holds itself million acquisition of Delaware out generally to the public in the US as an investment adviser, nor acts as an Investments, a diversified asset investment adviser to any US registered investment company. management firm The Proposed Legislation would also amend Section 204 of the Advisers Act by Weil Gotshal advised CCMP n Capital and Bancroft Private Equity inserting a new subsection “(b)” titled “Records and Reports of Private Funds.” in connection with the €250 This new subsection would require confidential reporting by private funds of such million sale of Nowaco to Bidvest things as assets under management, borrowings, off balance sheet exposures, Weil Gotshal advised Change n counterparty credit risk exposures, trading and investment positions, and other Capital Partners in connection with information as determined by rulemaking which is deemed necessary to enable its acquisition of German fashion regulators to determine potential systemic risk and potential threats to overall US retail chain Hallhuber GmbH financial stability. SEC examination authority would be expanded to include Weil Gotshal partner Mark regular examinations of private funds in addition to the fund managers. n Soundy was a consultant editor to, and Weil Gotshal partners Finally, the SEC would have authority to share reports and other information with Christopher Aidun, David Kreisler, the Federal Reserve and with the newly proposed Financial Services Oversight Dominic McCahill and Mark Council. The information could be used to determine if a private fund or family of Soundy were contributors to, the new book “A Practitioner’s Guide funds becomes so large, highly leveraged, and interconnected that it or they to Private Equity” published by City Financial Publishing
  2. 2. Private Equity Alert Special Edition September 2009 represent a threat to overall US subsection “(b)(3)” from Section by eliminating the exception in financial stability and, therefore, 203 of the Advisers Act, thus Section 203(b)(3) of the Advisers Act; should be supervised and regulated as eliminating any exemption from (ii) requiring some form of regis- a Tier Financial Holding Company. registration under the Advisers Act tration of private funds under the A Tier Financial Holding Company based on client count. Investment Company Act or imposing would be subjected to stricter and regulatory requirements on unregis- more conservative prudential tered private funds; and (iii) providing standards than those applicable to President Obama outlined the SEC with rule-making authority to bank holding companies, including condition the use by private funds of higher standards on capital, liquidity general proposals for over- Sections 3(c)() and 3(c)(7) under the and risk management. hauling the regulation of Investment Company Act. Director Donohoe further stated that direct In addition to the Proposed Legislation, the U.S. financial services regulation of private funds would there are several bills pending in industry which would include enable the SEC to impose investment Congress that could require registration of private funds and/or their managers: requiring all private fund restrictions or diversification require- ments, to regulate the structure of managers to be registered. private funds (e.g., requiring an n Senators Charles Grassley and Carl Levin introduced on January 29, independent board of directors) and 2009, S.344 – The Hedge Fund to regulate investment terms Transparency Act, which was referred n Senator Jack Reed introduced on including investor redemption rights, to the Senate Committee on June 6, 2009, S.276 – Private as appropriate, to protect investors. Banking, Housing and Urban Affairs. Fund Transparency Act of 2009, While it is not clear what any final S.344 would eliminate current which was referred to the Senate legislation will look like or when Sections 3(c)() and 3(c)(7) of the Committee on Banking, Housing legislation may be enacted, it appears Investment Company Act, resulting and Urban Affairs. S.276 would likely that registration of all private in private funds being deemed to be limit the scope of the Section 203 fund managers will be required. Once “investment companies” under the exemption from registration under registered, private fund managers will Investment Company Act, and the Advisers Act to foreign private be subject to the disclosure require- replacing those sections with new advisers (defined in a similar ments of the Form ADV, required to Section 6 exemptions from regis- manner to the Proposed Rule), appoint a chief compliance officer, tration. S.344 would require requiring private fund managers to required to have in effect and maintain registration of any private fund register, and would authorize the comprehensive written compliance manager, because such manager SEC to require from private fund procedures including, a code of ethics would be advising an “investment managers reports and records as are and procedures for addressing conflicts company.” S.344 further proposes to deemed necessary for the super- of interest, and subject to SEC routine require that private funds with $50 vision of systemic risk by any examinations. It is also possible that million or more in assets register Federal department or agency. additional disclosure may be required with, file an information form with, by private funds. The SEC has also endorsed legislation maintain books and records as requiring registration of private fund We will keep you apprised of further required by, and cooperate with any managers. In testimony on July 5, developments in this area. request for information or exami- 2009 before the Subcommittee on nation by, the SEC. Securities, Insurance and Investment n Representatives Michael Capuano of the Senate Committee on Banking, and Michael Castle introduced on Housing and Urban Affairs, Andrew January 27, 2009, H.R. 7 – Hedge Donohoe, Director of the Division of Fund Adviser Registration Act of Investment Management of the SEC, 2009, which was referred to the discussed regulatory approaches to House Committee on Financial private funds including (i) requiring Services. H.R. 7 would eliminate registration of private fund managers Weil, Gotshal Manges llp 2
  3. 3. Private Equity Alert Special Edition September 2009 SEC Proposes to Use Investment Advisers Act to Stop Pay to Play Practices Involving Government Pension Plans By Richard Ellenbogen The Securities and Exchange to a “covered investment pool” (i.e., related person of the investment Commission (the “SEC”) has proposed any investment company as defined in adviser, such as a placement agent, Rule 206(4)-5 (SEC Rel. No. IA-290 the Investment Company Act of 940, finder or otherwise, to solicit a (8/3/09)) (the “Proposed Rule”) under as amended (the “Investment government entity for advisory the Investment Advisers Act of 940, Company Act”), as well as any private business; and as amended (the “Advisers Act”), investment company relying on the n Make it unlawful for an investment designed to prevent “pay to play” exceptions in Section 3(c)(), 3(c)(7) or adviser itself or through any of its practices by registered and non- 3(c)() of the Investment Company covered associates to solicit or to registered investment advisers Act), in which a government entity coordinate contributions for an compensating placement agents, invests or is solicited to invest, would official of a government entity to finders and other intermediaries for be treated as though that investment which the investment adviser is procuring investment advisory adviser were providing or seeking to seeking to provide investment business from government pension provide investment advisory services advisory services, or payments to a plans. The proposed rule arises out of directly to the government entity. The political party of a state or locality the recent actions by Andrew Cuomo, Proposed Rule includes a catch-all where the investment adviser is Attorney General of New York, and provision that would make it unlawful providing or seeking to provide similar actions taken in other states, for an investment adviser or any of its investment advisory services to a involving pay to play practices of covered associates to do anything government entity. private investment fund advisers. The indirectly which, if done directly, proposed rule is largely modeled on would result in a violation of the The Proposed Rule would not apply to Municipal Securities Rulemaking Proposed Rule. or prohibit political contributions by Board Rules G-37 and G-38, which non-executives who are typically not prohibits member firm municipal More specifically, the Proposed Rule involved in soliciting investors, such as securities brokers and dealers from would: an investment adviser’s comptroller, engaging in pay to play practices. n Make it unlawful for an investment human resources personnel and adviser to receive compensation for information technology personnel. Proposed Rule 206(4)-5 would prohibit providing advisory services to a Exemptive relief may be sought from an investment adviser (including government entity for a two-year the two-year “time out” in circum- investment advisers exempt from period after the investment adviser or stances where contributions were registration under Section 203(b)(3) of any of its covered associates makes a discovered after the fact or where the Advisers Act) from providing or political contribution to a public imposition of the prohibition is agreeing to provide, directly or official of a government entity that is unnecessary to achieve the rule’s indirectly, payment to any third party in a position to influence the award intended purpose. (other than certain “related parties” or officers, partners, managing members of advisory business; The SEC is soliciting comments on the or employees of the investment Proposed Rule and has asked n Impose a two-year “time out” on an adviser) for a solicitation of advisory numerous questions including (i) investment adviser conducting business from any government entity whether the Proposed Rule should compensated advisory business with on behalf of such investment adviser, apply only to registered investment a government entity after a contri- regardless of whether the third party is advisers or be expanded to cover state bution is made, but would not ban itself a registered broker-dealer or the registered advisers, (ii) whether or limit the amount of political investment adviser and the solicitor disclosures of political contributions contributions an investment adviser are otherwise complying with Advisers to a pension plan trustee or requiring or its covered associates could make; Act Rule 206(4)-3 (Cash Payments for an investment adviser to adopt Client Solicitations). Under the n Prohibit an investment adviser from policies and procedures designed to Proposed Rule, an investment adviser paying any person who is not a prevent “pay to play” with an annual Weil, Gotshal Manges llp 3
  4. 4. Private Equity Alert Special Edition September 2009 certification, should be considered as an alternative to the Proposed Rule and (iii) Beijing Steven Xiang whether other alternatives would have a greater impact than the Proposed Rule. +86-10-8515-0558 Comments on the Proposed Rule are due by October 6, 2009. Boston James Westra We will keep you apprised of further developments in this area. +1-617-772-8377 Budapest David Dederick +1-361-302-9100 Dallas Back Issues of Private Equity Alert are available online at Glenn West +1-214-746-7780 Recent Articles: Frankfurt Gerhard Schmidt The FDIC Budges – A Little +49-69-21659-700 Equitable (In)subordination − Considerations for Sponsors Lending to Portfolio Companies Hong Kong Akiko Mikumo Letters of Intent and Avoiding the Unintended +852-3476-9008 Proposed Tax Legislation May Affect Taxation of Profits Interests Issued to Peter Feist Management−Preemptive Action May Be Appropriate +852-3476-9100 London FDIC Proposes Guidelines for Private Equity Investments in Failed Banks Michael Francies Administration Proposes Financial Regulatory Reform +44-20-7903-1170 Marco Compagnoni Recalibrate Your and Your Management Team’s Thinking to Meet Today’s Challenges +44-20-7903-1547 Addressing Liquidity Issues Through the Secondary Market Munich Gerhard Schmidt De-Levering Portfolio Companies Through Debt Buybacks – US and UK Perspectives +49-89-242430 Treasury Secretary Geithner Presents Framework for Regulation of Private Investment New York Funds Thomas Roberts +1-212-310-8479 Deleveraging the Portfolio Company – Stimulus Legislation Provides Tax Relief Barry Wolf The Hedge Fund Transparency Act: More Than It Seems +1-212-310-8209 Too Clubby? Doug Warner +1-212-310-8751 Fear and Greed Paris European Regulatory Initiatives Affecting Private Equity Sponsors and Hedge Funds David Aknin +331-44-21-9797 Buying Assets out of Bankruptcy in the US and the UK Prague Karel Muzikar +420-2-2140-7300 Private Equity Alert is published by the Private Equity Group of Weil, Gotshal Manges LLP, Providence David Duffell 767 Fifth Avenue, New York, NY 10153, +1-212-310-8000. The Private Equity Group’s practice includes +1-401-278-4700 the formation of private equity funds and the execution of domestic and cross-border acquisition and investment transactions. Our fund formation practice includes the representation of private equity Shanghai fund sponsors in organizing a wide variety of private equity funds, including buyout, venture capital, Steven Xiang distressed debt and real estate opportunity funds, and the representation of large institutional +86-21-6288-1855 investors making investments in those funds. Our transaction execution practice includes the Silicon Valley representation of private equity fund sponsors and their portfolio companies in a broad range of Craig Adas transactions, including leveraged buyouts, merger and acquisition transactions, strategic investments, +1-650-802-3020 recapitalizations, minority equity investments, distressed investments, venture capital investments Warsaw and restructurings. Pawel Rymarz Editor: Doug Warner (, +1-212-310-8751 +48-22-520-4000 Deputy Editor: Michael Weisser (, +1-212-310-8249 Washington, DC Robert Odle +1-202-682-7180 ©2009. All rights reserved. Quotation with attribution is permitted. This publication provides general information Wilmington and should not be used or taken as legal advice for specific situations that depend on the evaluation of precise factual circumstances. The views expressed in these articles reflect those of the authors and not necessarily the E. Norman Veasey views of Weil, Gotshal Manges LLP. If you would like to add a colleague to our mailing list or if you need to +1-302-656-6600 change or remove your name from our mailing list, please log on to or e-mail Weil, Gotshal Manges llp 4