David L. Goret, Esq., Scott H. Moss, Esq., Cole Beaubouef, Esq. and Edward Newlands, Esq.
On May 20, 2010, the Senate culminated months of debate by voting to approve comprehensive financial reform legislation that, if enacted, we expect will have a significant impact upon the United States financial system. The Senate’s legislative proposal closely resembles draft legislation introduced by Senator Chris Dodd (D-Conn.) in March 2010, with the addition of several amendments approved during floor debate.1 Among other items, the Senate bill addresses the following areas of regulatory reform:
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financial stability and regulation of "too big to fail" institutions;
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orderly liquidation procedures for troubled financial institutions;
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consolidation and realignment of banking regulatory authorities;
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regulation of advisers to hedge funds and private investment vehicles;
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creation of an advisory Office of National Insurance within the Federal Reserve;
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regulation of derivatives;
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regulations concerning executive compensation and corporate governance;
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creation of a Bureau of Consumer Financial Protection;
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strengthening of the Securities and Exchange Commission (the "SEC") and introduction of certain investor-protection measures; and
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enhanced regulation of the credit-reporting industry.
Legislators will now, via joint committees of the Senate and House of Representatives, begin the process of reconciling the Senate bill with financial industry regulatory reforms passed by the House in December 2009.2 Representative Barney Frank (D-Mass.), the chief architect of the House bill, has estimated that the bills will be reconciled for final passage by Congress and signature by President Obama by the July 4th holiday. Below, we have noted certain key legislative proposals contained in the bills, some of which will require reconciliation.
As proposed, each of the House and Senate bills would eliminate the exemption found in Section 203(b)(3) of the Investment Advisers Act of 1940 (the "Advisers Act") exempting from registration investment advisers managing fewer than fifteen clients and not holding themselves out to the public as investment advisers. Each of the Senate and House bills would require investment advisers with assets under management above a specified threshold ($100 million in the Senate bill, $150 million in the House bill) to register with the SEC and be subject to certain reporting and record-keeping requirements. The Senate bill would exempt investment advisers to private equity funds3 from the registration requirements, while the House bill does not include this exemption. Each bill would provide an exception from registration for investment advisers to venture capital funds.4 Finally, the Senate bill expressly removes family offices5 from the purview of the Advisers Act. The House bill does not contain a comparable exception. Each of the bills also provide for an adjustment (i.e. increase) to the accredited investor standard with respect to natural persons to $1 million (excluding the value of the investor’s primary residence).
Among other items, the bills also contain the following important differences:
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Derivatives – The Senate bill contains more strict restrictions on derivatives trading than does the House bill, including a controversial provision that would require banks to spin off their derivatives trading practices. The Senate bill also would require a larger percentage of derivatives to be cleared with central clearinghouses.
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Volcker Rule – The Senate bill would restrict banks from engaging in proprietary trading and from investing in or sponsoring hedge funds and private equity funds. The House bill has no corresponding provision.
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Consumer Protection Agency – While both bills provide for the creation of a Consumer Protection Agency, the Senate bill would place this executive agency within the Federal Reserve, while the House bill would make this an independent agency.
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Private Liquidation Fund – The House bill would require the maintenance of a $150 billion fund to be collected from the largest financial institutions for emergency use in the liquidation of large failing financial institutions. A similar provision was removed from the Senate bill during final floor debate.
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Federal Reserve Audit – Each bill would reduce the regulatory authority of the Federal Reserve and restrict its emergency lending power. In addition, each bill would authorize regular audits of the Federal Reserve by the United States Government Accountability Office.
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Broker-Dealer Fiduciary Duty – The House bill would impose a fiduciary duty on broker-dealers requiring that broker-dealers act in the best interests of their clients. The Senate declined to impose a similar heightened duty but directed the SEC to study the effectiveness of current fiduciary duty standards within two (2) years of the enactment of the bill.
Lowenstein Sandler's Investment Management Group will continue to monitor closely the developments relating to this important legislation and provide you with updates as events warrant. In the interim, please contact any of the listed attorneys, or any other member of Lowenstein Sandler’s Investment Management Group, for further information on the matters discussed herein.
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1Senator Dodd's proposal is discussed in the April 2010 Lowenstein Sandler Investment Management Newsletter, which is available here.
2The Lowenstein Sandler Investment Management Group client alert analyzing the House bill is available here.
3As proposed, the definition of "private equity funds" would be defined by the SEC within six (6) months of the effective date of the legislation.
4As proposed, the definition of "venture capital funds" would be defined by the SEC within six (6) months of the effective date of the legislation.
5As proposed, the definition of "family office" would be defined by the SEC to be "consistent with the previous exemptive policy of the Commission, as reflected in exemptive orders for family offices in effect on the date of enactment."
