II 111th CONGRESS 1st Session S. 344 IN THE SENATE OF THE UNITED STATES January 29, 2009 Mr. Grassley (for himself and Mr. Levin) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs A BILL To require hedge funds to register with the Securities and Exchange Commission, and for other purposes.

1.

Short title

This Act may be cited as the Hedge Fund Transparency Act.

2.

Hedge Fund Registration Requirements

(a)

Definition of investment company

Section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)) is amended— (1)by striking paragraph (1); (2)by striking paragraph (7); (3)by redesignating paragraphs (2) through (6) as paragraphs (1) through (5), respectively; and (4)by redesignating paragraphs (8) through (14) as paragraphs (6) through (12), respectively. (b)

Additional Exemptions

Section 6 of the Investment Company Act of 1940 (15 U.S.C. 80a–6) is amended— (1)in subsection (a), by adding at the end the following: (6)(A)Subject to subsection (g), any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than 100 persons, and which is not making and does not presently propose to make a public offering of its securities. (B)For purposes of this paragraph and paragraph (7), beneficial ownership— (i)by a company shall be deemed to be beneficial ownership by one person, except that, if the company owns 10 percent or more of the outstanding voting securities of the issuer, and is or, but for the exemption provided for in this paragraph or paragraph (7), would be an investment company, the beneficial ownership shall be deemed to be that of the holders of the outstanding securities (other than short-term paper) of such company; and (ii)by any person who acquires securities or interests in securities of an issuer described in this paragraph shall be deemed to be beneficial ownership by the person from whom such transfer was made, pursuant to such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title, where the transfer was caused by legal separation, divorce, death, or any other involuntary event. (7)(A)Subject to subsection (g), any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of the acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities. Securities that are owned by persons who received the securities from a qualified purchaser as a gift or bequest, or in a case in which the transfer was caused by legal separation, divorce, death, or any other involuntary event, shall be deemed to be owned by a qualified purchaser, subject to such rules, regulations, and orders as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. (B)Notwithstanding subparagraph (A), an issuer is exempt under this paragraph if— (i)in addition to qualified purchasers, outstanding securities of that issuer are beneficially owned by not more than 100 persons who are not qualified purchasers, if— (I)such persons acquired any portion of the securities of such issuer on or before September 1, 1996; and (II)at the time at which such persons initially acquired the securities of such issuer, the issuer was exempt under paragraph (6); and (ii)prior to availing itself of the exemption provided by this paragraph— (I)such issuer has disclosed to each beneficial owner that future investors will be limited to qualified purchasers, and that ownership in such issuer is no longer limited to not more than 100 persons; and (II)concurrently with or after such disclosure, such issuer has provided each beneficial owner with a reasonable opportunity to redeem any part or all of their interests in the issuer, notwithstanding any agreement to the contrary between the issuer and such persons, for the proportionate share of that person of the net assets of the issuer. (C)Each person that elects to redeem under subparagraph (B)(ii)(II) shall receive an amount in cash equal to the proportionate share of that person of the net assets of the issuer, unless the issuer elects to provide such person with the option of receiving, and such person agrees to receive, all or a portion of the share of that person in assets of the issuer. If the issuer elects to provide such persons with such an opportunity, disclosure concerning such opportunity shall be made in the disclosure required by subparagraph (B)(ii)(I). (D)An issuer that is exempt under this paragraph shall nonetheless be deemed to be an investment company for purposes of the limitations set forth in subparagraphs (A)(i) and (B)(i) of section 12(d)(1) (15 U.S.C. 80a–12(d)(1) (A)(i) and (B)(i)) relating to the purchase or other acquisition by such issuer of any security issued by any registered investment company and the sale of any security issued by any registered open-end investment company to any such issuer. (E)For purposes of determining compliance with this paragraph and paragraph (6), an issuer that is otherwise exempt under this paragraph and an issuer that is otherwise exempt under paragraph (6) shall not be treated by the Commission as being a single issuer for purposes of determining whether the outstanding securities of the issuer exempt under paragraph (6) are beneficially owned by not more than 100 persons, or whether the outstanding securities of the issuer exempt under this paragraph are owned by persons that are not qualified purchasers. Nothing in this subparagraph shall be construed to establish that a person is a bona fide qualified purchaser for purposes of this paragraph or a bona fide beneficial owner for purposes of paragraph (6). ; and (2)by adding at the end the following: (g)

Limitation on exemptions for large investment companies

(1)

In general

An investment company with assets, or assets under management, of not less than $50,000,000 is exempt under subsection (a)(6) or (a)(7) only if that company— (A)registers with the Commission; (B)files an information form with the Commission under paragraph (2); (C)maintains such books and records as the Commission may require; and (D)cooperates with any request for information or examination by the Commission. (2)

Information Form

The information form required under paragraph (1) shall be filed at such time and in such manner as the Commission shall require, and shall— (A)be filed electronically; (B)be filed not less frequently than once every 12 months; (C)include— (i)the name and current address of— (I)each natural person who is a beneficial owner of the investment company; (II)any company with an ownership interest in the investment company; and (III)the primary accountant and primary broker used by the investment company; (ii)an explanation of the structure of ownership interests in the investment company; (iii)information on any affliation that the investment company has with another financial institution; (iv)a statement of any minimum investment commitment required of a limited partner, member, or other investor; (v)the total number of any limited partners, members, or other investors; and (vi)the current value of— (I)the assets of the investment company; and (II)any assets under management by the investment company; and (D)be made available by the Commission to the public at no cost and in an electronic, searchable format. .

3.

Implementing Guidance and Rules

(a)

Forms and Guidance

Not later than 180 days after the date of enactment of this Act, the Securities and Exchange Commission shall issue such forms and guidance as are necessary to carry out this Act. (b)

Rules

The Securities and Exchange Commission may make a rule to carry out this Act.

4.

Anti–Money Laundering Obligations

(a)

Purpose

It is the purpose of this section to safeguard against the financing of terrorist organizations and money laundering. (b)

In General

An investment company that relies on paragraph (6) or (7) of section 6(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–6(a) (6) and (7)), as amended by this Act, as the basis for an exemption under that Act shall establish an anti-money laundering program and shall report suspicious transactions under subsections (g) and (h) of section 5318 of title 31, United States Code. (c)

Rulemaking

(1)

In General

The Secretary of the Treasury, in consultation with the Chairman of the Securities and Exchange Commission and the Chairman of the Commodity Futures Trading Commission, shall, by rule, establish the policies, procedures, and controls necessary to carry out subsection (b). (2)

Contents

The rule required by paragraph (1)— (A)shall require that each investment company that receives an exemption under paragraph (6) or (7) of section 6(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–6(a) (6) and (7)), as amended by this Act, shall— (i)use risk–based due diligence policies, procedures, and controls that are reasonably designed to ascertain the indentity of and evaluate any foreign person (including, where appropriate, the nominal and beneficial owner or beneficiary of a foreign corporation, partnership, trust, or other foreign entity) that supplies or plans to supply funds to be invested with the advice or assistance of such investment company; and (ii)be subject to section 5318(k)(2) of title 31, United States Code; and (B)may incorporate elements of the proposed rule for unregistered investment companies published in the Federal Register on September 26, 2002 (67 Fed. Reg. 60617) (relating to anti–money laundering programs). (3)

Publication Date

The Secretary of the Treasury, shall— (A)propose the rule required by this subsection not later than 90 days after the date of enactment of this Act; and (B)issue the rule required by this subsection in final form not later than 180 days after the date of enactment of this Act. (d)

Effective Date

Subsection (b) shall take effect 1 year after the date of enactment of this Act, whether or not a final rule is issued under subsection (c), and the failure to issue such rule shall in no way affect the enforceability of this section.

5.

Technical Corrections

(a)

Securities Act of 1933

Section 3(a) of the Securities Act of 1933 (15 U.S.C. 77c(a)) is amended— (1)in paragraph (2)— (A)by striking section 3(c)(3) and inserting section 3(c)(2); and (B)by striking section 3(c)(14) and inserting section 3(c)(12); (2)in paragraph (4), by striking section 3(c)(10)(B) and inserting section 3(c)(8)(B); and (3)in paragraph (13), by striking section (3)(c)(14) and inserting section 3(c)(12). (b)

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended— (1)in section 3(a) (15 U.S.C. 78c(a))— (A)in paragraph (12)(A)— (i)in clause (iii), by striking section 3(c)(3) and inserting section 3(c)(2); (ii)in clause (v), by striking section 3(c)(10)(B) and inserting section 3(c)(8)(B); and (iii)in clause (vi), by striking section 3(c)(14) and inserting section 3(c)(12); (B)in paragraph (12)(C), by striking section 3(c)(14) and inserting section 3(c)(12); and (C)in paragraph (54)(A)— (i)in clause (ii), by striking exclusion from the definition of investment company pursuant to section 3(c)(7) and inserting exemption under section 6(a)(7); and (ii)in clause (vii), by striking section 3(c)(2) and inserting section 3(c)(1); (2)in section 3(g) (15 U.S.C. 78c(g)) by striking section 3(c)(14) each place that term appears and inserting section 3(c)(12); and (3)in section 12(g)(2) (15 U.S.C. 78l(g)(2))— (A)in subparagraph (D), by striking section 3(c)(10)(B) and inserting section 3(c)(8)(B); and (B)in subparagraph (H), by striking section 3(c)(14) and inserting section 3(c)(12). (c)

Investment Company Act of 1940

The Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.) is amended— (1)in section 2(a)(51) (15 U.S.C. 80a–2(a)(51))— (A)in subparagraph (A)(i), by striking excepted under section 3(c)(7) and inserting exempt under section 6(a)(7); and (B)in subparagraph (C)— (i)by striking that, but for the exceptions provided for in paragraph (1) or (7) of section 3(c), would be an investment company (hereafter in this paragraph referred to as an excepted investment company) and inserting that is exempt under paragraph (6) or (7) of section 6(a) (hereafter in this paragraph referred to as an ‘exempt investment company’); (ii)by striking section 3(c)(1)(A) and inserting section 6(a)(6)(B)(i); and (iii)by striking excepted each place that term appears and inserting any exempt; (2)in section 6 (15 U.S.C. 80a–6)— (A)in subsection (a)— (i)in paragraph (2), by striking section 3(c)(1) and inserting section 6(a)(6); and (ii)in paragraph (5)(A)(iv), by striking that would be an investment company except for the exclusions from the definition of the term investment company under paragraph (1) or (7) of section 3(c) and inserting that is exempt under paragraph (6) or (7) of section 6(a); and (B)in subsection (f), by striking excluded from the definition of an investment company by section 3(c)(1) and inserting exempt under section 6(a)(6); (3)in section 7(e) (15 U.S.C. 80a–7(e)), by striking section 3(c)(10)(B) and inserting section 3(c)(8)(B); and (4)in section 30 (15 U.S.C. 80a–29) in each of subsections (i) and (j), by striking section 3(c)(14) each place that term appears and inserting section 3(c)(12). (d)

Investment Advisers Act of 1940

The Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) is amended— (1)in section 203(b) (15 U.S.C. 80b–3(b))— (A)in paragraph (4) by striking section 3(c)(10) each place that term appears and inserting section 3(c)(8); and (B)in paragraph (5), by striking section 3(c)(14) and inserting section 3(c)(12); and (2)in section 205(b) (15 U.S.C. 80b–5(b))— (A)in paragraph (2)(B), by striking section 3(c)(11) and inserting section 3(c)(9); and (B)in paragraph (4), by striking excepted from the definition of an investment company under section 3(c)(7) and inserting exempt under section 6(a)(7). (e)

Internal Revenue Code of 1986

Section 851(a)(2) of the Internal Revenue Code of 1986 (relating to the definition of regulated investment company) is amended by striking section 3(c)(3) and inserting section 3(c)(2).