Update to Ice Miller's Coverage of
Private Fund Regulation – Treasury Department's Proposal

U.S. Secretary of the Treasury Timothy Geithner recently explained the Obama administration's proposal to overhaul the nation's financial regulatory system. If adopted, the proposed initiatives would greatly enhance the amount and types of information which private investment funds would be forced to make available to the federal government.

Testifying to the House Financial Services Committee on March 26, 2009, Geithner provided a broad overview of the regulatory changes which the Obama administration believes is necessary to decrease the risk of future crises to the nation's financial system. The comprehensive plan would involve identifying and reducing systemic risk, increasing consumer and investor protection, plugging regulatory gaps, and coordinating regulations with international partners.

Perhaps the most sweeping proposal effects hedge funds, private equity funds and other private pools of investment capital. While lacking in many specific details, Geithner's proposal would necessitate all advisors to private investment funds with assets under management over a certain "moderate" threshold to register with the Securities and Exchange Commission (SEC). Furthermore, any fund advised by an SEC-registered investment advisor would be subject to "investor and counterparty disclosure requirements and regulatory reporting requirements." Such disclosure requirements would include providing, on a confidential basis, such information necessary to gauge whether the private investment fund or fund family is so highly leveraged or large that it creates a risk to the stability of the financial system.

The SEC would in turn share this information with the as-yet-undetermined entity or agency responsible for the regulation of systematically significant institutions. In the event this regulator determines that a private investment fund poses a systemic threat, the fund would be subject to certain "prudential standards." These proposed standards would include rigorous capital benchmarks and strict liquidity, counterparty and credit risk management requirements. Furthermore, the systemic regulator would have the ability to force the fund to institute "corrective actions" to ensure that capital levels would not fall below certain floors.

Secretary Geithner indicated that additional details of his proposals would be forthcoming over the next few weeks. Ice Miller LLP will monitor these developments and provide updates as necessary. For more information on the proposals, please contact John Thornburgh or Mark Alson.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.