On July 15, 2009, the Obama Administration proposed legislation that would:

• require most previously unregistered investment advisers, including advisers to private funds (including hedge funds, funds-of-funds, venture capital funds and private equity funds), to register with the Securities and Exchange Commission (“SEC”); and
• require all registered investment advisers to comply with new reporting and recordkeeping requirements and provide information about private funds which they manage, including assets under management, use of leverage (including off-balance sheet exposures), counterparty credit risk exposures, trading and investment positions and trading practices.

Under this proposed legislation, investment advisers with more than $30 million in assets under management will have to register under the Investment Advisers Act of 1940 (the “Advisers Act”). An exemption would be available for certain foreign private investment advisers with limited U.S. clients. The legislation would also give the SEC authority to require registered advisers to provide reports, records and other private fund information to investors, prospective investors, counterparties, and creditors.

Once registered, all previously unregistered advisers will have to comply with the provisions of the Advisers Act, including but not limited to requirements with respect to disclosure, custody of client assets, compliance procedures, receipt of performance-based compensation, and maintenance of books and records.

We believe that this legislation (or legislation similar to this proposal) is likely to be enacted and we recommend that our clients that are unregistered advisers consider taking a number of proactive steps in anticipation thereof.

Recommended Steps for Unregistered Advisers

• Form ADV and Disclosure Obligations – Become familiar with the disclosure required on Form ADV, which must be completed to register with the SEC. Form ADV Part I must be filed electronically with the SEC, while Form ADV Part II does not currently need to be filed with the SEC, but must be distributed to prospective and current clients. Note especially the section relating to the disclosures that need to be made concerning the disciplinary history of firm personnel.
• Compliance Manual – Begin the process of preparing a manual of policies and procedures reasonably designed to prevent violations of the Advisers Act. The manual should cover areas such as valuation, conflicts of interest, trade allocations, personal trading, business contingency planning, proxy voting and similar topics.
• Chief Compliance Officer – Determine the appropriate person within your organization who will act as the Chief Compliance Officer, or identify an outsider that you might ultimately hire for such a position. Such person should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm.
• Performance-Based Compensation – If you manage a 3(c)(1) fund which pays performance compensation, you should begin evaluating whether the investors meet the “qualified client” criteria (generally, clients must have a net worth exceeding $1,500,000) that will need to be satisfied in order to receive performance compensation following SEC registration.
• Books and Records – Understand which books and records you will be required to maintain once you register.
• Performance Data – Be certain that you have all records necessary to form the basis for the calculation of performance data to continue to use past performance (e.g., client account statements, performance calculation worksheets, and published materials listing the fund’s net asset value).
• Custody Rule – Become familiar with the Rule (and recent proposals) governing the custody of client assets and be prepared to identify where and how all of your clients’ assets are maintained.
• Compliance Audit – Consider undertaking a compliance audit by an outside legal or compliance firm to identify issues that will need to be addressed and to review and formulate relevant policies and procedures.

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If you have any questions with respect to the foregoing, or would like our assistance with respect to adviser registration, compliance manual preparation and/or a compliance audit, please contact your primary attorney in the Investment Management Group at Seward & Kissel LLP.