SEC registration, Volcker rule to become law

The US Congress today passed sweeping financial reform legislation, which includes the so-called Volcker Rule and required SEC registration for private equity and real estate firms.

The US Senate today passed long-awaited financial reform, including the Volcker Rule and SEC registration requirements, ending months of congressional debate.

President Obama is expected to sign it into law as early as next week.

The reconciled bill, the Restoring American Financial Stability Act of 2010, passed with a vote of 60-39.

The finance reforms will require private equity and real estate firms with $150 million or more in assets to register with the SEC. Venture capital funds are exempt.

Under the new registration requirements, eligible firms will need to establish formal compliance policies to outline how they would deal with potential conflicts of interest. Registration also means firms need to designate or hire a compliance officer, as well as face regular inspections by the SEC.

The so-called “Volcker rule” is also included in the bill, which would limit banks’ proprietary trading activities with regard to private equity real estate, private equity and hedge funds. The rule forces banks to hold no more than 3 percent of a real estate fund’s capital, with a bank investing no more than 3 percent of its tier 1 capital into inhouse alternative investment vehicles.

Former Federal Reserve chairman Paul Volcker developed the rule, which originally called for US banks to choose between running private equity and private equity real estate operations and taking deposits. Banks will have up to 12 years to comply with the rule.

Once implemented though, the rule could have a significant effect on co-investment in bank-sponsored private equity real estate funds. The likes of Morgan Stanley and Goldman Sachs have often invested up to 20 percent of the total commitments of their own alternative funds.

According to industry sources, as of 31 March, Morgan Stanley had invested the equivalent of 9 percent of its almost $50 billion of tier 1 capital in its own hedge fund, private equity and real estate funds, while Goldman Sachs had invested roughly 22 percent, with $15.4 billion of equity invested in such vehicles against a tier 1 capital reserve of $69.4 billion.