The 'Restoring American Financial Stability Act of 2010': Implications for Banks, Hedge Funds and Private Equity Funds

On May 20, 2010, the U.S. Senate (the “Senate”) voted 59-39 to approve the Restoring American Financial Stability Act of 2010 (the “Senate Bill”). The Senate Bill will be merged with a similar measure approved in the U.S. House of Representatives (the “House”) in December 2009 (the “House Bill”) by a House-Senate conference committee, which will reconcile differences between the Senate and House Bills. A final version of the complete Senate Bill, as amended, is not yet available. This Stroock Special Bulletin was prepared on the basis of the best available information.

The Senate Bill includes numerous restrictions on banking organizations, including prohibitions on proprietary trading and investing in funds, as well as requirements for the registration of fund investment advisers and an increased accredited investor financial threshold (discussed further below). The devil is in the details, and in this case, the details regarding the new bank restrictions are to be filled in by new regulations to be issued by the Federal banking regulators, subject to guidance from a new Financial Stability Oversight Council (the “Council”), which also will have the ability to modify or create exceptions to the restrictions. The Senate Bill also calls for a thorough study and rule promulgation process before the new bank restrictions would become effective.