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H.R. 5424 (114th): Investment Advisers Modernization Act of 2016


The text of the bill below is as of Jun 9, 2016 (Introduced).


I

114th CONGRESS

2d Session

H. R. 5424

IN THE HOUSE OF REPRESENTATIVES

June 9, 2016

(for himself, Mr. Vargas, Mr. Foster, and Mr. Stivers) introduced the following bill; which was referred to the Committee on Financial Services

A BILL

To amend the Investment Advisers Act of 1940 and to direct the Securities and Exchange Commission to amend its rules to modernize certain requirements relating to investment advisers, and for other purposes.

1.

Short title

This Act may be cited as the Investment Advisers Modernization Act of 2016.

2.

Modernizing certain requirements relating to investment advisers

(a)

Maintenance of books and records

Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall amend section 275.204–2 of title 17, Code of Federal Regulations, to provide that an investment adviser is not required to maintain—

(1)

any communications or materials (including communications or materials made available in a secure electronic or physical data room) used in connection with due diligence for a prospective investment, if the communications or materials are subject to a confidentiality agreement; or

(2)

any written communications required by paragraph (a)(7) of such section, if the communications are sent and received only by supervised persons of the investment adviser.

(b)

Investment advisory contracts

(1)

Assignment

(A)

Assignment defined

Section 202(a)(1) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(1)) is amended by striking ; but and all that follows and inserting ; but no assignment of an investment advisory contract shall be deemed to result from the death or withdrawal, or the sale or transfer of the interests, of a minority of the members, partners, shareholders, or other equity owners of the investment adviser having only a minority interest in the business of the investment adviser, or from the admission to the investment adviser of one or more members, partners, shareholders, or other equity owners who, after such admission, shall be only a minority of the members, partners, shareholders, or other equity owners and shall have only a minority interest in the business..

(B)

Consent to assignment by qualified clients

Section 205(a)(2) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–5(a)(2)) is amended by inserting before the semicolon the following: , except that if such other party is a qualified client (as defined in section 275.205–3 of title 17, Code of Federal Regulations, or any successor thereto), such other party may provide such consent at the time the parties enter into, extend, or renew such contract.

(2)

Not required to provide for notification of change in membership of partnership

Section 205 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–5) is amended—

(A)

in subsection (a)—

(i)

in paragraph (1), by striking the semicolon and inserting ; or;

(ii)

in paragraph (2), by striking ; or and inserting a period; and

(iii)

by striking paragraph (3); and

(B)

in subsection (d), by striking paragraphs (2) and (3) of subsection (a) and inserting subsection (a)(2).

(c)

Advertising rule

(1)

In general

Not later than 90 days after the date of the enactment of this Act, the Commission shall amend section 275.206(4)–1 of title 17, Code of Federal Regulations, to provide that paragraphs (a)(1) and (a)(2) of such section do not apply to an advertisement that an investment adviser publishes, circulates, or distributes solely to persons described in paragraph (2) of this subsection.

(2)

Persons described

A person is described in this paragraph if such person is, or the investment adviser reasonably believes such person is—

(A)

a qualified client (as defined in section 275.205–3 of title 17, Code of Federal Regulations), determined as of the time of the publication, circulation, or distribution of the advertisement rather than immediately prior to or after entering into the investment advisory contract referred to in such section;

(B)

a knowledgeable employee (as defined in section 270.3c–5 of title 17, Code of Federal Regulations) of any private fund to which the investment adviser acts as an investment adviser;

(C)

a qualified purchaser (as defined in section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a))); or

(D)

an accredited investor (as defined in section 230.501 of title 17, Code of Federal Regulations), determined as if the investment adviser were the issuer of securities referred to in such section and the time of the publication, circulation, or distribution of the advertisement were the sale of such securities.

3.

Removing duplicative burdens and appropriately tailoring certain requirements

(a)

Brochure delivery

Not later than 90 days after the date of the enactment of this Act, the Commission shall amend section 275.204–3(c) of title 17, Code of Federal Regulations, to provide that an investment adviser is not required to deliver a brochure or brochure supplement to a client that is a limited partnership, limited liability company, or other pooled investment vehicle for which each limited partner, member, or other equity owner has received, before purchasing a security issued by the pooled investment vehicle, a prospectus, private placement memorandum, or other offering document containing (to the extent material to an understanding of the pooled investment vehicle, the business of the pooled investment vehicle, and the securities being offered by the pooled investment vehicle) substantially the same information as would be required by Part 2A or 2B of Form ADV at the time of delivery of the brochure or brochure supplement, as the case may be.

(b)

Form PF

Not later than 90 days after the date of the enactment of this Act, the Commission shall amend section 275.204(b)–1 of title 17, Code of Federal Regulations, to provide that an investment adviser to a private fund is not required to report any information beyond that which is required by sections 1a and 1b of Form PF, unless such investment adviser is a large hedge fund adviser or a large liquidity fund adviser (as such terms are defined in such Form).

(c)

Frequency of transaction reports by access persons

Not later than 90 days after the date of the enactment of this Act, the Commission shall amend section 275.204A–1 of title 17, Code of Federal Regulations, so as to provide that, in the case of an investment adviser that acts as an investment adviser solely to one or more clients that primarily own or hold securities that are not public securities (regardless of whether such securities were public securities at the time of acquisition by the client or clients), the code of ethics required by such section shall require the access persons of the investment adviser to submit the transaction reports described in paragraph (b)(2) of such section at a frequency specified by the investment adviser, but not less frequently than annually.

(d)

Custody rule

Not later than 90 days after the date of the enactment of this Act, the Commission shall amend section 275.206(4)–2 of title 17, Code of Federal Regulations, as follows:

(1)

The Commission shall provide additional exceptions to the independent verification requirement of paragraph (a)(4) of such section for an investment adviser with respect to funds and securities of a limited partnership (or a limited liability company or other type of pooled investment vehicle), as follows:

(A)

An exception that applies if the outstanding securities (other than short-term paper, as defined in section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a))) of the pooled investment vehicle are beneficially owned exclusively by—

(i)

the investment adviser;

(ii)

affiliated persons of the investment adviser;

(iii)

supervised persons of the investment adviser;

(iv)

officers, directors, and employees of the affiliated persons of the investment adviser;

(v)

family members and former family members (as such terms are defined in section 275.202(a)(11)(G)–1 of title 17, Code of Federal Regulations) of persons described in clause (iii) or (iv); or

(vi)

officers, directors, employees, or affiliated persons of, or persons who provide, have provided, or have entered into a contract to provide services to—

(I)

the investment adviser of the pooled investment vehicle;

(II)

one or more clients of the investment adviser of the pooled investment vehicle; or

(III)

issuers from which the pooled investment vehicle or any other client of the investment adviser of the pooled investment vehicle has acquired securities, such as the portfolio company of a private fund.

(B)

An exception that applies if the pooled investment vehicle has been established to hold only the securities of a single issuer in which one or more pooled investment vehicles managed by the investment adviser have acquired a controlling interest.

(2)

Consistent with, and expanding on, IM Guidance Update No. 2013–04, titled Privately Offered Securities under the Investment Advisers Act Custody Rule, published by the Division of Investment Management of the Commission, the Commission shall, with respect to the exception for certain privately offered securities in paragraph (b)(2) of such section—

(A)

remove the requirement of clause (i)(B) of such paragraph (relating to the uncertificated nature and recordation of ownership of the securities); and

(B)

remove the requirement of clause (ii) of such paragraph (relating to audit and financial statement distribution requirements with respect to securities of pooled investment vehicles).

(e)

Proxy voting rule

Not later than 90 days after the date of the enactment of this Act, the Commission shall amend section 275.206(4)–6 of title 17, Code of Federal Regulations, to provide that such section does not apply to any voting authority with respect to client securities that are not public securities.

4.

Facilitating robust capital formation by preventing regulatory mismatch

The Commission may not—

(1)

amend section 230.156 of title 17, Code of Federal Regulations, to extend the provisions of such section to offerings of securities issued by private funds; or

(2)

adopt rules applicable to offerings of securities issued by private funds that are substantially the same as the provisions of such section.

5.

Exclusion of advisory services to registered investment companies

This Act shall not apply with respect to advisory services provided, or proposed to be provided, to an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.).

6.

References to regulations

In this Act, any reference to a regulation shall be construed to refer to such regulation or any successor thereto.

7.

Definitions

In this Act:

(1)

Public security

The term public security means a security issued by an issuer that—

(A)

is required to submit reports under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a); 78o(d)); or

(B)

has a security that is listed or traded on any exchange or organized market operating in a foreign jurisdiction.

(2)

Terms defined in Investment Advisers Act of 1940

The terms defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)) have the meanings given such terms in such section.