On September 9, 2016, the U.S. House of Representatives approved a bill that would amend the Investment Advisers Act of 1940 to modernize certain disclosure requirements and lessen regulatory burdens on private fund advisers.  The proposed amendments would not apply to advisory services provided to registered investment companies.

H.R. 5424, the Investment Advisers Modernization Act of 2016, would, among other things, direct the Securities and Exchange Commission (SEC) to amend certain specified regulations related to advertising, custody, recordkeeping, brochure delivery, and assignment of advisory contracts.

The Investment Advisers Modernization Act of 2016 would:

1. Allow advisers organized as partnerships to change the composition of the partnership without providing notice to the SEC every time there is a change;
2. Lift certain securities advertising restrictions on advisers that advertise to qualified investors and exempt private equity fund sponsors from certain enhanced disclosures (Form ADV, Part 2);
3. Remove certain reporting requirements for large private equity funds to treat them like other equity funds (Form PF, Part 4);
4. Exempt from the Proxy Voting Rule investment advisers that exercise voting authority only with respect to non-public securities;
5. Expand the “privately offered securities” exemption under the Custody Rule so that it applies to both certificated and uncertificated securities and provides an exemption for special purpose vehicles (SPV) managed by private fund sponsors and co-investment funds that hold only one investment; and
6. Require the SEC to waive the application of certain anti-fraud provisions to advisers to clients that advertise exclusively to

• Qualified clients, determined as of the time of the publication or distribution of the advertisement, rather than immediately before or after entering into an advisory contract,
• Knowledgeable employees of any private fund to which the investment adviser acts as an investment adviser
• Qualified purchasers, or
• Accredited investors (determined as of the time of the publication).

The sponsors of the bill said that bill intends to ease regulations on advisers to funds that invest in small businesses by easing restrictions on access to private capital.  On September 12, 2016, the Bill was received in the Senate, read twice, and referred to the Committee on Banking, Housing, and Urban Affairs.

Our take

While the bill would roll back some of recent regulatory requirements that grew out of the Dodd-Frank bill, it is seen as having little chance of being enacted.

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