The House passed legislation that would ease some requirements imposed by the Investment Advisers Act and its related rules on private equity funds. Republicans emphasized the bipartisan character of the Investment Advisers Modernization Act of 2016 (H.R. 5424), whose final text was heavily influenced by amendments pressed by Rep. Bill Foster (D-Ill). The amended bill passed the full House by a recorded vote of 261-145.
But passage came only after Rep. Maxine Waters (D-Calif), Ranking Member of the House Financial Services Committee, led opponents in charging that the bill was a give-away to private equity firms, some of which she said had failed at delivering local emergency services, while also extending their reach into mortgage and consumer lending. Representative Waters told members the final bill leaves too many risky provisions in place and late amendments did too little to fix these defects. She also reminded members of the White House’s veto threat.
Sponsor Rep. Robert Hurt (R-Va) said the private equity industry had been swept up by the Dodd-Frank Act reforms and that his bill stops short of repealing the registration requirement. He argued instead that the bill is a "streamlining" of a 76-year old law and is not about rolling back investor protections. House Financial Services Committee Chairman Jeb Hensarling (R-Texas), speaking from the floor, lauded bipartisan support for the Hurt bill, which he said was needed to help deal with sluggish U.S. economic growth.
According to Rep. Foster his amendments to the Hurt bill, including ones on transparency and audits, respond to the Obama Administration’s main objections and helped to garner bipartisan support in the House. Although many of Rep. Foster’s fellow Democrats praised his effort to fix what they see as a flawed bill, many decided that they could not back the final version.
Key role of Rep. Foster. The version of the Hurt bill that passed the house was significantly changed by amendments offered by Rep. Foster on both the House floor and previously before the House FSC. Before taking a final vote, the full House approved Rep. Foster’s latest amendment by a voice vote.
Specifically, the Foster amendment removed a provision that would have required the SEC to amend Advisers Act Rule 204-3(c) to delete text requiring an investment adviser to deliver a brochure to clients who are limited partnerships and other pooled investment vehicles. A second component of the Foster amendment removed a provision in the Hurt bill that would have eliminated the requirement in Advisers Act Rule 206(4)-2(b)(2)(ii) mandating audits of limited partnerships in order to invoke a relaxed rule regarding custody of funds or securities. The Hurt bill provision was tied to the SEC’s IM Guidance Update No. 2013-04.
Representative Foster’s influence also prevailed at the committee level during the markup of the Hurt bill, which was approved by a recorded vote of 47-12, pulling in a majority of the minority party, a point repeatedly made by Republicans advocating passage by the full House. An amendment offered by Rep. Foster removed a provision that would have required the SEC to amend Advisers Act Rule 204-2 to ease books and records requirements. The amendment also removed a transaction reporting provision that would have required the SEC to make changes to the frequency of reports by access persons for investment advisers who advice clients that primarily hold non-public securities.
Hurt bill mechanics. The Hurt bill makes numerous changes to the Advisers Act and would require the SEC to further amend some its related rules. Here are a few highlights:
- Proxy voting— The Hurt bill directs the SEC to amend the proxy voting requirements in Advisers Act Rule 206(4)-6 to clarify that the rule does not apply to non-public securities. A separate provision in the Hurt bill defines the related term "public security" to mean securities of an issuer that files reports under Exchange Act Sections 13(a) or 15(d), or has a security listed or traded on a foreign exchange. Rule 206(4)-6 currently requires advisers to have policies and procedures for voting securities in clients’ best interest, while also imposing proxy disclosure obligations.
- Advertising— Advisers Act Rule 206(4)-1 would be relaxed for advertisements distributed to persons who are, or whom the adviser reasonably believes are, qualified clients, knowledgeable employees, qualified purchasers, or accredited investors. The rule currently bans advertisements that refer to testimonials and, subject to a qualification, references to past specific recommendations that were or would have been profitable to any person. The report accompanying the bill clarifies that the general antifraud provisions regarding pooled investment vehicles contained in Advisers Act Rule 206(4)-8 still apply, as would the remainder of Rule 206(4)-1.
- Form PF— The reporting mandate for advisers to private funds would be eased to require reporting of only the information contained in Sections 1a and 1b of Form PF. But the legislative change would not apply to a large hedge fund adviser or a large liquidity fund adviser.
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