IB 

Union Calendar No. 540 

114TH CONGRESS 

2D SESSION H. R. 5424 

[Report No. 114–698] 

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. 

IN THE HOUSE OF REPRESENTATIVES 

JUNE 9, 2016 

Mr. HURT of Virginia (for himself, Mr. VARGAS, Mr. FOSTER, and Mr. STIVERS) introduced the following bill; which was referred to the Committee 

on Financial Services 

JULY 21, 2016 

Additional sponsors: Ms. SINEMA and Mr. HULTGREN

JULY 21, 2016 

Reported with an amendment, committed to the Committee of the Whole 

House on the State of the Union, and ordered to be printed 

[Strike out all after the enacting clause and insert the part printed in italic] 

[For text of introduced bill, see copy of bill as introduced on June 9, 2016] 


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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. 


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1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Investment Advisers 

5 Modernization Act of 2016’’. 

6 SEC. 2. MODERNIZING CERTAIN REQUIREMENTS RELATING 

7 TO INVESTMENT ADVISERS. 

8 (a) INVESTMENT ADVISORY CONTRACTS.— 

9 (1) ASSIGNMENT.— 

10 (A) ASSIGNMENT DEFINED.—Section 

11 202(a)(1) of the Investment Advisers Act of 1940 

12 (15 U.S.C. 80b–2(a)(1)) is amended by striking 

13 ‘‘; but’’ and all that follows and inserting ‘‘; but 

14 no assignment of an investment advisory con15 tract shall be deemed to result from the death or 

16 withdrawal, or the sale or transfer of the inter17 ests, of a minority of the members, partners, 

18 shareholders, or other equity owners of the invest19 ment adviser having only a minority interest in 

20 the business of the investment adviser, or from 

21 the admission to the investment adviser of one or 

22 more members, partners, shareholders, or other 

23 equity owners who, after such admission, shall be 

24 only a minority of the members, partners, shareVerDate Sep 11 2014 21:13 Jul 21, 2016 Jkt 059200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6203 E:\BILLS\H5424.RH H5424

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1 holders, or other equity owners and shall have 

2 only a minority interest in the business.’’. 

3 (B) CONSENT TO ASSIGNMENT BY QUALI4 FIED CLIENTS.—Section 205(a)(2) of the Invest5 ment Advisers Act of 1940 (15 U.S.C. 80b– 

6 5(a)(2)) is amended by inserting before the semi7 colon the following: ‘‘, except that if such other 

8 party is a qualified client (as defined in section 

9 275.205–3 of title 17, Code of Federal Regula10 tions, or any successor thereto), such other party 

11 may provide such consent at the time the parties 

12 enter into, extend, or renew such contract’’. 

13 (2) NOT REQUIRED TO PROVIDE FOR NOTIFICA14 TION OF CHANGE IN MEMBERSHIP OF PARTNER15 SHIP.—Section 205 of the Investment Advisers Act of 

16 1940 (15 U.S.C. 80b–5) is amended— 

17 (A) in subsection (a)— 

18 (i) in paragraph (1), by striking the 

19 semicolon and inserting ‘‘; or’’; 

20 (ii) in paragraph (2), by striking ‘‘; 

21 or’’ and inserting a period; and 

22 (iii) by striking paragraph (3); and 

23 (B) in subsection (d), by striking ‘‘para24 graphs (2) and (3) of subsection (a)’’ and insert25 ing ‘‘subsection (a)(2)’’. 


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1 (b) ADVERTISING RULE.— 

2 (1) IN GENERAL.—Not later than 90 days after 

3 the date of the enactment of this Act, the Commission 

4 shall amend section 275.206(4)–1 of title 17, Code of 

5 Federal Regulations, to provide that paragraphs 

6 (a)(1) and (a)(2) of such section do not apply to an 

7 advertisement that an investment adviser publishes, 

8 circulates, or distributes solely to persons described in 

9 paragraph (2) of this subsection. 

10 (2) PERSONS DESCRIBED.—A person is described 

11 in this paragraph if such person is, or the investment 

12 adviser reasonably believes such person is— 

13 (A) a qualified client (as defined in section 

14 275.205–3 of title 17, Code of Federal Regula15 tions), determined as of the time of the publica16 tion, circulation, or distribution of the advertise17 ment rather than immediately prior to or after 

18 entering into the investment advisory contract 

19 referred to in such section; 

20 (B) a knowledgeable employee (as defined in 

21 section 270.3c–5 of title 17, Code of Federal Reg22 ulations) of any private fund to which the in23 vestment adviser acts as an investment adviser; 


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1 (C) a qualified purchaser (as defined in sec2 tion 2(a) of the Investment Company Act of 1940 

3 (15 U.S.C. 80a–2(a))); or 

4 (D) an accredited investor (as defined in 

5 section 230.501 of title 17, Code of Federal Regu6 lations), determined as if the investment adviser 

7 were the issuer of securities referred to in such 

8 section and the time of the publication, circula9 tion, or distribution of the advertisement were 

10 the sale of such securities. 

11 SEC. 3. REMOVING DUPLICATIVE BURDENS AND APPRO12 PRIATELY TAILORING CERTAIN REQUIRE13 MENTS. 

14 (a) BROCHURE DELIVERY.—Not later than 90 days 

15 after the date of the enactment of this Act, the Commission 

16 shall amend section 275.204–3(c) of title 17, Code of Federal 

17 Regulations, to provide that an investment adviser is not 

18 required to deliver a brochure or brochure supplement to 

19 a client that is a limited partnership, limited liability com20 pany, or other pooled investment vehicle for which each lim21 ited partner, member, or other equity owner has received, 

22 before purchasing a security issued by the pooled investment 

23 vehicle, a prospectus, private placement memorandum, or 

24 other offering document containing (to the extent material 

25 to an understanding of the pooled investment vehicle, the 


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1 business of the pooled investment vehicle, and the securities 

2 being offered by the pooled investment vehicle) substantially 

3 the same information as would be required by Part 2A or 

4 2B of Form ADV at the time of delivery of the brochure 

5 or brochure supplement, as the case may be. 

6 (b) FORM PF.—Not later than 90 days after the date 

7 of the enactment of this Act, the Commission shall amend 

8 section 275.204(b)–1 of title 17, Code of Federal Regula9 tions, to provide that an investment adviser to a private 

10 fund is not required to report any information beyond that 

11 which is required by sections 1a and 1b of Form PF, unless 

12 such investment adviser is a large hedge fund adviser or 

13 a large liquidity fund adviser (as such terms are defined 

14 in such Form). 

15 (c) CUSTODY RULE.—Not later than 90 days after the 

16 date of the enactment of this Act, the Commission shall 

17 amend section 275.206(4)–2 of title 17, Code of Federal 

18 Regulations, as follows: 

19 (1) The Commission shall provide additional ex20 ceptions to the independent verification requirement 

21 of paragraph (a)(4) of such section for an investment 

22 adviser with respect to funds and securities of a lim23 ited partnership (or a limited liability company or 

24 other type of pooled investment vehicle), as follows: 


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1 (A) An exception that applies if the out2 standing securities (other than short-term paper, 

3 as defined in section 2(a) of the Investment Com4 pany Act of 1940 (15 U.S.C. 80a–2(a))) of the 

5 pooled investment vehicle are beneficially owned 

6 exclusively by— 

7 (i) the investment adviser; 

8 (ii) affiliated persons of the investment 

9 adviser; 

10 (iii) supervised persons of the invest11 ment adviser; 

12 (iv) officers, directors, and employees 

13 of the affiliated persons of the investment 

14 adviser; 

15 (v) family members and former family 

16 members (as such terms are defined in sec17 tion 275.202(a)(11)(G)–1 of title 17, Code of 

18 Federal Regulations) of persons described in 

19 clause (iii) or (iv); or 

20 (vi) officers, directors, employees, or af21 filiated persons of, or persons who provide, 

22 have provided, or have entered into a con23 tract to provide services to— 

24 (I) the investment adviser of the 

25 pooled investment vehicle; 


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1 (II) one or more clients of the in2 vestment adviser of the pooled invest3 ment vehicle; or 

4 (III) issuers from which the 

5 pooled investment vehicle or any other 

6 client of the investment adviser of the 

7 pooled investment vehicle has acquired 

8 securities, such as the portfolio com9 pany of a private fund. 

10 (B) An exception that applies if the pooled 

11 investment vehicle has been established to hold 

12 only the securities of a single issuer in which one 

13 or more pooled investment vehicles managed by 

14 the investment adviser have acquired a control15 ling interest. 

16 (2) Consistent with, and expanding on, IM 

17 Guidance Update No. 2013–04, titled ‘‘Privately Of18 fered Securities under the Investment Advisers Act 

19 Custody Rule’’, published by the Division of Invest20 ment Management of the Commission, the Commis21 sion shall, with respect to the exception for certain 

22 privately offered securities in paragraph (b)(2) of 

23 such section— 

24 (A) remove the requirement of clause (i)(B) 

25 of such paragraph (relating to the uncertificated 


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1 nature and recordation of ownership of the secu2 rities); and 

3 (B) remove the requirement of clause (ii) of 

4 such paragraph (relating to audit and financial 

5 statement distribution requirements with respect 

6 to securities of pooled investment vehicles). 

7 (d) PROXY VOTING RULE.—Not later than 90 days 

8 after the date of the enactment of this Act, the Commission 

9 shall amend section 275.206(4)–6 of title 17, Code of Fed10 eral Regulations, to provide that such section does not apply 

11 to any voting authority with respect to client securities that 

12 are not public securities. 

13 SEC. 4. FACILITATING ROBUST CAPITAL FORMATION BY 

14 PREVENTING REGULATORY MISMATCH. 

15 The Commission may not— 

16 (1) amend section 230.156 of title 17, Code of 

17 Federal Regulations, to extend the provisions of such 

18 section to offerings of securities issued by private 

19 funds; or 

20 (2) adopt rules applicable to offerings of securi21 ties issued by private funds that are substantially the 

22 same as the provisions of such section. 


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1 SEC. 5. EXCLUSION OF ADVISORY SERVICES TO REG2 ISTERED INVESTMENT COMPANIES. 

3 This Act shall not apply with respect to advisory serv4 ices provided, or proposed to be provided, to an investment 

5 company registered under the Investment Company Act of 

6 1940 (15 U.S.C. 80a–1 et seq.). 

7 SEC. 6. REFERENCES TO REGULATIONS. 

8 In this Act, any reference to a regulation shall be con9 strued to refer to such regulation or any successor thereto. 

10 SEC. 7. DEFINITIONS. 

11 In this Act: 

12 (1) PUBLIC SECURITY.—The term ‘‘public secu13 rity’’ means a security issued by an issuer that— 

14 (A) is required to submit reports under sec15 tion 13(a) or 15(d) of the Securities Exchange 

16 Act of 1934 (15 U.S.C. 78m(a); 78o(d)); or 

17 (B) has a security that is listed or traded 

18 on any exchange or organized market operating 

19 in a foreign jurisdiction. 

20 (2) TERMS DEFINED IN INVESTMENT ADVISERS

21 ACT OF 1940.—The terms defined in section 202(a) of 

22 the Investment Advisers Act of 1940 (15 U.S.C. 80b– 

23 2(a)) have the meanings given such terms in such sec24 tion. 


srobinson on DSK5SPTVN1PROD with BILLS
Union Calendar No. 540 

114TH CONGRESS 

2D SESSION H. R. 5424 

[Report No. 114–698] 

A BILL 

To amend the Investment Advisers Act of 1940 and 

for other purposes. quirements relating to investment advisers, and sion to amend its rules to modernize certain reto direct the Securities and Exchange CommisJULY 21, 2016 

Reported with an amendment, committed to the Comand ordered to be printed mittee of the Whole House on the State of the Union, 


srobinson on DSK5SPTVN1PROD with BILLS