I 

114TH CONGRESS 

2D SESSION H. R. 5424 

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 

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 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’’. 


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1 SEC. 2. MODERNIZING CERTAIN REQUIREMENTS RELATING 

2 TO INVESTMENT ADVISERS. 

3 (a) MAINTENANCE OF BOOKS AND RECORDS.—Not 

4 later than 90 days after the date of the enactment of this 

5 Act, the Securities and Exchange Commission shall amend 

6 section 275.204–2 of title 17, Code of Federal Regula7 tions, to provide that an investment adviser is not required 

8 to maintain— 

9 (1) any communications or materials (including 

10 communications or materials made available in a se11 cure electronic or physical data room) used in con12 nection with due diligence for a prospective invest13 ment, if the communications or materials are subject 

14 to a confidentiality agreement; or 

15 (2) any written communications required by 

16 paragraph (a)(7) of such section, if the communica17 tions are sent and received only by supervised per18 sons of the investment adviser. 

19 (b) INVESTMENT ADVISORY CONTRACTS.— 

20 (1) ASSIGNMENT.— 

21 (A) ASSIGNMENT DEFINED.—Section 

22 202(a)(1) of the Investment Advisers Act of 

23 1940 (15 U.S.C. 80b–2(a)(1)) is amended by 

24 striking ‘‘; but’’ and all that follows and insert25 ing ‘‘; but no assignment of an investment advi26 sory contract shall be deemed to result from the 


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1 death or withdrawal, or the sale or transfer of 

2 the interests, of a minority of the members, 

3 partners, shareholders, or other equity owners 

4 of the investment adviser having only a minor5 ity interest in the business of the investment 

6 adviser, or from the admission to the invest7 ment adviser of one or more members, partners, 

8 shareholders, or other equity owners who, after 

9 such admission, shall be only a minority of the 

10 members, partners, shareholders, or other eq11 uity owners and shall have only a minority in12 terest in the business.’’. 

13 (B) CONSENT TO ASSIGNMENT BY QUALI14 FIED CLIENTS.—Section 205(a)(2) of the In15 vestment Advisers Act of 1940 (15 U.S.C. 80b– 

16 5(a)(2)) is amended by inserting before the 

17 semicolon the following: ‘‘, except that if such 

18 other party is a qualified client (as defined in 

19 section 275.205–3 of title 17, Code of Federal 

20 Regulations, or any successor thereto), such 

21 other party may provide such consent at the 

22 time the parties enter into, extend, or renew 

23 such contract’’. 

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1 SHIP.—Section 205 of the Investment Advisers Act 

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

3 (A) in subsection (a)— 

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

5 semicolon and inserting ‘‘; or’’; 

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

7 or’’ and inserting a period; and 

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

9 (B) in subsection (d), by striking ‘‘para10 graphs (2) and (3) of subsection (a)’’ and in11 serting ‘‘subsection (a)(2)’’. 

12 (c) ADVERTISING RULE.— 

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

14 the date of the enactment of this Act, the Commis15 sion shall amend section 275.206(4)–1 of title 17, 

16 Code of Federal Regulations, to provide that para17 graphs (a)(1) and (a)(2) of such section do not 

18 apply to an advertisement that an investment ad19 viser publishes, circulates, or distributes solely to 

20 persons described in paragraph (2) of this sub21 section. 

22 (2) PERSONS DESCRIBED.—A person is de23 scribed in this paragraph if such person is, or the 

24 investment adviser reasonably believes such person 

25 is— 


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

2 275.205–3 of title 17, Code of Federal Regula3 tions), determined as of the time of the publica4 tion, circulation, or distribution of the adver5 tisement rather than immediately prior to or 

6 after entering into the investment advisory con7 tract referred to in such section; 

8 (B) a knowledgeable employee (as defined 

9 in section 270.3c–5 of title 17, Code of Federal 

10 Regulations) of any private fund to which the 

11 investment adviser acts as an investment ad12 viser; 

13 (C) a qualified purchaser (as defined in 

14 section 2(a) of the Investment Company Act of 

15 1940 (15 U.S.C. 80a–2(a))); or 

16 (D) an accredited investor (as defined in 

17 section 230.501 of title 17, Code of Federal 

18 Regulations), determined as if the investment 

19 adviser were the issuer of securities referred to 

20 in such section and the time of the publication, 

21 circulation, or distribution of the advertisement 

22 were the sale of such securities. 


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1 SEC. 3. REMOVING DUPLICATIVE BURDENS AND APPRO2 PRIATELY TAILORING CERTAIN REQUIRE3 MENTS. 

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

5 after the date of the enactment of this Act, the Commis6 sion shall amend section 275.204–3(c) of title 17, Code 

7 of Federal Regulations, to provide that an investment ad8 viser is not required to deliver a brochure or brochure sup9 plement to a client that is a limited partnership, limited 

10 liability company, or other pooled investment vehicle for 

11 which each limited partner, member, or other equity owner 

12 has received, before purchasing a security issued by the 

13 pooled investment vehicle, a prospectus, private placement 

14 memorandum, or other offering document containing (to 

15 the extent material to an understanding of the pooled in16 vestment vehicle, the business of the pooled investment ve17 hicle, and the securities being offered by the pooled invest18 ment vehicle) substantially the same information as would 

19 be required by Part 2A or 2B of Form ADV at the time 

20 of delivery of the brochure or brochure supplement, as the 

21 case may be. 

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

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

24 section 275.204(b)–1 of title 17, Code of Federal Regula25 tions, to provide that an investment adviser to a private 

26 fund is not required to report any information beyond that 


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1 which is required by sections 1a and 1b of Form PF, un2 less such investment adviser is a large hedge fund adviser 

3 or a large liquidity fund adviser (as such terms are defined 

4 in such Form). 

5 (c) FREQUENCY OF TRANSACTION REPORTS BY AC6 CESS PERSONS.—Not later than 90 days after the date 

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

8 section 275.204A–1 of title 17, Code of Federal Regula9 tions, so as to provide that, in the case of an investment 

10 adviser that acts as an investment adviser solely to one 

11 or more clients that primarily own or hold securities that 

12 are not public securities (regardless of whether such secu13 rities were public securities at the time of acquisition by 

14 the client or clients), the code of ethics required by such 

15 section shall require the access persons of the investment 

16 adviser to submit the transaction reports described in 

17 paragraph (b)(2) of such section at a frequency specified 

18 by the investment adviser, but not less frequently than an19 nually. 

20 (d) CUSTODY RULE.—Not later than 90 days after 

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

22 shall amend section 275.206(4)–2 of title 17, Code of Fed23 eral Regulations, as follows: 

24 (1) The Commission shall provide additional ex25 ceptions to the independent verification requirement 


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1 of paragraph (a)(4) of such section for an invest2 ment adviser with respect to funds and securities of 

3 a limited partnership (or a limited liability company 

4 or other type of pooled investment vehicle), as fol5 lows: 

6 (A) An exception that applies if the out7 standing securities (other than short-term 

8 paper, as defined in section 2(a) of the Invest9 ment Company Act of 1940 (15 U.S.C. 80a– 

10 2(a))) of the pooled investment vehicle are ben11 eficially owned exclusively by— 

12 (i) the investment adviser; 

13 (ii) affiliated persons of the invest14 ment adviser; 

15 (iii) supervised persons of the invest16 ment adviser; 

17 (iv) officers, directors, and employees 

18 of the affiliated persons of the investment 

19 adviser; 

20 (v) family members and former family 

21 members (as such terms are defined in sec22 tion 275.202(a)(11)(G)–1 of title 17, Code 

23 of Federal Regulations) of persons de24 scribed in clause (iii) or (iv); or 


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1 (vi) officers, directors, employees, or 

2 affiliated persons of, or persons who pro3 vide, have provided, or have entered into a 

4 contract to provide services to— 

5 (I) the investment adviser of the 

6 pooled investment vehicle; 

7 (II) one or more clients of the in8 vestment adviser of the pooled invest9 ment vehicle; or 

10 (III) issuers from which the 

11 pooled investment vehicle or any other 

12 client of the investment adviser of the 

13 pooled investment vehicle has acquired 

14 securities, such as the portfolio com15 pany of a private fund. 

16 (B) An exception that applies if the pooled 

17 investment vehicle has been established to hold 

18 only the securities of a single issuer in which 

19 one or more pooled investment vehicles man20 aged by the investment adviser have acquired a 

21 controlling interest. 

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

23 Guidance Update No. 2013–04, titled ‘‘Privately Of24 fered Securities under the Investment Advisers Act 

25 Custody Rule’’, published by the Division of InvestVerDate Sep 11 2014 03:59 Jun 10, 2016 Jkt 059200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H5424.IH H5424

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1 ment Management of the Commission, the Commis2 sion shall, with respect to the exception for certain 

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

4 such section— 

5 (A) remove the requirement of clause 

6 (i)(B) of such paragraph (relating to the 

7 uncertificated nature and recordation of owner8 ship of the securities); and 

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

10 of such paragraph (relating to audit and finan11 cial statement distribution requirements with 

12 respect to securities of pooled investment vehi13 cles). 

14 (e) PROXY VOTING RULE.—Not later than 90 days 

15 after the date of the enactment of this Act, the Commis16 sion shall amend section 275.206(4)–6 of title 17, Code 

17 of Federal Regulations, to provide that such section does 

18 not apply to any voting authority with respect to client 

19 securities that are not public securities. 

20 SEC. 4. FACILITATING ROBUST CAPITAL FORMATION BY 

21 PREVENTING REGULATORY MISMATCH. 

22 The Commission may not— 

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

24 Federal Regulations, to extend the provisions of 


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1 such section to offerings of securities issued by pri2 vate funds; or 

3 (2) adopt rules applicable to offerings of securi4 ties issued by private funds that are substantially 

5 the same as the provisions of such section. 

6 SEC. 5. EXCLUSION OF ADVISORY SERVICES TO REG7 ISTERED INVESTMENT COMPANIES. 

8 This Act shall not apply with respect to advisory serv9 ices provided, or proposed to be provided, to an investment 

10 company registered under the Investment Company Act 

11 of 1940 (15 U.S.C. 80a–1 et seq.). 

12 SEC. 6. REFERENCES TO REGULATIONS. 

13 In this Act, any reference to a regulation shall be con14 strued to refer to such regulation or any successor thereto. 

15 SEC. 7. DEFINITIONS. 

16 In this Act: 

17 (1) PUBLIC SECURITY.—The term ‘‘public secu18 rity’’ means a security issued by an issuer that— 

19 (A) is required to submit reports under 

20 section 13(a) or 15(d) of the Securities Ex21 change Act of 1934 (15 U.S.C. 78m(a); 

22 78o(d)); or 

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

24 on any exchange or organized market operating 

25 in a foreign jurisdiction. 


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1 (2) TERMS DEFINED IN INVESTMENT ADVISERS

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

3 of the Investment Advisers Act of 1940 (15 U.S.C. 

4 80b–2(a)) have the meanings given such terms in 

5 such section. 

Æ 


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