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[Congressional Bills 114th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5424 Introduced in House (IH)]

<DOC>

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.

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

SECTION 1. SHORT TITLE.

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

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.).

SEC. 6. REFERENCES TO REGULATIONS.

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

SEC. 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.
                                 <all>
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