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 re-
quirements 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. STIV-
ERS) 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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Be it enacted by the Senate and House of Representa-
tives 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) 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 con-
tract shall be deemed to result from the death or 
withdrawal, or the sale or transfer of the inter-
ests, of a minority of the members, partners, 
shareholders, or other equity owners of the invest-
ment 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, share-
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holders, or other equity owners and shall have 
only a minority interest in the business.’’. 
(B) CONSENT TO ASSIGNMENT BY QUALI-
FIED CLIENTS.—Section 205(a)(2) of the Invest-
ment Advisers Act of 1940 (15 U.S.C. 80b– 
5(a)(2)) is amended by inserting before the semi-
colon 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 Regula-
tions, 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 NOTIFICA-
TION
OF
CHANGE
IN
MEMBERSHIP
OF
PARTNER-
SHIP.—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 ‘‘para-
graphs (2) and (3) of subsection (a)’’ and insert-
ing ‘‘subsection (a)(2)’’. 
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(b) 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 Regula-
tions), determined as of the time of the publica-
tion, circulation, or distribution of the advertise-
ment 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 Reg-
ulations) of any private fund to which the in-
vestment adviser acts as an investment adviser; 
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(C) a qualified purchaser (as defined in sec-
tion 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 Regu-
lations), determined as if the investment adviser 
were the issuer of securities referred to in such 
section and the time of the publication, circula-
tion, or distribution of the advertisement were 
the sale of such securities. 
SEC. 3. REMOVING DUPLICATIVE BURDENS AND APPRO-
PRIATELY 
TAILORING 
CERTAIN 
REQUIRE-
MENTS. 
(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 com-
pany, or other pooled investment vehicle for which each lim-
ited 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 
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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 Regula-
tions, 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) 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 ex-
ceptions to the independent verification requirement 
of paragraph (a)(4) of such section for an investment 
adviser with respect to funds and securities of a lim-
ited partnership (or a limited liability company or 
other type of pooled investment vehicle), as follows: 
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(A) An exception that applies if the out-
standing securities (other than short-term paper, 
as defined in section 2(a) of the Investment Com-
pany 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 invest-
ment 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 sec-
tion 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 af-
filiated persons of, or persons who provide, 
have provided, or have entered into a con-
tract to provide services to— 
(I) the investment adviser of the 
pooled investment vehicle; 
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(II) one or more clients of the in-
vestment adviser of the pooled invest-
ment 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 com-
pany 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 control-
ling interest. 
(2) Consistent with, and expanding on, IM 
Guidance Update No. 2013–04, titled ‘‘Privately Of-
fered Securities under the Investment Advisers Act 
Custody Rule’’, published by the Division of Invest-
ment Management of the Commission, the Commis-
sion 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 
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nature and recordation of ownership of the secu-
rities); 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). 
(d) 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 Fed-
eral 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 securi-
ties issued by private funds that are substantially the 
same as the provisions of such section. 
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SEC. 5. EXCLUSION OF ADVISORY SERVICES TO REG-
ISTERED INVESTMENT COMPANIES. 
This Act shall not apply with respect to advisory serv-
ices 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 con-
strued to refer to such regulation or any successor thereto. 
SEC. 7. DEFINITIONS. 
In this Act: 
(1) PUBLIC SECURITY.—The term ‘‘public secu-
rity’’ means a security issued by an issuer that— 
(A) is required to submit reports under sec-
tion 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 sec-
tion. 
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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 
to direct the Securities and Exchange Commis-
sion to amend its rules to modernize certain re-
quirements relating to investment advisers, and 
for other purposes. 
JULY 21, 2016 
Reported with an amendment, committed to the Com-
mittee of the Whole House on the State of the Union, 
and ordered to be printed 
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