The Investment Advisers Modernization Act of 2016

On June 16th, the House Financial Services Committee approved H.R. 5424, the “Investment Advisers Modernization Act of 2016.” The proposed bill primarily provides relief to private fund advisers, but also includes provisions applicable to investment advisers that don’t manage private funds. Notably, these provisions do not apply to advisers of registered investment companies.  The key provisions of the proposed bill are:

  • Books & records retention:  Advisers would not be required to maintain materials used in connection with due diligence for a prospective investment, if the materials are subject to a confidentiality agreement.  Also, any internal communications sent and received only by supervised persons of the adviser would be exempt from retention requirements.
  • Contracts:  Expands the definition regarding the assignment of advisory contracts when there is minority change of ownership to specifically cover additional types of entities.  Also, provides that consent of assignments by qualified clients may be given at the time such clients “enter into, extend, or renew such contract”, and removes the notice requirement by partnerships when there is a change in partners.
  • Advertising:  Advertising materials distributed solely to qualified clients, knowledgeable employees of advisers to private funds, qualified purchasers, and accredited investors (each is a defined term with qualification requirements), would be able to include testimonials and past specific recommendations.
  • Brochure delivery:  Advisers would be relieved of the obligation to deliver a brochure and brochure supplement to a privately held pooled investment vehicle (private fund) client, so long as the private fund investors have received the same information via delivery of a private placement memorandum or other offering documents.
  • Form PF:  Advisers to private funds shall not be required to report information beyond that required in sections 1a and 1b of Form PF unless the adviser is a large hedge fund or a large liquidity fund adviser.
  • Personal trading:  Access persons of advisers that provide services solely to one or more clients who hold only privately held securities, would be required to submit transaction reports annually instead of the current quarterly requirement, unless more frequent reporting is required  by the adviser.
  • Proxy voting: SEC Rule 206(4)-6 (proxy voting) would not apply to any voting authority with respect to client securities that are not publicly traded securities.
  • Custody rule:  Under certain conditions, advisers to certain pooled investment vehicles would be granted an exception to the independent verification (surprise audit) requirement under the custody rule when the only investors are the adviser or its officers, directors, affiliates, family members etc.

HR 5424 still must be passed by the House and Senate and then signed by the President to become law, which may or may not happen.  However, compliance personnel may want to consider how these changes could affect business practices, if approved by the President and monitor the progress of the proposal.  For further information or if you have any questions, please contact us at or (619) 278-0020.

Leave a Reply

Your email address will not be published. Required fields are marked *