What Is The Investment Modernization Act of 2016?
The Investment Modernization Act of 2016 is a bi-partisan bill that would amend the Investment Advisors Act of 1940 and update selected Securities and Exchange Commission (SEC) rules to “modernize certain requirements relating to investment advisers.” ((H.R. 5424 114th Cong. (2D Sess. 2016)) The bill passed the House on September 9th 2016. The likelihood of the bill becoming law is low. According to Govtracker.com, the bill has a 15% chance of being enacted. ((H.R.5425: Investment Modernization Act of 2016, GovTrack.us, https://www.govtrack.us/congress/bills/114/hr5424)). Still, the bill is interesting because it is an example of legislation in the wake of Dodd-Frank aimed at either providing a needed update to rules regulating investment advisors, or it is one of the first bills that will try and chip away many of the Dodd-Frank regulations that provide protection for investors.
Although introduced as a bi-partisan bill, support for it is overwhelmingly Republican. It passed in the House with a 61% majority, and 86.5% of the yes votes were cast by Republicans. ((House Vote #495 in 2016, GovTrack.us, https://www.govtrack.us/congress/votes/114-2016/h495))
According to the Congressional Budget Office, the implementation of H.R 5424 would cost $2M in administration costs over a five-year period. ((H.R. 5424, Investment Advisers Modernization Act of 2016: Cost Estimate, Congressional Budget Office, https://www.cbo.gov/publication/51792)) However, this cost would be offset by fees collected, and therefore the net effect would be insignificant. ((Id.)) As such, if the bill were to be successful, there is unlikely to be a significant, direct financial impact resulting from the implementation of the bill. The main impact of the bill will likely be on investors and funds, with respect to an easing of regulatory requirements.
Not surprisingly, many in the Asset Management industry are praising the bill as a needed reform to update outdated rules and regulations. In particular, proponents focus on how the investment landscape has evolved since the 1940s and the current laws have “not kept pace” with modern developments. ((Investment Modernization Act of 2016, Investment Advisor Association, https://www.investmentadviser.org/eweb/dynamicpage.aspx?webcode=ki_hr5424_2016.)) The changes in the law are lauded as reducing burdens on “small businesses” that provide no significant benefits to consumers. ((Id.)) Supporters also suggest that the bill still maintains important checks on investment activities. In particular, it maintains federal exams on private equity firms—an important component of the post-2008 crisis Dodd-Frank reforms. ((Ben Protess and Danielle Ivory, Private Equity Tries to Chip Away at Dodd-Frank with House Bill, The New York Times (Sept. 8, 2016), http://www.nytimes.com/2016/09/09/business/dealbook/private-equity-tries-to-chip-away-at-dodd-frank-with-house-bill.html?_r=0.
Critics of the bill claim the opposite. They claim that its enactment will allow hedge funds and private equity firms to “escape from virtually all enforcement efforts” and that it will “weaken protections meant to stop Madoff-types frauds.” ((Yves Smith, HR 5424, “Investment Advisers Modernization Act,” a “Get Out of Madoff and Other Frauds for Free” Bill, Passes Financial Services Committee, Naked Capitalism (Jun. 17, 2016), http://www.nakedcapitalism.com/2016/06/hr-5424-investment-advisers-modernization-act-a-get-out-of-madoff-and-other-frauds-for-free-bill-passes-financial-services-committee.html)). Others oppose the bill because it “will diminish the flow of information between managers and investors” and “weaken the SEC’s ability to provide oversight of private equity managers.” ((Letter from Institutional Ltd. Partners Assoc. to The Honorable Maxine Waters (Sept. 6, 2016), http://democrats.financialservices.house.gov/uploadedfiles/ilpa_on_hr_5424.pdf)) The bill would in fact loosen reporting requirements regarding the nature of investments. ((H.R. 5424)) The impact of these looser reporting requirements is debatable, as discussed in Part II.
What Changes Would the Act Make to Existing Law?
Key provisions of the bill include changes to requirements relating to investment advisors, advertising rules, and removing certain reporting requirements. Specifically, the bill seeks to:
- Amend the Investment Advisers Act of 1940’s definition of “Assignment.”
- Amend the 1940 Act’s process of assignment by qualified clients.
- Revise the 1940 Act’s requirements for notifications for changes in membership of partnership.
- Revise the 1940 Act’s restrictions on advertisements by removing the restriction for four categories of people.
- Remove the 1940 Act’s requirement for reporting information beyond what is required by section 1a and 1b of Form PF (this does not apply to large hedge fund or large liquidity fund advisers).
- Remove requirements in the Code of Federal Regulations relating to uncertified nature and recordation of ownership and relating to audit and financial statements for pooled investment vehicles.
- Amend the Code of Federal Regulations to exempt non-public securities from certain voting requirements.
- Prohibit the Commission from extending certain provisions to securities issued by private funds, and prevent the commission from enacting new rules that would do the same. (()).
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