Modernization Act

H.R. 5424, the “Investment Advisers Modernization Act of 2016”

The Investment Adviser Association (IAA) strongly supports H.R. 5424, the “Investment Advisers Modernization Act of 2016,” introduced on June 9 by Rep. Robert Hurt (R-Va.), with cosponsors Juan Vargas (D-Ca.), Steve Stivers (R-Oh.), and Bill Foster (D-Ill.). The bill, which will provide much-needed updates to the Investment Advisers Act of 1940, was favorably reported out of committee by a 47-12 vote on June 16.

Background

The statutory framework of the Investment Advisers Act has proven remarkably robust in protecting investors. However, the financial services landscape has evolved significantly over the last 75 years and certain of the Advisers Act’s provisions have not kept pace with these developments. A number of these provisions impose undue burdens on investment advisers – most of which are small businesses – without commensurate investor benefit.

The Modernization Act

The bill is comprised of narrowly crafted provisions amending the Advisers Act that will relieve advisers of unnecessary burdens without affecting the paramount investor protections provided by the Act.

Although primarily providing relief to private fund advisers, the bill also includes provisions with broader application to investment advisers (other than those providing advisory services to mutual funds). The bill includes provisions that:

  • Repeal a rule dating to 1961 that bans advisers’ use of testimonials and references to past specific recommendations, to the extent the materials are distributed solely to certain sophisticated clients and high net worth individuals, relying instead on well-established anti-fraud standards governing such materials.
  • Amend the SEC’s complex Custody Rule, offering relief from one aspect of the Rule in situations involving privately offered securities where there is little risk of misappropriation by the adviser because restricted securities are not readily transferrable.
  • Ease burdens related to the assignment of advisory contracts for advisers with structures other than partnerships – which are excluded under current law – when there is a change in minority ownership, thereby eliminating an unjustified bias in favor of certain forms of corporate structure.