[Congressional Record Volume 162, Number 136 (Friday, September 9, 2016)]
[House]
[Pages H5230-H5239]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
INVESTMENT ADVISERS MODERNIZATION ACT OF 2016
Mr. HURT of Virginia. Mr. Speaker, pursuant to House Resolution 844,
I call up the bill (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, and ask for its immediate
consideration in the House.
The Clerk read the title of the bill.
The SPEAKER pro tempore. Pursuant to House Resolution 844, the
amendment in the nature of a substitute recommended by the Committee on
Financial Services, printed in the bill, is adopted, and the bill, as
amended, is considered read.
The text of the bill, as amended, is as follows:
H.R. 5424
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) 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)''.
(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 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) 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
[[Page H5231]]
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 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.
The SPEAKER pro tempore. The bill, as amended, shall be debatable for
1 hour equally divided and controlled by the chair and ranking minority
member of the Committee on Financial Services.
After 1 hour of debate on the bill, as amended, it shall be in order
to consider the further amendment printed in part B of House Report
114-725, if offered by the Member designated in the report, shall be
considered read, shall be separately debatable for the time specified
in the report equally divided and controlled by the proponent and an
opponent, and shall not be subject to a demand for a division of the
question.
The gentleman from Virginia (Mr. Hurt) and the gentlewoman from
California (Ms. Maxine Waters) each will control 30 minutes.
The Chair recognizes the gentleman from Virginia.
General Leave
Mr. HURT of Virginia. Mr. Speaker, I ask unanimous consent that all
Members may have 5 legislative days in which to revise and extend their
remarks and submit extraneous materials on the bill under
consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Virginia?
There was no objection.
Mr. HURT of Virginia. Mr. Speaker, I yield myself such time as I may
consume.
Mr. Speaker, I rise in support of H.R. 5424, the Investment Advisers
Modernization Act of 2016.
I represent a rural district in Virginia, Virginia's Fifth District,
which stretches from Fauquier County to the North Carolina border.
As I traveled through my district during August, much as I have done
throughout my time in Congress, I continued to hear hardworking
Americans express concern about the current state of our economy and
the economic uncertainty facing their children and grandchildren. I
think every Member of this body can agree that, with millions of
Americans out of work, our top focus in Congress should be on enacting
policies to help spur job creation throughout our country.
Today, we are discussing several legislative efforts that, if
enacted, will encourage economic growth and job creation by reducing
unnecessary regulatory burdens. One of these measures is a bipartisan
piece of legislation that I have been working on with Representatives
Foster, Vargas, Stivers, Hultgren, Sinema, and others. In fact, during
a June markup in the Financial Services Committee, H.R. 5424 garnered
broad bipartisan support, passing by 47-12.
This measure, the Investment Advisers Modernization Act, is an effort
to modernize a 76-year-old law to reflect current industry needs and
standards. The legislation directs the SEC to update rules that clarify
provisions within the Investment Advisers Act.
Specifically, the legislation modernizes the outdated portions of the
Investment Advisers Act, such as ``assignment'' definition; it removes
duplicative requirements, such as the notification to clients for any
change in membership of a partnership; and it tailors current reporting
metrics so that advisers are not required to provide burdensome and
unnecessary information on their portfolio companies, among other
things. Most importantly, it streamlines the regulatory scheme, while
giving the SEC sufficient discretion to craft these rules to ensure
investor protection. To be clear, this bill would in no way compromise
investor protection, nor would it hinder the SEC's ability to pursue
enforcement actions.
In our district, the investment of private capital is responsible for
thousands of jobs. These critical investments allow our small
businesses to innovate, expand their operations, and create jobs that
our communities need.
Over the past three Congresses, there has been growing concern about
the burden that Dodd-Frank unnecessarily placed on advisers to private
equity, while at the same time exempting advisers to similar investment
funds.
Over recent years, many of us have worked together in a bipartisan
effort to eliminate the registration required by Dodd-Frank, but this
bill does not do that and would not change the registration requirement
that Dodd-Frank mandated. It simply updates the Investment Advisers
Act. Instead, this legislation is a pragmatic and bipartisan approach
to addressing some of the concerns with the Investment Advisers Act.
No matter your views on Dodd-Frank, the Investment Advisers
Modernization Act represents the view that Congress should continuously
look for bipartisan, commonsense solutions to update and streamline its
laws in order to encourage economic growth and job creation.
I ask my colleagues on both sides of the aisle to support H.R. 5424,
the Investment Advisers Modernization Act.
Mr. Speaker, I reserve the balance of my time.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
Mr. Speaker, we stand here today after an extraordinarily long
recess, and Republicans' first order of businesses is to protect Wall
Street profits instead of dealing with a host of critical issues facing
the American public.
I recently visited Baton Rouge, Louisiana, where thousands of
residents are still without homes and communities are struggling to
recover in the wake of last month's historic devastating flooding.
There is so much that we need to do as Members of Congress to help
our constituents in the short amount of time we have left in session,
whether it is helping the people of Baton Rouge, ending the crisis of
homelessness in America, or preventing senseless gun violence. However,
rather than working together to pass sensible legislation to address
these issues, we are debating H.R. 5424, a bad bill that would put
Americans' savings and investments at risk by opening the door to
further abuses in the private equity industry.
This is an industry that touches all of us because it is not just
private businesses looking to these funds to raise capital. One-quarter
of the investments held by private equity firms come from our public
pension funds that are holding our teachers' and firefighters'
retirement savings. And it is not just our public pensions that are on
the line. It is also our emergency services and mortgages and consumer
lending markets where private equity funds are increasing their
presence.
That is why it is so important to have adequate oversight of this
industry. We must ensure that Wall Street does not turn a profit at the
expense of investors, consumers, and retirees.
Unfortunately, H.R. 5424 would roll back Dodd-Frank's much-needed
oversight and transparency measures for the shadow banking industry.
Dodd-Frank required advisers to private equity funds and hedge funds
with more than $150 million in assets under management to register with
the SEC and
[[Page H5232]]
comply with important reporting and audit requirements. In addition, it
required newly registered advisers to file systemic risk reports with
the Financial Stability Oversight Council, because we had sufficient
information on the risks that private funds could pose to our economy
as a whole.
Thanks to this new oversight, the Securities and Exchange Commission
has been able to examine and, where appropriate, bring enforcement
actions against private fund advisers. In fact, the SEC has brought
numerous enforcement actions against private fund advisers for a
variety of transgressions in the past few years.
In 2013, the SEC identified violations or weaknesses in more than 50
percent of cases where it had examined how fees and expenses are
handled by advisers. Recently, the SEC Director of Enforcement urged
greater transparency in this area and said the Commission ``will
continue to aggressively bring impactful cases in this space.''
All of this comes on top of recent news reports showing how private
equity firms are investing in our fire departments, ambulance services,
and mortgage and consumer lending markets. Their profit-driven tactics
have resulted in slower reaction times in our emergency services,
exorbitant interest rates, and the same sort of foreclosure abuses that
we witnessed before and during the financial crisis.
So, when it comes to private equity funds and hedge funds, it is
clear that more regulation is needed, not less. Yet this bill takes us
in the wrong direction. For example, advisers would no longer have to
notify clients of a change in ownership or provide them with
information on their procedures for handling conflicts of interest in
voting proxies. Additionally, they would not have to disclose
information on large funds to the FSOC, making it harder to monitor and
detect systemic risk.
Also troubling is that the bill would create a Bernie Madoff loophole
by providing a broad exception from an annual audit requirement for
funds whose investors may have a relationship with the adviser and for
funds invested in private securities that are not represented by a
paper certificate.
I must note that, despite efforts by my colleagues to amend this bill
and remove some of its harmful provisions, there are still too many
problematic provisions in this bill that would put investors, retirees,
and consumers at risk. That is why it is opposed by consumer and
investor advocates, State security regulators, institutional investors,
and labor unions representing workers whose pensions could be affected.
Moreover, the White House has threatened to veto the bill, saying it
``would enable private fund advisers to slip back into the shadows''
and ``unnecessarily put working and middle class families at risk,
while benefiting Wall Street and other narrow special interests.''
I, therefore, strongly urge my colleagues to oppose H.R. 5424.
I reserve the balance of my time.
{time} 0930
Mr. HURT of Virginia. Mr. Speaker, I yield 3 minutes to the gentleman
from Missouri (Mr. Luetkemeyer), who is the chairman of our Housing and
Insurance Subcommittee.
Mr. LUETKEMEYER. Mr. Speaker, I first would like to thank the
gentleman from Virginia (Mr. Hurt) for his hard work on H.R. 5424.
Since joining this body, Mr. Hurt has been a tireless advocate for
small business creation, capital formation, and working with families
across Virginia and throughout the United States. He is to be commended
for his efforts.
Today, Mr. Speaker, we will consider his legislation, H.R. 5424, the
Investment Advisers Modernization Act. This bill makes long-awaited and
sensible changes to the 76-year-old Investment Advisers Act. H.R. 5424
also streamlines requirements for private equity funds and
sophisticated investors in private equity funds.
As I said on the floor yesterday, there should be no room for
regulation that serves only to appease bureaucratic demands. Capital
should be used to create jobs and further growth, not fulfill
meaningless and unproductive regulatory requirements.
Private equity plays a vital role in our economy. I have seen it
firsthand in my district and across Missouri, and hope my colleagues
recognize that private equity is responsible for saving and creating
jobs in each of their congressional districts. Capital is the lifeblood
of businesses.
At a time when investment returns are down and options are limited,
when investment advice is more expensive and may soon be out of reach
for many Americans, and when our economy continues to stagnate, we need
to take measured steps to streamline regulations and free equity. That
is the way you fuel an economic recovery.
This bill came to us from constituents who we have been listening to
during all of the different times that we go home and talk to them.
They said these are the rules and regulations that are strangling their
ability to do business.
The ranking member just talked about a shadow banking system. I would
argue that we have a shadow regulatory system that is producing rules
and regulations at a furious clip, and without understanding the
consequences of those rules and regulations.
H.R. 5424 will make modest but meaningful changes to existing law.
This is a bipartisan bill that received support from the majority of
the minority during the Financial Services Committee markup. It is
legislation that merits support from all my colleagues, and that is
because H.R. 5424 is about modernization, capital formation and,
ultimately, American jobs.
I ask my colleagues to join me in supporting this legislation. I
thank the gentleman from Virginia for his leadership on these issues
and Chairman Hensarling for bringing this bill to the floor.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield 3\1/2\ minutes
to the gentlewoman from New York (Mrs. Carolyn B. Maloney), the ranking
member of our Subcommittee on Capital Markets and Government Sponsored
Enterprises.
Mrs. CAROLYN B. MALONEY of New York. I thank the gentlewoman for
yielding.
Mr. Speaker, I rise today in opposition to H.R. 5424.
While my good friend from Illinois, Mr. Foster, is going to offer an
amendment that would remove two of the most problematic provisions, I,
unfortunately, still have serious concerns with the remaining
provisions in the bill, which makes changes to core aspects of a
regulatory regime that has been very successful for decades.
For one thing, this entire bill applies to more than just private
equity funds. It applies to private equity funds, hedge funds, and
commodity pools. So, as a threshold matter, this is not narrow or
targeted relief.
I also have a problem with the provision exempting private equity
advisers from the Proxy Voting Rule for private securities. The Proxy
Voting Rule simply requires advisers to have a policy--just a policy--
in place to deal with conflicts of interest when the adviser is voting
on shareholder proposals on their clients' behalf.
Proxy voting is not limited to public companies, and conflicts of
interest exist whether a company is public or private. So there is
really no reason why private securities should get an exemption here.
In fact, private equity advisers are even more likely to have a
conflict of interest when they are voting on shareholder proposals on a
client's behalf because the entire business model of a private equity
funds is premised on the funds having a significant amount of
influence, if not outright control; and, in some cases, they even
manage the company.
So a private equity adviser that is voting on a client's behalf would
have a conflict of interest virtually every time it is faced with a
proposal that is good for management, but bad for shareholders.
Requiring a private equity adviser to have policies in place to
manage these conflicts of interest is really not too much to ask. We
are just asking for policies to be in place.
While I think there are some very good things in this bill that are
reasonable, I think too many of the provisions go too far, so I urge my
colleagues to oppose this bill.
Mr. HURT of Virginia. Mr. Speaker, I yield 3 minutes to the gentleman
from Illinois (Mr. Hultgren).
Mr. HULTGREN. Mr. Speaker, I rise today in support of H.R. 5424, the
Investment Advisers Modernization Act.
[[Page H5233]]
I am proud to be a cosponsor of this legislation, which was introduced
by Congressman Hurt. I would especially like to thank Speaker Ryan and
Chairman Hensarling for their work in bringing this up for a vote
today.
Private equity has a long history of making a positive difference for
Illinois companies, their employees, and our communities. Over the last
10 years, private equity firms have invested hundreds of billions of
dollars in Illinois-based companies. In fact, Illinois ranked number
one nationally in attracting private equity investment in 2015,
according to the American Investment Council.
It comes as no surprise that these companies, backed by strong
financing and experienced management, with innovative products and
services, support hundreds of thousands of workers and their families.
In addition to the economic growth driven by private equity, we also
shouldn't overlook its importance to investors. For example, the State
Universities Retirement System of Illinois and its 200,000 members
depend on investments in private equity-backed companies.
So why shouldn't we, as legislators, seize an opportunity to make
private equity investment easier?
This bill would make relatively modest updates to a 76-year-old
Investment Advisers Act.
Our securities laws are meant to reflect the sophistication of the
investors. We should not apply cumbersome regulations intended for
less-sophisticated retail investors to professionals with deep
knowledge and expertise of investment advising.
The majority of private equity funds in Illinois are middle market
and do not have large administrative staffs. Generally, the staff is
just one or two finance professionals. The proliferation of rules,
reporting, and regulation at both the Federal and State level has
severely taxed these firms and taken valuable resources away from the
important job of identifying, investing in and growing companies and,
thus, growing our economy.
The Investment Advisers Modernization Act will reduce administrative
costs, making it easier to invest in our communities, and improve the
rate of return, whether they are saving for retirement or for a
university's endowment.
In closing, I would like to thank Chairman Hensarling again and Mr.
Hurt for their leadership on this legislation.
It is no surprise that such a commonsense bill already has a strong
bipartisan record. I urge all of my colleagues to support the
Investment Advisers Modernization Act.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
Mr. Speaker, after general debate, my colleague from Illinois will
offer an amendment to eliminate two toxic provisions of this bill.
While I am supportive of his effort, I am concerned that his amendment
does not go far enough.
I am going to describe the six provisions Mr. Foster's amendment
leaves intact but that are still harmful to investors and threatens the
ability of the SEC to oversee private equity funds and hedge funds. As
such, even if the amendment is adopted, I urge all Members to oppose
final passage of H.R. 5424.
The first reason to vote against final passage is that H.R. 5424
would still remove systemic risk reporting requirements for private
equity funds. Congress created the Financial Stability Oversight
Council when it passed the Dodd-Frank Act to look for risks across the
entire financial system, including those within shadow banks like
private equity funds.
Democrats understood that one of the most important lessons of the
crisis was the value of sunshine into all of the dark corners of our
markets. We do not want another AIG to make enough risky financial bets
to take down the entire economy without anyone knowing until it is too
late.
H.R. 5424, however, would repeal the requirement that large private
equity firms provide certain information about their portfolio
companies and their leverage.
The second reason to vote ``no'' on an amended H.R. 5424 is that the
bill still would prohibit the SEC from applying the antifraud guidance
related to advertising materials of mutual funds to private equity
funds and hedge funds. This is a basic investor protection.
Private equity funds should not be able to selectively use
performance data to dupe investors into buying their funds. It works
for mutual funds and it will work for other funds similarly.
Reason number three to oppose H.R. 5424 is that the amended bill
would remove the bright-line test for fraudulent and misleading
advertising materials, thereby allowing private equity advisers to use
testimonials and past recommendations to create a false perception of
the adviser's performance. This provision will enable private equity
funds to more easily sell key securities to unsuspecting investors.
Reason number four to vote ``no'' is the bill would still remove the
requirement that fund advisers notify investors of ownership changes.
This would allow an adviser to sell its business or the fund it manages
to anyone, raising the concern that an unacceptable party would
suddenly be managing a pension's invested money without their consent.
The public pension plans have a right to know if the star manager has
been replaced with an underachiever.
An amended H.R. 5424 also would repeal disclosures of proxy voting
procedures for handling conflicts of interest. Namely, the bill
eliminates a requirement that advisers to private equity funds and
hedge funds have policies and procedures in place to dictate how and
when the adviser will vote a proxy and how it will mitigate any
conflicts of interest.
Because these policies and procedures inform investors and the SEC to
whether an adviser is meeting some of its fiduciary responsibilities, I
find it hard to understand how Democrats who stood up to protect the
fiduciary obligations of everyday Americans can now support weakening
it for the funds investing on behalf of those Americans.
Finally, even though the Foster amendment preserves the audit
requirement for certificated securities, the bill would remove the
audit requirement under the SEC's custody rules for private,
uncertificated securities for which advisers would not have to keep any
record. Although such securities may not be common in the private
space, this distinction between two types of securities has all the
trappings of a loophole in the making and would create a terrible
incentive.
So I would urge all Members to oppose H.R. 5424 even if the Foster
amendment is adopted.
I reserve the balance of my time.
Mr. HURT of Virginia. Mr. Speaker, I yield 3 minutes to the gentleman
from Illinois (Mr. Foster).
{time} 0945
Mr. FOSTER. Mr. Speaker, I thank the gentleman for yielding.
I cosponsored this bill because private equity makes considerable
investment in Illinois and, specifically, in my district. Nationwide,
many businesses are backed by private equity and are a key driving
force behind our economy, making critical national and local economic
contributions. These businesses support 11 million jobs nationwide.
This bill is about applying the provisions of the Investment Advisers
Modernization Act that make sense for the private equity business
model. That business model involves making long-term investments in
companies that a fund intends to turn around or grow over a period of
years.
This bill, from the very beginning, was an effort to apply those
requirements in a way that makes sense, and it is the culmination of a
great deal of bipartisan work.
Working across the aisle, I have worked with Congressman Hurt of
Virginia to remove the provisions that my colleagues on my side of the
aisle have indicated are the most troubling to them. Together, we
worked on two amendments. The amendment passed in committee resulted in
more than half of the Democrats on the committee supporting the bill.
Today I will be offering an amendment that will address two concerns
that have been most prominently expressed by Democrats and advocates
through the amendment I will be proposing and answers their main
objections.
First, the amendment will address concerns over transparency into the
[[Page H5234]]
fund's policies. It will continue current law that the adviser is
required to deliver a brochure to the client with information about
fees and brokerage services and, in turn, deliver that information to
the SEC.
Second, we are addressing concerns over investor confidence that
funds hold the assets that they say they do. The provision that we are
removing would have provided a narrow exemption to the annual audit and
surprise inspection requirements for some funds, so they will continue
to be subject to these after my amendment is, hopefully, adopted.
My amendment will ensure that funds continue to receive a third-party
look to ensure that the fund has the assets it has represented to
clients that it has, including that the asset is held in the name of
the client.
I know that there are other concerns, but after careful
consideration, I believe they can be addressed. Opponents say that
advisers will no longer keep records of the private securities that are
held in custody, but this is actually not accurate. The adviser does
need to keep records. These securities are illiquid and require issuer
consent to sell, and these securities will be subject to annual audit
and surprise inspection.
Opponents also say that the clients might find that they have a new
adviser without their consent, but current law allows for minority
stakes in an adviser organized as a partnership to be done without
consent. So this provision just treats an LLC and corporate structures
identically.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. HURT of Virginia. Mr. Speaker, I yield the gentleman an
additional 1 minute.
Mr. FOSTER. Mr. Speaker, this bill would remove the requirement for
private equity funds to submit certain information on Form PF to the
FSOC; but that information is intended to capture funds that have built
up leveraged and risky positions that pose a systemic risk through
counterparty exposure. This is very different from the business model
of private equity firms.
I know that for those Members who supported H.R. 1105 in the last
Congress, this should actually be easier because it provides a very
narrow, targeted relief. I voted against H.R. 1105, but I support this
bill after thinking carefully about it and the changes.
The bill received the support of more than half the Democrats on the
Financial Services Committee, and I hope that many more Democrats will
support this bill on the floor after my amendment has been adopted.
Mr. Speaker, I urge my colleagues to support this bipartisan bill
that will support businesses and economic growth around the country.
Ms. MAXINE WATERS of California. Mr. Speaker, investors, consumer
advocates, public pension funds, and others have spoken on H.R. 5424,
and they have deemed it to be harmful.
Let me read for you a few excerpts from opposition letters received
by the House of Representatives. First of all, let me tell you who they
are: Americans for Financial Reform; the American Federation of State,
County, and Municipal Employees; the American Federation of Teachers;
the Consumer Federation of America; Communications Workers of America;
and U.S. PIRG.
``Far from modernizing the regulation of investment advisers, this
legislation would roll back the clock to the years before private fund
advisers were subject to elementary oversight measures, measures that
numerous documented abuses have shown to be necessary for investor
protection. The laundry list of regulatory exemptions in this bill
would enable the exploitation of investors, possibly including outright
fraud. It would also reduce the information available to regulators to
address systemic risk.''
North American Securities Administrators Association, Incorporated,
these are our State securities regulators, the cops on the beat
policing Main Street from financial crime, let me give you their quote:
``Although the bill purports to be an updating of the framework for
the regulation of investment advisers, it is in fact little more than
an effort to shield advisers to private funds from the scrutiny of SEC
registration and examination oversight.''
Let's hear what CalPERS has to say: ``We believe that H.R. 5424 would
erode the Dodd-Frank provisions that established greater transparency
into private equity funds, protected investors against fraud by
fund advisers, and enhanced the ability of regulators to effectively
monitor systemic risk in the private fund industry.''
CalSTRS: ``This current legislation amends the Investment Advisers
Act of 1940 to purportedly `modernize' certain requirements related to
private equity advisers. In actuality, this proposed legislation would
roll back important investor protections provided to funds, in terms of
transparency and oversight by the Securities and Exchange Commission.''
Let's hear from the Institutional Limited Partners Association: ``The
ILPA believes that the changes to mandatory disclosures and other
requirements as proposed in H.R. 5424 would be counterproductive to
providing institutional limited partners with the transparency they
need to ensure alignment of interest in their private equity fund
investments, and to carry out their duty to protect the interests of
millions of beneficiaries of these investments--retirees,
policyholders, nonprofit and educational institutions.''
Let's hear from the Council Institutional Investors:
``H.R. 5424 rolls back important transparency and reporting
requirements that we and many of our members believe are critical to
investor protection. For example, section 3(b) of H.R. 5424 would
provide exceptions for private equity and hedge funds from existing
disclosure requirements on Form PF, a confidential form used by the
U.S. Securities and Exchange Commission and other regulators to track
risks in the financial system.''
Let's hear from Public Citizen: ``This bill allows investment
advisers to escape current safeguards designed to reduce inflated sales
pitches or obfuscation of investment risks. Specifically, investment
advisers need to make sure that potential private equity investors have
basic sales documents such as the company prospectus before
consummating a sale. Investors in private funds should be accorded
ample information. The bill also frustrates efforts by investors to
gain access to company records in so-called books-and-records
requests.''
Unite Here: ``H.R. 5424 is an invitation for private equity managers
to make false and misleading statements to the public. At a time when
the nearly $4 trillion private equity industry should become more
transparent, H.R. 5424 would enable it to become more opaque, putting
workers, retirees, and the general public at risk.''
Mr. Speaker, I reserve the balance of my time.
Mr. HURT of Virginia. Mr. Speaker, I yield such time as he may
consume to the gentleman from Texas (Mr. Hensarling). Chairman
Hensarling has done so much to promote pro-growth policies in the
Financial Services Committee.
Mr. HENSARLING. Mr. Speaker, I rise in strong support of H.R. 5424. I
want to thank the gentleman from Virginia for his leadership and the
gentleman from Illinois as well.
This is a strong, bipartisan bill out of the House Financial Services
Committee having passed on a vote of 47-12, which means 80 percent of
the members of the House Financial Services Committee, including over
half of the Democrats, support this commonsense, pro-growth, pro-jobs
legislation.
Mr. Speaker, as children--including my own--all across this Nation go
back to school, we would be negligent if we didn't acknowledge the
latest report card that Americans received on our economy less than 2
weeks ago. The report card shows our economy growing at a measly 1.1
percent, roughly one-third of its normal growth. In other words, it has
received a failing grade, Mr. Speaker. One economics writer has said
the report suggests ``the economy could be on the brink of recession.''
Americans deserve better. Hardworking Americans do deserve better.
Again, economic growth has been far stronger in our country. The
economy grew on an average of 3.7 percent during every other recovery
in the postwar era. But growth has averaged nearly 2 percent in the
last 7 years, and even worse, about 1 percent so far this year. It is
just more evidence that the economy is not working for working
Americans. They have seen their paycheck
[[Page H5235]]
shrink, and they have seen their wages stagnate. Seven years after
recession ended, nearly 14 million Americans are unemployed or
underemployed.
I am confident that all of us--Republicans and Democrats alike--want
this to change. We want to help Americans who are struggling, who are
underemployed and unemployed. We have to lift the nearly 7 million
additional Americans who have been thrown into poverty during these
last 7 years. We must help them. We know--or should know--that nothing
helps the poor, the unemployed, and the underemployed like economic
growth. Growth means more jobs, more growth means higher average wages,
more growth means less government borrowing, and growth enables
Americans to achieve the dream of financial independence.
But if we want to ignite growth and revive our struggling economy,
the answer is not more debt, more spending, or more onerous regulations
from Washington. Instead, we need more entrepreneurs, more innovation,
and more small business expansion on Main Street. So at this time, when
record levels of debt and Federal regulation hinder growth and slow our
economy, it is critical for us to find bipartisan solutions--not always
easy to come by--that will accelerate growth and get our economy back
on track.
Mr. Speaker, we have exactly that kind of bill before us today.
Again, it is a bipartisan bill supported and sponsored by the gentleman
from Virginia (Mr. Hurt), Mr. Vargas of California from the Democratic
side of the aisle, Mr. Stivers of Ohio from the Republican side of the
aisle, and Mr. Foster of Illinois from the Democratic side of the
aisle. I have the honor of serving with all four of these gentlemen on
the House Financial Services Committee, and I thank them for their
bipartisan work on this bill.
Again, this passed in our committee 47-12. Over half the Democrats on
the committee support the bill--80 percent of the committee. There is
no reason why every Member of the House shouldn't approve this
bipartisan Investment Advisers Modernization Act because, Mr. Speaker,
again, it is bipartisan, it is pragmatic, and it is commonsense. It
simply updates portions of a 76-year-old law by updating regulations
that have made it harder for the job growth engine of America--our
small businesses--to access the capital they need to create jobs on
Main Street.
{time} 1000
We know, again, that small businesses across the country are
struggling to find investment and financing options that enable them to
open their doors, hire workers, and succeed. They are struggling,
again, because of a growing regulatory burden imposed by Washington, by
a Washington-knows-best mentality.
Witnesses have testified before our committee, Mr. Speaker, that
there has been a serious decline in loans from banks to small
businesses over the past few years, and our Nation has gone a decade--a
decade--with no growth in the value of small business loans.
It is not surprising that, during the second quarter of this year,
one of every three small-business owners said they had to transfer
personal assets to keep their businesses running, according to a recent
report from Pepperdine University. This same report found that 50
percent of small-business owners said their growth opportunities are
restricted by the current business financing environment.
As a small-business owner, my hometown of Dallas wrote me recently:
``We have seen wave after wave of Federal regulations affecting our
ability to grow.'' Another small business owner from the town of
Chandler, in the Fifth District I have the privilege of representing,
summed up the economic harm caused by Washington's regulatory burden
this way: ``No one can keep up.''
In order for the economy to grow for small businesses to create jobs
that Americans need, we have to remove unnecessary regulations that tie
up private capital and cause economic uncertainty. We must put in their
place policies that encourage investment, innovation, and
entrepreneurial spirit that makes America a beacon of opportunity for
all.
Again, Mr. Speaker, we have a bipartisan bill before us having passed
47-12, 80 percent of our committee having approved. It is a modest, but
important, step in the right direction. But as one witness told us: It
will go a long way towards facilitating capital formation while
maintaining our commitment to investor protection.
I urge all of my colleagues to support the bipartisan bill. By doing
so, they will remove unnecessary burdens on our small businesses, and
we will help grow not only the American economy but the Main Street
economy as well.
I thank Members on both sides of the aisle for their bipartisan work
on this very, very strong bill. And I thank the gentleman from Virginia
for his leadership and for yielding the time.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
I think I heard my colleague on the opposite side of the aisle
reference Main Street, but I did not hear him describe who his Main
Street is, and we don't know who he is talking about.
Let me just remind the Members one more time who is opposing this
bill--this is truly representative of Main Street--AFL-CIO; American
Federation of Teachers; American Federation of State, County and
Municipal Employees; Americans for Financial Reform; Communications
Workers of America; Consumer Federation of America; Council of
Institutional Investors; CalPERS; CalSTRS; Institutional Limited
Partners Association; North American Securities Administrators
Association; Public Citizen; UNITE HERE; United Automobile, Aerospace
and Agricultural Implement Workers of America, UAW; and U.S. Public
Interest Research Group.
We have opposition from working people, from the real people of Main
Street, on this legislation. I think, as Members begin to read and look
at this bill, they will understand how dangerous it is and how we would
be rolling back the clock, jeopardizing the reforms that we have made
with Dodd-Frank, and also taking us back to undermining the SEC in
extraordinary ways.
Recently, Mr. Speaker, there was an investigative series initiated by
The New York Times looking into the operations of private equity firms.
I would like to read for you a few key excerpts from the articles which
I think might highlight the need for further regulation of private
equity and not the rollbacks we see today in H.R. 5424.
This is from a June 25, 2016, article titled: ``When You Dial 911 and
Wall Street Answers.''
``Since the 2008 financial crisis, private equity firms, the
`corporate raiders' of an earlier era, have increasingly taken over a
wide array of civic and financial services that are central to American
life.
``Unlike other for-profit companies, which often have years of
experience making a product or offering a service, private equity is
primarily skilled in making money. And in many of these businesses, The
Times found, private equity firms applied a sophisticated moneymaking
playbook: a mix of cost cuts, price increases, lobbying and litigation.
``In emergency care and firefighting, this approach creates a
fundamental tension: the push to turn a profit while caring for people
in their most vulnerable moments.''
This article then goes on to describe how response times slowed and
lives were put in danger--and I am talking about the response time of
fire departments that are now controlled by equity funds--when these
profit-hungry Wall Street firms took over essential public health
services, like ensuring ambulances arrived to victims on time.
From an article titled, ``How Housing's New Players Spiraled into
Banks' Old Mistakes,'' dated June 26, 2016: ``When the housing crisis
sent the American economy to the brink of disaster in 2008, millions of
people lost their homes. The banking system had failed homeowners and
their families.
``New investors soon swept in--mainly private equity firms--promising
to do better.
``But some of these new investors are repeating the mistakes that
banks committed throughout the housing crisis, an investigation by The
New York Times has found. They are quickly foreclosing on homeowners.
They are losing families' mortgage paperwork, much as the banks did.
And many of these practices were enabled by the
[[Page H5236]]
federal government, which sold tens of thousands of discounted
mortgages to private equity investors, while making few demands on how
they treated struggling homeowners.
``The rising importance of private equity in the housing market is
one of the most consequential transformations of the post-crisis
American financial landscape. A home, after all, is the single largest
investment most families will ever make.
``Private equity firms, and the mortgage companies they own, face
less oversight than the banks. And yet they are the cleanup crew for
the worst housing crisis since the Great Depression.''
The article then goes on to describe how private equity firms can
squeeze fees out of homeowners during every stage of the foreclosure
process, often through conflicts of interest that make foreclosure more
profitable than providing sustainable loan modifications.
Mr. Speaker, this investigated series by The New York Times exposes
practices that I think no credible Member of Congress would want to be
associated with. This is horrible that we could even think that we are
allowing our citizens to be placed at risk and their lives jeopardized
because we have a private equity firm that is brought up and is now in
control of critical services to our citizens, and they have to do it
and make a profit. The way they make that profit is they cut back on
personnel, equipment, machinery, or whatever it takes to turn that
dollar.
I am absolutely amazed that any Member of Congress would dare to
think about supporting this kind of legislation that would allow these
practices not only to continue in ways that I have described, and let
me just remind you, I don't know how we can soon forget the crisis that
this country experienced in 2008 when we had this subprime meltdown and
we had so many foreclosures, so many families that were literally put
on the streets because they lost their home because of practices that
were not regulated by this government.
This is amazing. This is absolutely amazing, and it is outrageous. I
believe when the Members who come to vote today take a look at the fine
print that they will understand what is happening here today. I think
even if some Members thought they could, or should, support this bill,
I think they are going to change their minds. And while it is being
touted as a bipartisan effort, I don't think so.
I reserve the balance of my time.
Mr. HURT of Virginia. Mr. Speaker, I yield 2 minutes to the gentleman
from California (Mr. Knight).
Mr. KNIGHT. Mr. Speaker, it is an honor to be here today to talk
about what is very essential in America, and that is getting people to
work and creating opportunities.
Small businesses are essential to America's economic competitiveness.
Not only do they employ half the Nation's private sector, but they also
create two-thirds of the net jobs in our country.
Unfortunately, in recent years, small businesses have been slow to
recover from a recession and credit crisis that has hit them especially
hard. Unlike large enterprises that can obtain funds from commercial
debt and equity markets, small businesses must often rely on their own
personal assets, retained earnings, community banks, and credit unions
for needed capital.
Last month, in the great city of Santa Clarita, I hosted my annual
small business conference and expo. The conference was designed to hear
from constituents exactly what was happening and their problems in
small businesses. After listening to small-business owners and
employees talk about the challenges they face, it was very evident that
overregulation and lack of access to capital were the biggest issues.
That is why I applaud and support Mr. Hurt's work on H.R. 5424, the
Investment Advisers Modernization Act of 2016. The Investment Advisers
Act has proven to be a duplicative burden that not only drives up costs
but also blocks an efficient allocation of capital.
We need to modernize these laws so that we can remove existing
barriers and tailor our policy to help facilitate capital formation.
H.R. 5424 would do exactly that. The legislation takes into
consideration the business model of today's private equity and not one
from 70 years ago.
I look forward to continuing my work with Mr. Hurt, and with all of
my colleagues here in the House, on commonsense measures like the
Investment Advisers Modernization Act of 2016, so that we can ensure
our small businesses can grow and employ more of our neighbors.
Again, Mr. Speaker, I support H.R. 5424, and ask my colleagues to
vote in favor of this bill because access to capital is not a partisan
issue, it is something that we need and will help our small businesses.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself as such
time as I may consume.
I will remind the Members that Nancy Pelosi, our leader, has weighed
in on this pretty heavily. She doesn't weigh in on a lot of things, but
she has put out an advisory here today titled: H.R. 5424, a House GOP
giveaway to the shadow banking industry.
We have from the administration that a Presidential veto will take
place on this legislation should it get to his desk.
This morning's debate illustrates Republican's misguided priorities.
When we are here in Washington, the American public expects us to
address the pressing needs of our Nation and not waste our time with
Wall Street giveaways that the financial crisis taught us is neither
prudent nor without devastating consequences.
Why is it that the interest of Wall Street takes high priority when
we return from our break?
{time} 1015
Why aren't we talking about homelessness? Why aren't we talking about
Flint? Why aren't we talking about Zika? Why aren't we talking about
Baton Rouge?
I will tell you that there are those who think, perhaps, they have to
take care of Wall Street, that it comes first, but I do not think so. I
ask for a ``no'' vote on this bill.
I yield back the balance of my time.
Mr. HURT of Virginia. Mr. Speaker, I yield myself such time as I may
consume.
In closing, I urge all of the Members of this body to support this
good bill.
Let's remember where we started with this registration requirement
for private equity. In the Dodd-Frank Act, in the aftermath of the
financial crisis, private equity was swept into the Dodd-Frank Act in
an effort, ostensibly, to try to stop future systemic crises in the
United States' markets. As a consequence, over the last couple of
years, we have introduced legislation to repeal that registration
requirement. This bill does not do that. Those efforts were bipartisan
in nature. They were designed to promote more investment in jobs across
this country, but that was met with resistance. Registration is now a
fact of life. There are Members on the other side who did not support
our previous efforts, Mr. Foster being one of them.
As has been said, we have more than half of the Democrats on the
Financial Services Committee supporting this legislation because it is
not a repeal of the registration requirement. What it is, in fact, is a
streamlining of a 76-year-old law that has made it more difficult for
investment funds to be able to be successful.
This bill is not about rolling back investor protection. In fact,
investor protection will still be strong. The SEC has the power to
bring enforcement actions. Nothing has been done, again, to repeal the
registration requirement. These firms will still continue to have to be
registered. This is not about investor protection. All of the antifraud
provisions that are currently in Federal securities law will continue
to apply.
This is about teachers. It is about firefighters. This is about the
pension funds in these investment funds that have had success over the
last 10 years. These have been the places where these pension funds
have, in fact, invested because they have been solid-performing funds.
That is good for teachers and firefighters and their retirements. That
is what this bill is about. It is about making it easier for these
funds to be successful so that they can bring back those returns for
the retirements of our teachers and our firefighters.
At the end of the day, probably as important as anything to me are
the
[[Page H5237]]
jobs that are created all across this country because of the
investments of these funds--places like Main Street in Martinsville,
Virginia, where we have seen, over the last 15 years, unemployment as
high as 25 percent. There have been investments in places like
Southside, Virginia, that have created jobs, that have grown companies.
That is what this bill is about. It is about those jobs in
Martinsville, Virginia. It is about those families in Martinsville,
Virginia, or in Rocky Mount, or in Charlottesville, in Virginia's Fifth
District. That is what this bill is about. That is why it has garnered
strong bipartisan support on our committee, and I hope it will garner
strong bipartisan support today on this floor. I urge my colleagues to
support this measure.
Mr. Speaker, I yield back the balance of my time.
Mr. LYNCH. Mr. Speaker, I rise in opposition to H.R. 5424, the so-
called ``Investment Advisers Modernization Act of 2016.'' Regrettably,
instead of modernizing the regulation of investment advisors, as the
bill's title suggests, the legislation under consideration today would
take us back to a time when there was minimal transparency and
reporting requirements for private firms such as private equity and
hedge funds.
Over the past few months, I have been following the New York Times
investigative series that exposed abuses by the private equity industry
that impact our daily lives. I am concerned that private equity firms
are now overtaking our fire departments, our ambulance services, our
public water services, and our mortgage market. The influence of these
private firms in services that traditionally have been provided by our
government is resulting in slower reaction times for emergency
services, aggressive collection practices, and the type of foreclosure
abuse that we saw before the 2008 financial crisis. Given the increased
influence of these firms in our daily lives, it is critical that we do
not roll back crucial oversight and transparency requirements through
this legislation.
I served on the Financial Services Committee during the 2008
financial crisis. I witnessed the harmful impact that the lack of
regulation had on hard-working families around our nation. I had the
honor of helping to reform our financial system through the enactment
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (The
Dodd-Frank Act). The Dodd-Frank Act increased the transparency of
private funds by requiring increased reporting and compliance
requirements.
Unfortunately, this legislation would destroy much of the hard work
we did through the Dodd-Frank Act. According to Americans for Financial
Reform, the regulatory exemptions included in this bill would enable
the exploitation of investors and would reduce the information
available to regulators to address systemic risk. Specifically, this
harmful legislation removes certain requirements made applicable by the
Dodd-Frank Act to investment advisers to private equity funds and hedge
funds, so that they do not have to notify their investors of ownership
changes, report certain information on large private equity funds in
their systemic risk reports to the Financial Stability Oversight
Council, or annually deliver plain-text disclosures to clients. It also
exempts these private funds from the annual independent audit
requirement, which was strengthened by the Securities and Exchange
Commission following the Bernie Madoff scandal.
A quarter of the investments in private equity funds comes from
public pensions, which invest the retirement savings of our nation's
teachers and firefighters. We cannot repeal these important protections
for our nation's public servants.
In closing, this harmful bill would provide regulatory relief for an
industry that needs more regulation. It is a dangerous step in the
wrong direction. This is why I urge my colleagues to vote ``no'' on
this bill.
The SPEAKER pro tempore (Mr. Carter of Georgia). All time for debate
on the bill has expired.
Amendment printed in part b of house report 114-725 Offered by Mr.
Foster
=========================== NOTE ===========================
September 9, 2016, on page H5237, the following appeared:
AMENDMENT OFFERED BY MR. FOSTER
The online version has been corrected to read: AMENDMENT PRINTED
IN PART B OF HOUSE REPORT 114-725 OFFERED BY MR. FOSTER
========================= END NOTE =========================
Mr. FOSTER. Mr. Speaker, I have an amendment at the desk.
The SPEAKER pro tempore. The Clerk will designate the amendment.
The text of the amendment is as follows:
Page 6, strike line 14 and all that follows through page
7, line 5.
Page 7, strike line 18 and all that follows through
``Consistent with'' on page 9, line 16, and insert
``Regulations, consistent with''.
Page 9, beginning on line 20, strike ``the Commission
shall,''.
Page 9, line 23, insert ``, so as to'' after ``such
section''.
The SPEAKER pro tempore. Pursuant to House Resolution 844, the
gentleman from Illinois (Mr. Foster) and a Member opposed each will
control 5 minutes.
=========================== NOTE ===========================
September 9, 2016, on page H5237, the following appeared: Page
9, line 23, insert ``, so as to'' after ``such section''. Mr.
FOSTER (during the reading). Mr. Speaker, I ask unanimous consent
that the amendment be considered as read. The SPEAKER pro tempore.
Is there objection to the request of the gentleman from Illinois?
There was no objection. The SPEAKER pro tempore. Pursuant to House
Resolution 844, the gentleman from Illinois (Mr. FOSTER) and a
Member opposed each will control 5 minutes.
The online version has been corrected to read: Page 9, line 23,
insert ``, so as to'' after ``such section''. The SPEAKER pro
tempore. Pursuant to House Resolution 844, the gentleman from
Illinois (Mr. FOSTER) and a Member opposed each will control 5
minutes.
========================= END NOTE =========================
The Chair recognizes the gentleman from Illinois.
Mr. FOSTER. Mr. Speaker, I thank my friend from Virginia (Mr. Hurt)
for working with me on this bill.
Mr. Speaker, the amendment that I am proposing addresses two of the
concerns that have been most prominently expressed by Democrats and
advocates, including the two major objections that the administration's
statement, which opposed this bill before the amendment, highlighted. I
hope this will lead most of the Caucus to join me in voting for this
bipartisan bill after my amendment addresses the chief concerns voiced
by my colleagues.
First, the amendment will address concerns over transparency into the
fund's policies. It will continue current law that the adviser is
required to deliver a brochure to the client with information about
fees and brokerage services and, in turn, deliver that information to
the SEC.
Second, my amendment will address concerns over investor confidence
that the funds hold the assets that they say they do. It removes a
provision that would have provided a narrow exemption from the annual
audit or surprise inspection requirements for some funds; so they will
now, with this amendment, continue to be fully subject to annual audits
and surprise inspections. My amendment will ensure that the funds
continue to receive a third-party look to confirm the assets it has
represented to clients, including that the asset is actually held in
the name of the client.
These are the two concerns most prominently expressed, but I know
there are others.
After careful consideration, I do not believe that they are
problematic or should prevent Members from supporting this bill. The
adviser does need to keep records on the securities in its custody. The
securities eligible to be held in its custody are illiquid and will be
subject to the annual audit or surprise inspection. Funds that have
built up leveraged and risky positions that could pose a systemic risk
through counterparty exposure and other mechanisms will still be
required to submit the additional information on Form PF to the FSOC.
My amendment will remove the provisions that had been the main
features for the opposition during this process, so I urge my
colleagues to support this bipartisan bill.
Mr. Speaker, I reserve the balance of my time.
Mr. HURT of Virginia. Mr. Speaker, I ask unanimous consent to claim
the time in opposition.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Virginia?
There was no objection.
The SPEAKER pro tempore. The gentleman is recognized for 5 minutes.
Mr. HURT of Virginia. Mr. Speaker, I commend Representative Foster
and his staff for working with us on this measure and for making it a
truly bipartisan effort, for which I am grateful.
This amendment is simple; yet, much like the amendment that was
offered by Representative Foster during the July markup of this bill,
it helps alleviate some outstanding concerns, and it helps ensure that
the legislation continues to gain bipartisan support.
This amendment would remove two sections:
First, it would remove the brochure delivery changes that were made a
part of this bill. While I believe the private fund sponsors already
disclose substantial information in their private placement memoranda,
which are included in the books and records requirements that advisers
are required to maintain, there was concern that removing the
requirement that advisers complete and deliver a brochure and a
brochure supplement to a client that is a limited partnership or
otherwise would make it more difficult for the SEC to conduct
examinations and compile information.
The second change would remove the first part of the custody rule
changes
[[Page H5238]]
that were made in the bill. The legislation would, as reported, require
the SEC to provide additional exemptions to the custody rule, which
will generally require an adviser of a pooled investment vehicle to
have an independent accountant conduct surprise or scheduled audits
every year of its clients' funds and securities. While I believe that
the proposed exemption is carefully tailored to limit its scope to
persons with whom the fund sponsor has a close relationship, there were
concerns about the level of connectedness and how far current SEC staff
guidance could be extended. This is an issue that should continue to be
evaluated as, I believe, the current SEC guidance is too narrow, and
the cost of the audit is often greater than the investor protection it
provides.
While I think there are serious policy merits to the legislation as
reported, I do think that these two changes that have been proposed by
Mr. Foster alleviate some concerns and help make the bill even more
bipartisan than it was when it received the strong vote that it did in
the Financial Services Committee. I support this amendment, and I thank
the gentleman from Illinois (Mr. Foster) for offering this amendment.
Mr. Speaker, I reserve the balance of my time.
Mr. FOSTER. Mr. Speaker, how much time do I have remaining?
The SPEAKER pro tempore. The gentleman from Illinois has 2\1/2\
minutes remaining.
Mr. FOSTER. Mr. Speaker, I yield 2\1/2\ minutes to the gentlewoman
from Arizona (Ms. Sinema).
Ms. SINEMA. Thank you to Chairman Hensarling, Ranking Member Waters,
and Congressmen Hurt, Foster, Vargas, and Stivers for all of their work
on this bipartisan legislation to streamline the antiquated regulatory
framework for private equity fund advisers while maintaining
appropriate industry oversight and investor protections.
Private equity investors across the country provide billions of
dollars each year to Main Street businesses, and over 11 million
Americans work for private equity-backed businesses. Last year alone,
private equity firms invested an estimated $18 billion in more than 60
Arizona-based companies. Together, these companies support over 130,000
workers and their families.
GoDaddy is the world's largest domain name register with more than 12
million customers, and like thousands of large and small American
businesses, GoDaddy is a private equity-backed company. Last month, I
visited their Tempe, Arizona, facility in my district. It is a state-
of-the-art complex that promotes collaboration and innovation, and it
employs over 1,000 Arizonans, including engineers, developers, and
small business consultants. With the help and investment of private
equity, GoDaddy will create hundreds of quality technology jobs for
years to come.
By providing narrowly targeted regulatory relief to private equity
fund advisers, this legislation improves the flow of capital to
businesses in every community and in every district in the United
States. This bill passed out of the House Financial Services Committee
on a bipartisan vote. Following the committee vote, we worked together
on a bipartisan fix to address two specific concerns.
First, the amendment strikes the bill's narrow exemption from the
annual audit or surprise inspection requirements for some funds,
ensuring that investors are able to verify that funds actually contain
particular investments as claimed. Second, the amendment ensures that
advisers will continue to deliver a plain language narrative brochure
annually to both clients and the SEC.
All currently registered investment advisers remain subject to SEC
registration and examination and the antifraud provisions of the
Investment Advisers Act. This legislation does not reduce the SEC's
authority to examine or to bring enforcement actions against private
fund managers or eliminate any of the tools that the SEC has to pursue
such actions. Further, private equity funds invest in companies for
several years and, therefore, do not present systemic risks.
Private equity-backed businesses are a key driving force behind our
economy, making critical national and local economic contributions. We
must work together to create an environment that enables these
companies to grow and succeed and expand opportunities for hardworking
Americans.
Thank you again to my colleagues on both sides of the aisle for their
work on this important legislation.
Mr. HURT of Virginia. Mr. Speaker, I yield 2 minutes to the
gentlewoman from New York (Mrs. Carolyn B. Maloney).
Mrs. CAROLYN B. MALONEY of New York. I thank the gentleman for
yielding.
Mr. Speaker, I support the Foster amendment that has been offered by
my good friend and colleague from Illinois, and I thank him for his
hard work in responding to concerns that the Democrats raised. I thank
Chairman Hensarling for accepting the amendment and Congressman Hurt
for accepting the amendment.
This amendment removes a provision in the bill that would exempt
certain funds from the annual audit requirement of the custody rule.
The custody rule is a longstanding investor protection that guards
against outright theft of clients' funds, so I think that is a very
huge burden of proof if you want to even think about rolling it back.
There are so many ways to comply with the custody rule, but this bill
without the Foster amendment would allow certain advisers to be exempt
from having an annual audit, from having an annual surprise exam, and
the requirement to hold a client's securities at an independent
qualified custodian. In other words, it would exempt certain advisers
from all of the protections of the custody rule. I think that is a
bridge too far, and I am so pleased that Mr. Foster's amendment would
remove this provision. It makes it a much better bill.
I still have concerns about the remaining provisions of the bill, but
I think that this amendment is a huge step in the right direction, and
I urge my colleagues to support the Foster amendment.
Mr. FOSTER. Mr. Speaker, I yield back the balance of my time.
Mr. HURT of Virginia. Mr. Speaker, I close simply by saying that I
have certainly appreciated being able to work with Mr. Foster on this
over the last several months. I appreciate his leadership on the issue,
and I hope this body will approve this amendment.
I yield back the balance of my time.
The SPEAKER pro tempore. Pursuant to the rule, the previous question
is ordered on the bill, as amended, and on the amendment offered by the
gentleman from Illinois (Mr. Foster).
The question is on the amendment offered by the gentleman from
Illinois (Mr. Foster).
The amendment was agreed to.
The SPEAKER pro tempore. The question is on the engrossment and third
reading of the bill.
The bill was ordered to be engrossed and read a third time, and was
read the third time.
{time} 1030
Motion to Recommit
Mrs. TORRES. Mr. Speaker, I have a motion to recommit at the desk.
The SPEAKER pro tempore. Is the gentlewoman opposed to the bill?
Mrs. TORRES. I am opposed in its current form.
Mr. HENSARLING. Mr. Speaker, I reserve a point of order.
The SPEAKER pro tempore. A point of order is reserved.
The Clerk will report the motion to recommit.
The Clerk read as follows:
Mrs. Torres moves to recommit the bill H.R. 5424 to the
Committee on Financial Services with instructions to report
the same back to the House forthwith with the following
amendment:
Add at the end the following:
SEC. 8. REPORT ON EMERGENCY VEHICLE RESPONSE TIMES OF
COMPANIES OWNED BY PRIVATE FUNDS.
(a) In General.--Section 204(b) of the Investment Advisers
Act of 1940 (15 U.S.C. 80b-4(b)) is amended by adding at the
end the following:
``(12) Report on emergency vehicle response times of
companies owned by private funds.--
``(A) In general.--Each investment adviser required to file
annual or other reports under this section and who advises a
private fund that owns a controlling interest in an emergency
services company shall, not less often than annually,
disclose to the Commission--
``(i) the change in the average response time of emergency
vehicles since the private fund acquired a controlling
interest in the emergency services company, disaggregated
[[Page H5239]]
by the response times of emergency vehicles deployed to--
``(I) rural areas; and
``(II) urban areas;
``(ii) if a required response time is established by a
contract for emergency services between the emergency
services company and a unit of local government or by an
ordinance of a unit of local government, the percentage of
response times of emergency vehicles deployed by the
emergency services company to that unit of local government
that do not meet such requirement; and
``(iii) if the response times failed to meet the required
response time described under clause (ii), a description of
the impact of such failure on the value of the emergency
services company to the private fund.
``(B) Definitions.--For purposes of this paragraph:
``(i) Emergency services company.--The term `emergency
services company' means a company that provides ambulance,
firefighter, or other emergency services in response to 9-1-1
calls.
``(ii) Emergency vehicle.--The term `emergency vehicle'
means an ambulance, fire engine, or other vehicle deployed in
response to a 9-1-1 call.''.
(b) Rulemaking.--Not later than 270 days after the date of
the enactment of this section, the Commission shall issue
regulations to carry out paragraph (12) of section 204(b) of
the Investment Advisers Act of 1940, as added by subsection
(a).
Mrs. TORRES (during the reading). Mr. Speaker, I ask unanimous
consent to dispense with the reading.
The SPEAKER pro tempore. Is there objection to the request of the
gentlewoman from California?
There was no objection.
The SPEAKER pro tempore. The gentlewoman from California is
recognized for 5 minutes.
Mrs. TORRES. Mr. Speaker, this is a final amendment to the bill,
which will not kill the bill or send it back to committee. If adopted,
the bill will immediately proceed to final passage, as amended.
Mr. Speaker, a June 26 New York Times article revealed some of the
troubling consequences of private equity firms taking over local
emergency services.
According to the article, since the 2008 financial crisis, private
equity firms are investing in growing numbers in emergency services
companies, sometimes with disastrous results. The piece found cases
where emergency response times were so slow, personnel even had time
for a cigarette break before arriving to the scene.
Some emergency services companies also reported mismanagement,
specifically, that their parent companies are not able to pay their
salaries or restock ambulances with critical medical supplies.
My amendment will make sure that there is accountability and
transparency when private equity firms invest in emergency services. My
amendment will not prohibit private equity funds from investing in
these services or place any restrictions on how they choose to invest,
nor will it deny the fact that private equity has and can play an
important role in investing in companies in communities across our
country. It would simply provide reassurance to our constituents that
when they call 911, their lives won't be put at risk because their
local fire or ambulance service wants to turn a profit.
This motion to recommit would require private equity firms to report
the change in response time of emergency vehicles since the private
fund acquired a controlling interest in the emergency services company.
Additionally, the report will require data on the percent of emergency
response times that violate contracts entered into by local governments
and emergency services companies and include an explanation as to why
response times did not meet requirements set out in such contracts.
At a time when local jurisdictions are struggling to make ends meet
and the demands on emergency services are only growing, there is
certainly a role for private equity firms to play in making sure our
constituents have the services they need and expect. But if a private
equity firm decides to invest in an emergency service company, they
also take on the responsibility to provide those services to the best
of their capacity.
As a former 911 dispatcher, I know that when it comes to getting
emergency personnel to those in need, every second matters. There is no
margin of error, and under absolutely no circumstances should profit
come before saving lives.
I urge my colleagues to support this motion.
I yield back the balance of my time.
Mr. HENSARLING. Mr. Speaker, I withdraw my reservation of a point of
order.
The SPEAKER pro tempore. The reservation of a point of order is
withdrawn.
Mr. HENSARLING. Mr. Speaker, I claim the time in opposition.
The SPEAKER pro tempore. The gentleman from Texas is recognized for 5
minutes.
Mr. HENSARLING. Mr. Speaker, I am just curious where this amendment
was during the bipartisan process to bring H.R. 5424 to the floor. I am
curious where it was in our committee deliberations. I am curious why
it was never presented to the Rules Committee and we are just seeing it
now.
Again, H.R. 5424, the Investment Advisers Modernization Act, is a
bipartisan piece of legislation to make sure our small businesses,
entrepreneurs, and innovators can access capital. It passed the
committee 49-12. More than half of the Democrats supported it.
Now we have a motion to recommit that moves it in the complete
opposite direction--one more disclosure, disclaimer, more job-killing
regulations to be put upon those who are trying to fund our small
businesses, to try to help the working poor better themselves, to try
to help improve the paychecks and the well-being of middle-income
America.
It is time to reject the motion to recommit. Let's work on a
bipartisan basis. Let's pass H.R. 5424. Vote down the motion to
recommit. Vote for the bipartisan bill.
I yield back the balance of my time.
The SPEAKER pro tempore. Without objection, the previous question is
ordered on the motion to recommit.
There was no objection.
The SPEAKER pro tempore. The question is on the motion to recommit.
The question was taken; and the Speaker pro tempore announced that
the noes appeared to have it.
Mrs. TORRES. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX and the
order of the House of today, further proceedings on this question will
be postponed.
____________________