[Congressional Record (Bound Edition), Volume 162 (2016), Part 9]
[House]
[Pages 12157-12167]
[From the U.S. 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

[[Page 12158]]

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 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.

[[Page 12159]]

  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 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

[[Page 12160]]

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 a of 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. 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.

[[Page 12161]]

  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 
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

[[Page 12162]]

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 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

[[Page 12163]]

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 federal government, 
which sold tens of thousands of discounted mortgages to private equity 
investors, while making few demands on how they treated struggling 
homeowners.

[[Page 12164]]

  ``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

[[Page 12165]]

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 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

  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.
  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

[[Page 12166]]

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 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:

[[Page 12167]]



     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 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 9-1-1, 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 9-1-1 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.

                          ____________________