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Regulation and Compliance > Federal Regulation > SEC

House Panel Passes 8 Bills Including Adviser Act Reform, Crowdfunding

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The House Financial Services Committee passed eight “economic growth” bills on Thursday that range from requiring the SEC to perform a more thorough cost-benefit analysis on its rules, exempting private fund advisors from certain aspects of the JOBS Act, a “fix” to crowdfunding bill, legislation updating the Investment Advisers Act, as well as a bill protecting senior investors.

Two of the bills, H.R. 5429, the SEC Regulatory Accountability Act and H.R. 4852, the Private Placement Improvement Act of 2016, were introduced by Rep. Scott Garrett, R-NJ, chairman of the Capital Markets Subcommittee.

Garrett’s bill would require the SEC to “demonstrate that any rules it proposes will help our businesses grow by performing a cost-benefit analysis.”

Garrett argued that his bill “codifies guidance” that President Barack Obama gave to executive branch agencies and will “lend credibility to the SEC’s rules, and ensures that businesses and start-ups have suitable supervision from the SEC and are not burdened by costly overregulation.”

A version of the SEC Regulatory Accountability Act passed the House in 2013, as H.R. 1062, by a bipartisan vote.  

Americans for Financial Reform, however, argued that the bill –if eventually passed into law—“would impose crippling new procedural obligations” on the SEC “and grant Wall Street firms new legal powers to overturn SEC rules, in a transparent move to make forceful agency action impossible.”

The Private Placement Improvement Act “makes a single notice of sales sufficient for exemption” from compliance with Regulation D, Garrett said, arguing that the bill helps the JOBS Act “reach its full potential by maintaining a clear and common-sense approach to regulations for private offerings.”

Americans for Financial Reform, argued, however that these “major new exemptions” under the Act include not requiring that funds have an annual independent audit of their client funds and securities holdings – “a precaution that could be crucial in preventing a fund from claiming to own securities when it actually does not, as Bernie Madoff did.”

The Act also creates “significant new exemptions to current requirements that funds provide investors with plain-English narrative reports (‘brochures’) that detail fees and compensation, investment strategies, risk of loss, any misconduct, and other financial information, and it would cut back from quarterly to annual the frequency of required reporting on insider securities transactions, an important item of information in determining whether insider trading has taken place,” AFR argues.

The Act also eliminates “key systemic risk information for regulators by dramatically reducing the number of funds who must report complete information on their leverage and holdings on Form PF, a confidential form used by regulators to track risks to the financial system.”

The bill “would exempt all private equity fund advisors from complete reporting on this form, all hedge fund advisors with assets under management below $1.5 billion, as well as liquidity fund advisors below $1 billion,” AFR continued. “This is especially dangerous given that, as noted the information collected on Form PF has been and is being used by the FSOC to identify potential areas of systemic risk, and work to prevent them.”

The Fix Crowdfunding Act, H.R. 4855, which passed by a 57-2 vote, addresses what the committee members argued are “two urgent challenges” in the SEC’s recently finalized equity crowdfunding rule. The first change increases the amount of sales during a 12-month period from $1 million to $5 million, while the second change allows “single purpose funds” to utilize crowdfunding.

Also passed was the Investment Advisers Modernization Act of 2016, H.R. 5424, legislation that seeks to modernize outdated sections of the Investment Adviser Act of 1940. Changes include requiring the SEC to provide exceptions from the custody rule’s requirement of an annual surprise exam for certain categories of private funds.

Supported by the Investment Adviser Association, the bill, as IAA explains, makes the following revisions:

  • Repeals a rule dating to 1961 that bans advisors’ use of testimonials and references to past specific recommendations, to the extent the materials are distributed  solely to certain sophisticated clients and high net worth individuals, relying instead on well-established anti-fraud standards governing such materials.
  • Amends the SEC’s complex Custody Rule, offering relief from one aspect of the rule in situations involving privately offered securities where there is little risk of misappropriation by the advisor because restricted securities are not readily transferrable.
  • Eliminates the requirement that advisors to private funds provide investors that are limited partnerships, LLCs, and other “pooled vehicles” with multiple disclosure documents comprised of substantially identical information.
  • Eases burdens related to the assignment of advisory contracts for advisors with structures other than partnerships – which are excluded under current law – when there is a change in minority ownership, thereby eliminating an unjustified bias in favor of certain forms of corporate structure.

The Senior$afe Act of 2016, H.R. 4538, which passed by a unanimous vote, helps identify, report and stop financial abuse of senior citizens. 

Specifically, the bill provides that banks, credit unions, investment advisors, broker-dealers and their employees would be protected from civil or administrative liability as long as employees receive training in how to spot and report predatory activity and disclose any possible exploitation of senior citizens with reasonable care. 


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