Investment Advisers Modernization Act of 2016

Floor Speech

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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 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.

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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.
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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.

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Mr. FOSTER. Mr. Speaker, how much time do I have remaining?

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Mr. FOSTER. Sinema).
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