House of Representatives to vote on PE bill

The House of Representatives is expected to vote on the Investment Advisers Modernization Act (HR 5424) today.

The proposed bill would reduce the amount of information that private equity firms and other financial advisors are required to provide to the Securities and Exchange Commission.

The Investment Advisers Modernization Act, which has been drawn up by Virginia congressman Robert Hurt and California congressman Juan Vargas, proposes updates to the Investment Advisers Act which was introduced in 1940. The amendments focus on several areas, including advertising rules that were adopted in 1961 with retail investors in mind, which can limit private equity firms who market to very sophisticated investors.

Under the current advertising rules, private equity managers have found it difficult to comply with requests from LPs to see case studies of their investments.

In order for the bill to become law, it would first need to pass the House and the Senate. However, earlier this week the Obama administration threatened to reject the bill, which it said would “enable private fund advisors to slip back into the shadows.”

“If the President were presented with the legislation, his senior advisers would recommend he veto the bill,” the administration said in a statement.

The administration said that it “strongly opposes HR 5424,” because it “would create a loophole providing a broad exemption from audit and exam requirements, leaving investors unable to verify that funds actually contain particular investments as claimed.”

The bill would abolish important safeguards, including requirements for advisors to notify clients of a change in ownership or control, deliver a plain language brochure to clients annually, and disclose certain information on large private equity funds to regulators, according to the administration.

In June, the US House Committee on Financial Services voted in favor of the proposed legislation by 47 votes to 12. All Republicans voting on the committee supported the bill, as did a majority of the committee’s Democratic members.

Private equity industry advocacy group the American Investment Council strongly supports the bill. “These thoughtful modifications show a commitment to improving the regulatory structure for private funds and we look forward to seeing this bill advance,” Mike Sommers, president and chief executive of the AIC said in a recent statement. “We consider it an excellent start to addressing a series of issues in this space. The bill would make the regulatory process more efficient and effective for both regulated entities and the regulators.”