House Passes Bill Relaxing Reporting Requirements for Private Equity Funds
On Friday, September 9, 2016, the United States House of Representatives passed The Investment Advisers Modernization Act of 2016 (H.R. 5424). As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010, private equity fund managers (and other investment advisers) with $150 million or more in assets under management are required to register with the Securities and Exchange Commission (SEC) and comply with the reporting standards of the Investment Advisers Act of 1940 (IAA). H.R. 5424 revises portions of the IAA and the federal regulations promulgated under the IAA, thereby reducing certain compliance obligations applicable to private equity funds and modernizing outdated rules which were enacted prior to the development of private equity. The significant features of H.R. 5424 are as follows:
Assignment of Investment Advisory Contracts: Under the IAA, a private equity fund cannot enter into an advisory or management services contract if such contract permits the assignment of the contract by the fund without the other party’s consent. H.R. 5424 expressly permits the assignment of an advisory contract with the consent of the counterparty if the counterparty (1) is a “qualified client” (as defined by the IAA) and (2) agrees to the clause permitting assignment at the time of execution. The upshot of this provision, were the legislation to pass, is that private equity funds would be permitted to include clauses in most of their advisory or management services contracts in which the portfolio company agrees that the contract can be assigned (assuming the client/portfolio company is qualified, which will almost always be the case based on the threshold). This will eliminate having to obtain the portfolio company’s consent if the private equity fund undergoes a change in control. Note that a portfolio company could still negotiate for an anti-assignment clause in the relevant agreement, but the lack of such a clause would no longer be a violation of Dodd-Frank under H.R. 5424.
- Notices of Changes in Membership: The IAA also requires investment advisory contracts to contain clauses under which investment advisers (if a partnership) must give notice to counterparties of any change in its membership. H.R. 5424 deletes this requirement from the IAA. This would eliminate the unnecessary and time consuming burden of private equity funds having to provide notice to their portfolio companies when minority interests of the fund change hands.
- Advertisements: The federal regulations promulgated under the IAA contain certain restrictions as to what can be contained in advertisements disseminated by private equity funds, including a prohibition on testimonials and references to past specific recommendations which were or would have been profitable. H.R. 5424 excludes these advertising restrictions for advertising circulated to certain persons, including “qualified clients” (as referenced above) and “accredited investors” (as defined under federal securities laws). This relaxation of advertising restrictions would make it easier for private equity managers to promote their funds.
- Brochure Deliveries: The federal regulations promulgated under the IAA require brochures and brochure supplements containing certain information to be delivered by private equity funds. H.R. 5424 eliminates the obligation to deliver such brochures if the information that was required to be contained in the brochure was contained in a prospectus, private placement memorandum or other offering document previously received by a client. This would end the requirement of private equity funds having to deliver annual brochures to their portfolio companies and other clients when such clients already possess the relevant information contained in the brochures.
- Form PF: The IAA requires private equity funds with at least $150 million in private funds assets under management to file a Form PF with the SEC to report information about the fund’s holdings. H.R.5424 would mitigate some of the reporting requirements with which funds have to comply in the Form PF.
- Private Equity Fund Sales Literature: Under H.R.5424, the SEC may not amend regulations regarding sales literature to extend such regulations to offerings of securities issued by private equity funds and may not adopt substantially similar rules applicable to such securities offerings. This would protect equity offerings in private equity funds from being subject to the same regulations as are certain other investment companies.
H.R. 5424 will now go to the United States Senate for a vote.
If you have questions or would like additional information regarding more specific points of the proposed legislation, please contact Ryan Udell (215.864.7152; firstname.lastname@example.org), Chad Cowan (215.864.6254; email@example.com) or Melissa Pang (215.864.6896; firstname.lastname@example.org).