Investment Advisers Modernization Act of 2016

Floor Speech

Date: Sept. 9, 2016
Location: Washington, DC


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 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.


Ms. MAXINE WATERS of California. Maloney), the ranking member of our Subcommittee on Capital Markets and Government Sponsored Enterprises.

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.


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 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.

``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 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?

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.