February 28, 1992
TO: BOARD OF GOVERNORS NO. 15-92
SEC RULES MEMBERS NO. 10-92
INVESTMENT ADVISER MEMBERS NO. 8-92
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 7-92
RE: INVESTMENT ADVISER LEGISLATION INTRODUCED IN THE SENATE
__________________________________________________________
On February 26, Senator Chris Dodd, Chairman of the Senate
Banking Securities Subcommittee, introduced the "Investment
Adviser Oversight Act of 1992". This legislation was developed
with the Securities and Exchange Commission to improve regulation
of the investment adviser industry. Set forth below is a summary
of the bill.
Annual Fees
In his statement introducing the bill, Chairman Dodd notes
that the "industry's growth has far exceeded the SEC's resources
to police the industry." The bill addresses this problem by
imposing an annual fee on SEC registered investment advisers.
The fee ranges from $300 for advisers with assets under
management of $10 million or less to $7,000 for advisers with
over $5 billion under management. The revenue collected by the
SEC from the annual fee must be used to recover its costs of
enhanced supervision and regulation of investment advisers and
their activities, such as its costs in connection with investment
adviser inspections. The Institute had testified in support of
this type of an annual fee, except that the Institute strongly
recommended that investment company assets be excluded from the
assets of an adviser under management in determining the fee
since investment companies currently pay considerable fees to the
SEC and are already subject to rigorous oversight under the
Investment Company Act. (See Memorandum to Board of Governors
No. 14-92, SEC Rules Members No. 9-92, Investment Adviser Members
No. 7-92 and Investment Adviser Associate Members No. 6-92, dated
February 26, 1992.)
Fidelity Bond
The bill authorizes the SEC to require advisers with
custody of client funds or securities, that have discretionary
authority to direct client investments, or that advise investment
companies to obtain a fidelity bond. (Section 17(g) of the 1940
Act currently only requires officers and employees of the
investment company to be bonded. This requirement will be
amended to extend to employees of advisers to investment
companies.) The Institute had testified in support of a fidelity
bond requirement.
Suitability Requirement
The bill adds an express suitability requirement under the
Advisers Act. In order to satisfy this requirement, investment
advisers first must obtain from the client information concerning
his or her financial situation, investment experience, and
investment objectives. Based on this information, and any other
information known to the adviser, the adviser reasonably must
determine that the investment advice to be provided is suitable
for that client. The Institute had testified in support of
including a suitability requirement under the Act.
One-Stop Filing
The bill authorizes the SEC to develop and implement a one-
stop filing system. This system would allow an adviser to make
one filing at one location and have the contents of that filing
electronically communicated to the SEC and the states in which
the adviser wishes to register.
* * *
A copy of the Senate bill and related materials is
attached. We will keep you informed of developments.
Amy B.R. Lancellotta
Associate General Counsel
Attachment