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May 1, 1992
TO: INVESTMENT ADVISERS COMMITTEE NO. 19-92
RE: STAFF DISCUSSION DRAFT OF HOUSE BILL ON INVESTMENT ADVISER
REGULATION
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Attached is a copy of a staff discussion draft of the House
bill on investment adviser regulation and a section-by-section
analysis. Set forth below is a brief description of the
significant provisions of the draft.
Annual Fees
The draft bill adds a new provision to the Advisers Act to
require annual fees based on assets under management determined
pursuant to a schedule ranging from $300 to $7,000. These fees
will be used to cover the costs of increased inspections of
registered investment advisers and investigations of persons
required to register under the Act.
Inspections and Investigations
The draft bill requires the SEC to inspect newly registered
advisers within one year of becoming registered with the SEC. In
addition, the SEC is required to establish a schedule for the
regular inspection of advisers. This schedule would have to be
revised periodically to take into account changes of factors that
increase the need for inspections, such as custody of funds and
authority to exercise investment discretion.
The bill also directs the SEC to survey, at least once
every 3 years, the extent of, and reasons for, the failure of
persons to register under the Act.
Coverage of Statute
The draft bill requires the SEC to develop rules to
interpret the exclusions available for certain professionals and
broker-dealers from the definition of "investment adviser" whose
advisory services are rendered solely incidental to the conduct
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of his or her business. The SEC is required to consult with
state securities commissions in developing these rules. In
addition, the SEC is required to establish standards for applying
certain factors in reaching a determination as to whether such a
professional is, in fact, eligible for the exclusion. Those
factors include: whether the person holds himself out as an
"investment adviser", "financial planner", or similar term;
whether the person receives compensation for providing advisory
services on a basis different than the person is compensated for
other professional services; and whether the advisory services
are related to the person's other professional activities.
Suitability and Other Obligations
The draft bill includes a suitability requirement under
which an adviser must obtain from the client information
concerning the client's financial situation, investment
experience, and investment objectives before determining whether
the advice to be provided is suitable for the client. The draft
bill also includes a recordkeeping requirement in connection with
the records obtained from the client under this provision.
The draft bill prohibits an adviser from: (1) providing a
report or analyses to a client that is purported to be prepared
individually for that client but that is prepared by someone
other than the adviser, or person associated with the adviser,
without disclosing that fact; and (2) guaranteeing that a
specific result will be achieved as a result of the investment
advisory services. In addition, an adviser would be required to
disclose to a client at the time the client enters into a
contract for services that the client has the right to obtain an
estimate of the prospective client's cost for such services. The
SEC will, by rulemaking, specify how such estimate should be
arrived at and presented.
Additional Disclosure Requirements
The SEC is directed to adopt rules requiring written
disclosure to clients or prospective clients about certain
specified items such as, but not limited to: (1) the background
and qualifications of the investment adviser or any employee of
the investment adviser who provides or is expected to provide
services to the client; (2) the nature of the services being
offered; and (3) the fees to be charged for such services, and
any commissions to be earned in connection with purchases and
sales recommended by the adviser.
Rules are also required relating to written disclosure that
must be provided before the client enters into a contract for
advisory services of any material conflict of interest including
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certain specified compensation arrangements and relationships
that the adviser may have with the issuer of a security that is
being recommended.
In addition, the SEC's rules must require an adviser to
provide certain written disclosure at the time advice is rendered
of specific compensation amounts, including gifts and other
noncash incentives, to be earned by the registered person or any
of its employees or affiliates.
Private Remedies
The draft bill would establish an express private right of
action against advisers who engage in certain fraudulent conduct.
This section of the draft bill also provides for joint and
several liability for controlling persons of persons liable under
this new section, unless the controlling person acted in good
faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action. The statute of
limitations for purposes of this section would be 5 years after
the violation on which the action is based, or 3 years after
discovery of the facts constituting the violation or cause of
action.
Bond Requirement
The draft bill authorizes the SEC to require certain
investment advisers, such as advisers with custody of client
funds or securities or that have discretionary authority to
direct client investments, to obtain a fidelity bond.
Confidentiality
The Advisers Act would be amended to make it unlawful for
any investment adviser to disclose the identity, financial
affairs, or investments of any client unless the adviser is
required to do so by law or unless the client consents to such
disclosure.
Federal-State Coordination
The draft bill establishes the policy objective of greater
federal and state coordination in the regulation of investment
advisers in order to achieve the greatest effectiveness of
regulation, inspection, and enforcement, and the greatest
uniformity in federal and state regulatory standards.
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We have been asked by Congressman Edward J. Markey,
Chairman of the House Telecommunications and Finance
Subcommittee, and Congressman Rick Boucher to provide their staff
with comments on the draft bill by May 13. Therefore, please
provide me with your views on the discussion draft by Thursday,
May 7, at the latest. I am particularly interested in your views
on the proposed private right of action. My direct number is
202/955-3523.
Amy B.R. Lancellotta
Associate General Counsel
Attachment