June 18, 1993
TO: INVESTMENT ADVISERS COMMITTEE NO. 14-93
RE: MASSACHUSETTS INVESTMENT ADVISERS BILL
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The Massachusetts House of Representatives is considering the attached
bill, which generally would adopt provisions to (1) require registration of
investment advisers and investment adviser representatives, (2) authorize the
Secretary to impose books and records, financial reporting, and disclosure and
filing requirements on investment advisers, and (3) authorize administrative
sanctions against investment advisers by the Secretary.
The bill would include in the definition of "investment adviser" financial
planners and other persons who "hold themselves out" as providing investment
advisory services for compensation. Among those whom the bill would exempt are
(1) persons whose only clients are certain institutions, including investment
companies, (2) registered broker-dealers and broker-dealer agents, and (3)
federally-registered investment advisers that are "qualified institutional
buyers" or QIB affiliates under Securities and Exchange Commission Rule 144A.
According to the Director of the Massachusetts Securities Division, this
last exclusion is designed for those institutional money managers that also have
retail clients. If an adviser invests on a discretionary basis at least $100
million for one QIB client, then the adviser would qualify as a QIB under Rule
144A and would be exempt under the bill, even if it also has retail clients. The
bill does not contain a de minimis exception for advisers with only a few clients
in Massachusetts.
The bill would require disclosure of such matters as the compensation
arrangements between the client and adviser and the adviser's "business
practices." The bill also would require disclosure, before each transaction, of
information about commissions and fees and third-party compensation arrangements.
The transaction reports would have to be in writing only if the recommendation
was in writing, and the Secretary could adopt a rule permitting clients to waive
a disclosure.
In a recent conversation with Institute staff, the Director clarified
certain aspects of the bill. First, an adviser generally could not aggregate
non-QIB accounts in order to meet the $100 million threshold for qualification
as a QIB. Second, although the bill could be read to require dual registration
of some persons as investment adviser representatives and investment advisers,
the Division instead intends to establish a two-tier registration system unless
an investment adviser representative has an advisory business on the side.
Finally, although the bill does not explicitly call for the use of Form ADV to
satisfy the disclosure requirements, the Division intends to require use of the
Form ADV. (Any non-Form ADV disclosure requirement, such as the transaction
reporting requirements, would have to be separately fulfilled.)
The legislature's session ends in December.
Thomas M. Selman
Assistant Counsel
Attachment