[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 578 Introduced in House (IH)]

103d CONGRESS
  1st Session
                                H. R. 578

   To provide for recovery of costs of supervision and regulation of 
   investment advisers and their activities, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            January 26, 1993

Mr. Boucher (for himself, Mr. Markey, Mr. Dingell, Mr. Fields of Texas, 
   Mr. Cooper, Mr. Wyden, Mr. Lehman, and Mr. Synar) introduced the 
   following bill; which was referred to the Committee on Energy and 
                                Commerce

_______________________________________________________________________

                                 A BILL


 
   To provide for recovery of costs of supervision and regulation of 
   investment advisers and their activities, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Investment Adviser Regulatory 
Enhancement and Disclosure Act of 1993''.

SEC. 2. ADDITIONAL RESOURCES FOR INVESTMENT ADVISER SUPERVISION.

    (a) Amendment.--The Investment Advisers Act of 1940 (15 U.S.C. 80b-
1 et seq.) is amended by inserting after section 203 the following new 
section:

                 ``fees for registrants and applicants

    ``Sec. 203A. (a) In General.--The Commission is authorized, in 
accordance with this section, to collect fees to recover the costs of 
registration, supervision, and regulation of investment advisers and 
their activities. Such fees shall be collected, and shall be available, 
only to the extent provided in advance in appropriations Acts. No 
appropriation Act may authorize fees to be collected under this section 
during any fiscal year unless the amount appropriated by such Act for 
such costs for such fiscal year equals or exceeds the aggregate amount 
that may reasonably be expected to be collected by such fees. Such fees 
shall be deposited as an offsetting collection to the Commission's 
appropriation and may remain available for such purposes for the 
succeeding fiscal year. The costs covered by such fees shall be limited 
to the costs of Commission expenses for registration, examinations, and 
surveys of persons registered or required to register under this Act.
    ``(b) Time for Payment.--
            ``(1) New registrants.--At the time of filing an 
        application for registration under this title, the applicant 
        shall pay to the Commission the fee specified in subsection 
        (c). No part of such fee shall be refunded to the applicant. 
        The filing of an application for registration under this title 
        shall not be deemed to have occurred unless the application is 
        accompanied by the fee required under this section.
            ``(2) Ongoing registrants.--Each investment adviser whose 
        registration is effective on the last day of its fiscal year 
        shall pay to the Commission the fee specified in subsection 
        (c). Such payment shall be made not later than 90 days after 
        the end of its fiscal year, or at such other time as the 
        Commission, by rule, shall determine, unless its registration 
        has been withdrawn, canceled, or revoked prior to that date. No 
        part of such fee shall be refunded to the investment adviser.
    ``(c) Cost-Based Schedule of Fees.--For any fiscal year for which 
fees are authorized to be collected by an appropriation Act, the amount 
of fees due from investment advisers in accordance with paragraphs (1) 
and (2) of subsection (b) shall be determined according to the 
following schedule:

``Assets under management                                      Fee due:
    Less than $10,000,000.........................                 $300
    $10,000,000 or more, but less than $25,000,000                 $500
    $25,000,000 or more, but less than $50,000,000               $1,000
    $50,000,000 or more, but less than                           $2,500
        $100,000,000.
    $100,000,000 or more, but less than                          $4,000
        $250,000,000.
    $250,000,000 or more, but less than                          $5,000
        $500,000,000.
    $500,000,000 or more..........................              $7,000.
    ``(d) Suspension for Failure To Pay.--The Commission, by order, may 
suspend the registration of any investment adviser if it finds, after 
notice, that such investment adviser has failed to pay when due any fee 
required by this section. The Commission shall reinstate such 
registration upon payment of the fee (and any penalty due), if such 
suspension was based solely on the failure to pay the fee.
    ``(e) Rulemaking.--The Commission may adopt such rules as are 
necessary to carry out this section.
    ``(f) Definition of Assets Under Management.--As used in this 
section, the term `assets under management' means the client assets 
with respect to which an investment adviser provides continuous and 
regular supervisory or management services.''.
    (b) Effective Date.--This section shall become effective upon the 
adoption by the Commission of implementing rules, under section 203A(f) 
of the Investment Advisers Act of 1940, as added by subsection (a).

SEC. 3. EXAMINATIONS AND SURVEYS.

    The Investment Advisers Act of 1940 is amended by inserting after 
section 222 (15 U.S.C. 80b-22) the following new section:

                       ``examinations and surveys

    ``Sec. 223. (a) Periodic Examinations.--The Commission shall 
establish and periodically revise a schedule for the regular 
examination of investment advisers. Such schedule shall provide for 
more frequent examinations of certain investment advisers based on 
factors that the Commission determines increase the need for 
examination of those investment advisers, which shall include (at a 
minimum) each of the following:
            ``(1) the frequency of customer complaints;
            ``(2) the risks associated with newly registered investment 
        advisers;
            ``(3) custody of funds and the authority to exercise 
        investment discretion;
            ``(4) the existence of deficiencies detected during an 
        examination under this title that may continue to present high 
        risks to clients; and
            ``(5) the receipt of commissions for the sale of 
        investments recommended to clients.
    ``(b) Surveys of Unregistered Persons.--The Commission shall, 
within 3 years after the date of enactment of this section and 
periodically thereafter, provide for the conduct of a survey to 
determine the extent of, and reasons for, the failure of persons to 
register as required by this Act. The Commission shall, on the basis of 
such survey results, establish objectives for the reduction or 
elimination of such failures and shall include in annual reports to 
Congress (under section 23(b) of the Securities Exchange Act of 1934) 
submitted after completion of the first survey, a statement of such 
objectives, an evaluation of the success in attaining those objectives 
during the preceding year, and such recommendations as the Commission 
considers appropriate to assist in the attainment of those objectives. 
If the survey identifies any pattern of noncompliance with the 
registration requirements of the title and the rules thereunder, the 
Commission's objectives shall include such rulemaking proceedings as 
may be required to correct such noncompliance.
    ``(c) Provisions Not Limitation.--The provisions of this section 
shall not be construed to limit the authority of the Commission to 
prescribe rules under this Act or to conduct an examination or 
investigation at any time or to institute proceedings under this title 
or any other title.''.

SEC. 4. DESIGNATION OF SELF-REGULATORY ORGANIZATIONS.

    The Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) is 
amended by inserting after section 223 (as added by section 3 of this 
Act) the following new section:

             ``designation of self-regulatory organizations

    ``Sec. 224. (a) Designation To Conduct Examinations.--The 
Commission, by rule, consistent with the public interest, the 
protection of investors, and the purposes of this title, may designate 
one or more self-regulatory organizations registered with the 
Commission under sections 6 or 15A of the Securities Exchange Act of 
1934, to conduct periodic examinations of its members and affiliates of 
members that are registered or required to register under this title to 
determine compliance with applicable provisions of this title and the 
rules and regulations thereunder. Such rules shall specify the minimum 
scope and frequency for such examinations and shall, to the extent 
consistent with the protection of investors, be designed to avoid 
unnecessary regulatory duplication or undue regulatory burdens. Such 
self-regulatory organization may discipline such members and affiliates 
of members for violations of the applicable provisions of this title 
and the rules and regulations thereunder pursuant to the standards and 
procedures set forth in sections 6, 15A, and 19 of the Securities 
Exchange Act of 1934. The penalties imposed by a self-regulatory 
organization for violations of this title shall not exceed those 
contained in subsections (e), (f), and (i) of section 203.
    ``(b) Limitation.--The Commission shall not exercise the 
designation authority contained in subsection (a) for members or 
affiliates of members if the primary business of the member or its 
affiliates is investment advisory activities. The Commission, by rule, 
may establish criteria for defining the term `primary business'.
    ``(c) Authority To Impose Fees.--
            ``(1) In general.--Any self-regulatory organization 
        designated by the Commission to perform the examinations 
        specified in subsection (a) shall have the authority to collect 
        fees in accordance with this subsection.
            ``(2) Limitation.--The total fee paid by a registered 
        investment adviser under this subsection shall not exceed an 
        amount determined in accordance with rules prescribed by the 
        Commission. Such rules shall require that the fees collected by 
        a self-regulatory organization under this subsection--
                    ``(A) cover only the costs of the self-regulatory 
                organization's expenses for examinations conducted 
                pursuant to subsection (a);
                    ``(B) as to any investment adviser, bear a 
                reasonable relationship to the costs of conducting an 
                examination of that adviser pursuant to subsection (a); 
                and
                    ``(C) not exceed such portion of the fee authorized 
                under section 203A as the Commission determines is 
                allocable to the Commission's expenses for conducting 
                such an examination.
            ``(3) Reduction of section 203a fees.--The amount of any 
        fee that a registered investment adviser is required to pay 
        under section 203A with respect to any fiscal year shall be 
        reduced by the amount paid to a self-regulatory organization in 
        accordance with this subsection with respect to such fiscal 
        year.
    ``(d) Effective Date of Rule.--A rule prescribed by the Commission 
under this section shall not be effective until 90 days after the date 
on which the Commission submits to each House of Congress a report--
            ``(1) containing the text of the proposed rule and the 
        reasons therefor;
            ``(2) describing the procedures to be used to coordinate 
        the collection of fees by the Commission under section 203A and 
        by a self-regulatory organization under the rule; and
            ``(3) containing such other information as may be necessary 
        to describe the implementation and enforcement of the rule.
    ``(e) Definition.--For purposes of this section, the term 
`affiliate' shall mean any person directly or indirectly controlling, 
controlled by, or under common control with a member.''.

SEC. 5. SUITABILITY AND OTHER ADVISER OBLIGATIONS.

    (a) Amendment.--Section 206 of the Investment Advisers Act of 1940 
(15 U.S.C. 80b-6) is amended to read as follows:

            ``prohibited transactions by investment advisers

    ``Sec. 206. (a) Prohibited Conduct.--It shall be unlawful for any 
investment adviser or any person associated with an investment adviser, 
by use of the mails or any means or instrumentality of interstate 
commerce, directly or indirectly--
            ``(1) to employ any device, scheme, or artifice to defraud 
        any client or prospective client;
            ``(2) to engage in any transaction, practice, or course of 
        business which operates as a fraud or deceit upon any client or 
        prospective client;
            ``(3) acting as principal for his own account, knowingly to 
        sell any security to or purchase any security from a client, or 
        acting as broker for a person other than such client, knowingly 
        to effect any sale or purchase of any security for the account 
        of such client, without disclosing to such client in writing 
        before the completion of such transaction the capacity in which 
        he is acting and obtaining the consent of the client to such 
        transaction;
            ``(4) to engage in any act, practice, or course of business 
        which is fraudulent, deceptive, or manipulative;
            ``(5) to provide investment advice to any client, other 
        than in connection with impersonal advisory services, unless 
        the adviser--
                    ``(A) prior to providing any investment advice, and 
                as appropriate thereafter, makes a reasonable inquiry 
                into the client's financial situation, investment 
                experience, and investment objectives;
                    ``(B) reasonably determines that the investment 
                advice is suitable for the client; and
                    ``(C) maintains reasonable records, in accordance 
                with such rules as the Commission shall prescribe, of 
                the information obtained from the inquiries the adviser 
                made in complying with this paragraph; or
            ``(6) to guarantee a client that a specific result will be 
        achieved as a result of the investment advisory services.
    ``(b) Exemptions and Special Rules.--
            ``(1) Exemption.--The prohibitions of subsection (a)(3) 
        shall not apply to any transaction with a customer of a broker 
        or dealer if such broker or dealer is not acting as an 
        investment adviser in relation to such transaction.
            ``(2) Authority to define and prescribe.--The Commission 
        shall, for the purposes of subsection (a)(4), by rules define, 
        and prescribe means reasonably designed to prevent, such acts, 
        practices, and courses of business as are fraudulent, 
        deceptive, or manipulative.
            ``(3) Definition of impersonal advisory services.--As used 
        in subsection (a)(5), the term `impersonal advisory services' 
        means any investment advisory services provided--
                    ``(A) by means of written material or oral 
                statements which do not purport to meet the objectives 
                or needs of specific individuals or accounts;
                    ``(B) through the issuance of statistical 
                information containing no expression of opinion as to 
                the investment merits of a particular security; or
                    ``(C) by any combination of the foregoing 
                services.''.
    (b) Rulemaking Required.--The Commission shall prescribe rules for 
purposes of paragraph (5)(C) of section 206(a) of the Investment 
Advisers Act of 1940 (as added by subsection (a) of this section) 
within one year after the date of enactment of this Act.

SEC. 6. ADDITIONAL DISCLOSURE OBLIGATIONS OF INVESTMENT ADVISERS.

    (a) Additional Obligations.--Section 204 of the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-4) is amended--
            (1) by striking the heading of such section and inserting 
        the following:

        ``periodic reports and other disclosure requirements'';

            (2) by inserting ``(a) Periodic and Other Reports.--'' 
        after ``Sec. 204.''; and
            (3) by adding at the end the following new subsections:
    ``(b) Brochure Required.--
            ``(1) In general.--Each person registered under section 203 
        of this title shall disseminate to each client or prospective 
        client a document disclosing material facts concerning matters 
        listed in paragraphs (2) and (3) and such other matters as the 
        Commission shall prescribe. In order to provide for timely and 
        effective disclosure of such facts and matters to clients, the 
        Commission shall by rule prescribe the format of the document 
        and the timing of its dissemination.
            ``(2) Contents of brochure.--The document required by 
        paragraph (1) shall include information concerning--
                    ``(A) the education and business background of such 
                person and of any associated person providing 
                significant investment advisory services to the client,
                    ``(B) compensation arrangements between the client 
                and the investment adviser,
                    ``(C) the nature of services offered,
                    ``(D) business practices,
                    ``(E) methods for obtaining information on the 
                disciplinary history and registration of the investment 
                adviser and persons associated with the investment 
                adviser, and
                    ``(F) conflicts of interest which could reasonably 
                be expected to impair the rendering of disinterested 
                advice.
            ``(3) Prominent disclosures.--Such document shall also 
        prominently disclose--
                    ``(A) that--
                            ``(i) the registered person receives or may 
                        receive, directly or indirectly, sales 
                        commissions or other fees in connection with a 
                        purchase or sale effected on behalf of a 
                        client; or
                            ``(ii) the registered person will not 
                        receive, directly or indirectly, any sales 
                        commission or other fees in connection with 
                        such purchase or sale, but the client may be 
                        charged a sales commission or other fee by 
                        another person in connection with such purchase 
                        or sale; and
                    ``(B) that remedies may be available to the client 
                with respect to disputes arising out of the advisory 
                relationship.
            ``(4) Definition.--The Commission shall define `associated 
        person providing significant investment advisory services to 
        the client' by rule for purposes of this subsection.
    ``(c) Transaction Reports.--
            ``(1) Initial disclosure.--Before a purchase or sale is 
        effected on behalf of any client, each registered investment 
        adviser shall, in accordance with rules prescribed by the 
        Commission, disclose to the client the total amount of 
        commissions, fees, or other charges that may reasonably be 
        expected to be charged in connection with the transaction (or, 
        in the case of payments from third parties, that a payment will 
        be received) and that the adviser or a related person will 
        receive a portion of the commission, fee, charge, or payment. 
        Such initial disclosure shall be in writing if the purchase or 
        sale was recommended in writing.
            ``(2) Confirmation.--After a purchase or sale is effected, 
        each registered investment adviser shall transmit to each 
        client a written statement that discloses the amount of 
        commissions, fees, or other charges charged in connection with 
        the transaction (or, in the case of payments from third 
        parties, that a payment has been or will be received). Such 
        written statement shall be in such form and contain such 
        information, and be provided in accordance with such rules, as 
        the Commission shall prescribe. Such rules shall, to the extent 
        consistent with the protection of investors, permit delivery of 
        a confirmation statement of a broker or a dealer that includes 
        information that meets the requirements of this subsection (and 
        the rules adopted thereunder) in order to satisfy such 
        requirements.
            ``(3) Waiver.--The Commission may, by rule, permit an 
        investment adviser to omit disclosure required by this 
        subsection with the knowing written consent of the client.
            ``(4) Exceptions.--This subsection shall not apply--
                    ``(A) with respect to any purchase or sale for 
                which the registered person, and any person associated 
                or under common control with the registered person, 
                will not receive any portion of the amount charged or 
                deducted in connection with the purchase or sale, and 
                will not receive any payment from a third party 
                required to be disclosed under paragraph (1);
                    ``(B) with respect to accounts for which the person 
                is authorized to exercise investment discretion; or
                    ``(C) with respect to any account for which the 
                person is not acting as an investment adviser.
            ``(5) Special rule.--The provisions of this subsection 
        shall also apply to persons associated with an investment 
        adviser effecting transactions for advisory clients through a 
        broker or dealer with which the person is associated.
    ``(d) Periodic Reports.--
            ``(1) In general.--Each registered investment adviser shall 
        periodically provide to each client a written statement of--
                    ``(A) all commissions, fees, or other charges paid 
                by the client during the period for services provided 
                by the registered person and any person associated or 
                under common control with the registered person;
                    ``(B) all compensation directly or indirectly 
                received during the period by the registered person, or 
                any person associated or under common control with the 
                registered person, from any third party with respect to 
                any recommended transaction;
                    ``(C) in the case of a client account for which the 
                adviser provides investment supervisory services, all 
                securities positions held in the account at the 
                beginning and at the end of the period; and
                    ``(D) such other matters as the Commission shall 
                prescribe.
            ``(2) Commission rules.--The Commission shall prescribe by 
        rule the format of the statement and timing of its delivery. 
        Such rule shall require that the format and timing of delivery 
        be designed to present the required information in a manner 
        that readily permits clients to compare the costs charged by 
        the investment adviser with the costs charged by other 
        advisers. In adopting such rule, the Commission shall require 
        an investment adviser whose clients purchase or sell investment 
        products through persons other than such adviser, or persons 
        associated or under common control with such adviser, to 
        disclose to its clients that such information concerning costs 
        charged does not include commissions or other fees paid in 
        connection with such purchases or sales. Such rule shall, to 
        the extent consistent with the protection of investors, permit 
        delivery of a report of a broker or dealer that includes 
        information that meets the requirements of this subsection (and 
        the rules adopted thereunder) in order to satisfy such 
        requirements.
            ``(3) Waiver.--The Commission may, by rule, permit an 
        investment adviser to provide the statement required by 
        paragraph (1) no more frequently than annually if the client 
        knowingly waives, in writing, the right to obtain such 
        statement more frequently than annually.
            ``(4) Exception.--This subsection shall not apply with 
        respect to any account for which the person is not acting as an 
        investment adviser.
    ``(e) Facilities for Filing Records and Reports.--The Commission, 
by rule, may require any investment adviser--
            ``(1) to file with the Commission any fee, application, 
        report, or notice required by this title or by the rules issued 
        under this title through any person designated by the 
        Commission for that purpose; and
            ``(2) to pay the reasonable costs associated with such 
        filing.''.
    (b) Rulemaking Required.--The Commission shall prescribe rules for 
purposes of subsections (b), (c), and (d) of section 204 of the 
Investment Advisers Act of 1940 (as added by subsection (a) of this 
section) within one year after the date of enactment of this Act.

SEC. 7. BOND REQUIREMENT.

    Section 208 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
8) is amended by adding at the end the following:
    ``(e) Bond Requirement.--
            ``(1) In general.--The Commission shall, by rules for the 
        protection of investors, require that any investment adviser 
        registered under section 203 who--
                    ``(A) is authorized to exercise investment 
                discretion, as defined in section 3(a)(35) of the 
                Securities Exchange Act of 1934, with respect to an 
                account,
                    ``(B) has access to the securities or funds of a 
                client, or
                    ``(C) is an investment adviser of an investment 
                company, as defined in section 2(a)(20) of the 
                Investment Company Act of 1940,
        shall obtain a bond from a reputable fidelity insurance company 
        against larceny and embezzlement in such reasonable amounts and 
        covering such officers, partners, directors, and employees of 
        the investment adviser as the Commission may prescribe.
            ``(2) Considerations in rulemaking.--In implementing 
        paragraph (1), the Commission shall consider--
                    ``(A) the degree of risk to client assets that is 
                involved;
                    ``(B) the cost and availability of fidelity bonds;
                    ``(C) existing fidelity bonding requirements; and
                    ``(D) any alternative means to protect client 
                assets.
            ``(3) Exemption authority.--The Commission by rule may 
        exempt any person or class of persons, under such terms and 
        conditions and for such periods as the Commission shall provide 
        in such rule, from the requirements of this subsection and the 
        rules thereunder.

SEC. 8. DISQUALIFYING CONDUCT.

    (a) Amendment.--Section 203(e) of the Investment Advisers Act of 
1940 (15 U.S.C. 80b-3(e)) is amended--
            (1) by redesignating paragraphs (3) through (7) as 
        paragraphs (4) through (8); and
            (2) by inserting after paragraph (2) the following new 
        paragraph:
            ``(3) has been convicted within ten years preceding the 
        filing of any application for registration or at any time 
        thereafter of any crime that is punishable by imprisonment for 
        one or more years and that is not described in paragraph (2) of 
        this subsection or of a substantially equivalent crime by a 
        foreign court of competent jurisdiction.''.
    (b) Conforming Amendments.--Section 203 of such Act is further 
amended--
            (1) in subsection (e)(6) (as redesignated by subsection (a) 
        of this section, by striking ``this paragraph (5)'' and 
        inserting ``this paragraph (6)'';
            (2) in subsection (f)--
                    (A) by striking ``paragraph (1), (4), (5), or (7)'' 
                and inserting ``paragraph (1), (5), (6), or (8)''; and
                    (B) by striking ``paragraph (3)'' and inserting 
                ``paragraph (4)''; and
            (3) in subsection (i)(1)(D), by striking ``section 
        203(e)(5) of this title'' and inserting ``subsection (e)(6) of 
        this section''.

SEC. 9. CONFIDENTIALITY.

    Section 208 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
8), as amended by section 7, is further amended by adding at the end 
the following new subsection:
    ``(f) Disclosure of Client Information Prohibited.--
            ``(1) Adviser disclosure.--It shall be unlawful for any 
        investment adviser to disclose any personally identifiable 
        financial information with respect to any client unless 
        required by law to do so, or unless--
                    ``(A) the client has been adequately informed of 
                the proposed information disclosure, in accordance with 
                rules prescribed by the Commission, and (i) has been 
                afforded the opportunity, in accordance with such 
                rules, to object to the disclosure, and (ii) has not 
                objected or has affirmatively consented;
                    ``(B) the information disclosed is necessary and 
                appropriate in order to establish an advisory or 
                brokerage account or to effect or attempt to effect a 
                transaction for the client;
                    ``(C) the information (i) is requested by 
                representatives of the Commission, a State agency whose 
                primary assignment is the regulation of the securities 
                business, or a self-regulatory organization, or (ii) is 
                requested by subpoena; or
                    ``(D) the information is requested by the client's 
                auditors or accountants.
            ``(2) Secondary disclosure.--It is unlawful for any person 
        to whom information is disclosed for the purpose described in 
        paragraph (1)(B) to use such information for any purpose other 
        than the effectuation of the client's transaction.''.

                                 <all>

HR 578 IH----2