[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 578 Referred in Senate (RFS)]
103d CONGRESS
1st Session
H. R. 578
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
May 5 (legislative day, April 19), 1993
Received
May 7 (legislative day, April 19), 1993
Read twice and referred to the Committee on Banking, Housing and Urban
Affairs
_______________________________________________________________________
AN ACT
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 section 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 rule 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 money penalties imposed by a self-
regulatory organization for violations of this title shall not exceed
those contained in section 203(i).
``(b) Limitations.--
``(1) Primary business 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 and its affiliates is investment
advisory activities.
``(2) Limitation with respect to affiliates of members.--
The Commission shall not exercise the authority contained in
subsection (a) for an affiliate of a member if--
``(A) the primary business of the affiliate is
investment advisory activities;
``(B) the affiliate is an affiliate of the member
solely as a result of the adviser's (or an associated
person of the adviser's) registration with the member
as a registered representative; and
``(C) the affiliate is a registered representative
of the member solely to enable the adviser to execute
transactions that are incidental to the investment
adviser's primary business;
unless the Commission determines, in accordance with such other
criteria as the Commission establishes by rule, that such
exercise of designation authority is consistent with the public
interest, the protection of investors, the purposes of this
title, and the objectives of the Commission's investment
adviser examination program.
``(3) Limitation with respect to savings association
affiliates of members.--The Commission shall not exercise the
authority contained in subsection (a) for an affiliate of a
member if the affiliate is a savings association, as such term
is defined in section 3(b)(1) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(b)(1)).
``(4) Definitional rules.--For purposes of this subsection,
the Commission may, by rule, establish criteria for defining
the terms `primary business' and `incidental to the investment
adviser's 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 advisory services provided by the
investment adviser.
``(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 investment adviser, and any person associated
or under common control with the investment adviser,
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 any person 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
provide to each client a periodic written statement in such
form and containing such information as the Commission shall
prescribe by rule consistent with the public interest, the
protection of investors, and the purposes of this title. Such
rule shall require the disclosure of--
``(A) commissions, fees, or other charges paid by
the client during the period for services provided by
the investment adviser and any person associated or
under common control with the investment adviser;
``(B) compensation directly or indirectly received
during the period by the investment adviser, or any
person associated or under common control with the
investment adviser, from any third party with respect
to any recommended transaction;
``(C) in the case of a client account for which the
investment adviser provides investment supervisory
services, 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 rule prescribed by the
Commission pursuant to paragraph (1) 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; Access to
Disciplinary and Other Information.--
``(1) Filing depositories.--The Commission, by rule, may
require any investment adviser--
``(A) 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
entity designated by the Commission for that purpose;
and
``(B) to pay the reasonable costs associated with
(i) such filing, and (ii) the maintenance of the toll-
free telephone listing required by paragraph (2).
``(2) Listing for toll-free inquiries.--The Commission
shall require the entity designated by the Commission to
receive fees, applications, reports, or notices pursuant to
paragraph (1) to--
``(A) establish and maintain a toll-free telephone
listing to receive inquiries regarding the disciplinary
and other information involving investment advisers and
persons associated with investment advisers; and
``(B) respond promptly to such inquiries in
writing.
Such designated entity may charge persons, other than
individual investors, reasonable fees for the cost of providing
written responses to inquiries. Such designated entity shall
not have any liability to any person for any actions taken or
omitted in good faith under this paragraph.''.
(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, by rules for the
protection of investors, shall require 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,
to 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), respectively; 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.''.
SEC. 10. CUSTODIANSHIP.
(a) Findings.--The Congress finds that--
(1) most clients of investment advisers who give their
advisers discretionary authority over their securities and
funds provide for the safekeeping of their securities and funds
with a custodian;
(2) it is a customary business practice for custodians to
provide reports of the transactions in client accounts directly
to clients;
(3) such direct reporting provides an important safeguard
against improper use of client assets; and
(4) permitting advisers to serve as the sole recipient of
custodial account communications has allowed, and may continue
to allow, unscrupulous persons to misuse client assets, causing
substantial losses for those clients.
(b) Report.--The Commission, within 18 months of enactment of this
Act, after consultation with the appropriate Federal banking agencies
(as such term is defined in section 3(q) of the Federal Deposit
Insurance Act), shall submit a report to Congress--
(1) analyzing the risks to investors when an investment
adviser is made the sole recipient of communications from the
custodian or when an investment adviser or affiliate thereof
serves as the custodian; and
(2) making any recommendations the Commission believes are
necessary to eliminate or reduce these risks.
Passed the House of Representatives May 4, 1993.
Attest:
DONNALD K. ANDERSON,
Clerk.
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