[Congressional Record Volume 140, Number 143 (Wednesday, October 5, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: October 5, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                INVESTMENT ADVISER OVERSIGHT ACT OF 1993

  Mr. MARKEY. Mr. Speaker, I ask unanimous consent that the Committee 
on Energy and Commerce be discharged from further consideration of the 
Senate bill (S. 423) to provide for recovery of costs and supervision 
and regulation of investment advisers and their activities, and for 
other purposes, and ask for its immediate consideration.
  The Clerk read the title of the Senate bill.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Massachusetts?
  Mr. FIELDS of Texas. Mr. Speaker, reserving the right to object, and 
I will not object, I yield to the gentleman from Massachusetts [Mr. 
Markey].
  Mr. MARKEY. Mr. Speaker, I thank the gentleman for yielding.
  Mr. Speaker, this is a bill which is going to protect the investors 
of this country against unscrupulous investment advisers. It is a good 
bill, and I hope that the House accepts it.
  Mr. Speaker, the amendment in the nature of a substitute that I am 
offering to S. 423 (the amendment) represents the fruits of countless 
hours of discussions and negotiations between House and Senate staff. 
It is important legislation that would, at long last, bring regulation 
to the most underregulated part of the securities industry. Investment 
advisers currently inhabit a Wild West of poorly funded regulation, 
where nearly 30 years can elapse before an adviser is ever subjected to 
a routine inspection by the Securities and Exchange Commission [SEC]. 
Nearly anyone--including convicted murderers and drug dealers--can 
become investment advisers by simply paying a $150 entrance fee. That 
leaves the millions of people who each year entrust their futures to 
investment advisers at the mercy of an industry that, while the 
majority of its members are honest and above reproach, nevertheless 
harbors many who regard investors as sheep to be shorn. And the most 
common way that investors are fleeced is through product-driven 
salespeople who get fat commissions from customers who mistakenly 
believe that their adviser is acting in their best interest.
  Since 1981, the number of investment advisers has increased from 
5,100 to 22,000, and assets under their management soared from $450 
million to $9.3 trillion. That is four times the amount deposited today 
in U.S. commercial banks. At the same time as this explosive growth, 
SEC staff assigned to inspect these advisers has increased by only 15 
inspectors--from 36 to 51. Unfortunately, those who are forced to 
depend on the kindness of strangers are almost entirely without the 
protection of the SEC--the securities cops on the beat. Both the SEC 
and the GAO have in fact concluded that investment adviser registration 
gives investors a false sense of comfort, and if regulation is not 
increased, investors would actually be better off with no registration 
of advisers at all. In other words, when your police force is massively 
outmanned and outgunned, you may be better off not even pretending that 
you have one. That is a sad commentary on the woeful state of affairs 
in an industry that touches nearly every household in this country. The 
amendment we are offering up today would justify investors' faith in 
SEC registration and regulation: it would add more cops to the beat and 
equip them with better weapons against fraudulent conduct. It would 
also arm investors with information so that they can better protect 
themselves. It is tough legislation that is nonetheless carefully 
crafted to avoid being burdensome to those advisers that are respectful 
of the law and their obligations to their clients.
  To help address these problems, this amendment, which contains 
consensus language supported by a bipartisan group of colleagues in the 
House and Senate, would provide the SEC with the annual funds it needs 
in order to inspect investment advisers more thoroughly and more 
frequently than they are able to do with the limited resources they 
have now. It would also provide enhanced protection for investors by 
establishing a mechanism for the identification of unregistered 
advisers; by allowing the SEC to designate a self-regulatory 
organization to conduct periodic examinations of certain advisers; by 
improving disclosures of conflicts of interest and other pertinent 
information; by authorizing the SEC to require fidelity bonds of 
certain advisers; by making provision for the establishment of a 
readily accessible telephonic or other electronic process for finding 
out about the disciplinary history of advisers; and by mandating 
prominent up-front disclosure of the convictions of advisers that have 
been or that employ persons that have been convicted of felonies.
  Last year, the House passed H.R. 578, the Investment Adviser 
Regulatory Enhancement and Disclosure Act--the original House bill--
from which many of the provisions and concepts contained in the present 
amendment derive. The original House bill and the original Senate bill 
differed in numerous ways, and the present vehicle represents our 
successful attempt to bridge those differences without losing the focus 
of the original House bill. Thanks to the extraordinary efforts of the 
chief sponsor of the original House bill, Representative Boucher, to 
the persistence of Chairman Dingell, and to the bipartisan cooperation 
and assistance of Representatives Moorhead and Fields, we have been 
able to arrive at a solid solution to the regulatory and other 
deficiencies in the investment adviser sector and to address the 
concerns of our colleagues in the Senate.

  To the extent that the amendment contains provisions that are 
substantially similar to provisions contained in the original House 
bill, the language of the House report accompanying H.R. 578--the House 
report--that describes those provisions shall continue to obtain. The 
purpose of my statement at this time is to explain and interpret 
changes between the original House bill and the language we are voting 
on today.
  The SEC staff is comprised of hard-working, committed men and women 
who, but for resources, would be able to clean up many of the 
outstanding compliance problems in the industry. In section 2, this 
amendment provides for the collection of new fees that will be used to 
fund an enhanced program of inspections. But more money will not, 
without properly targeted use, improve regulation, in part because even 
with the estimated $16 million annual increase in funding, the SEC will 
still have to perform regulatory triage and inspect the riskiest 
advisers first and most frequently. It is therefore critical that the 
SEC work to develop an inspection protocol that relies on an analysis 
of relative risk. It is clear that certain characteristics increase 
either the risk that an adviser is engaging in improper conduct or the 
temptation for an adviser to do so. For example, an adviser with 
custody of or broad discretion over funds has easier access to a 
client's assets. The receipt of commissions for the sale of investments 
recommended to a client likewise increases the risk that an adviser's 
recommendations may conflict with his fiduciary duties to his client. 
In addition, we expect that the SEC, in designing its inspection 
schedule and in developing a set of risk-based criteria for 
inspections, will take into account the conclusions and recommendations 
of the General Accounting Office [GAO]. The GAO, both in a 1990 report 
and in 1992 testimony before the Subcommittee on Telecommunications and 
Finance, argued forcefully that examinations of new registrants be 
conducted within a reasonable period of time following registration. It 
also made a compelling case for the SEC reinspecting advisers found to 
have deficiencies, rather than relying on the word of the adviser--
whose word under the circumstances should be treated with skepticism--
that any such defects have been corrected. Even a history of past 
deficiencies can represent in itself a risk factor for broader 
improprieties. In the notorious case, described at length in the House 
report, of Steven Wymer, the California investment adviser who bilked 
numerous cities and towns out of millions of dollars, the SEC conducted 
focused cause inspections in several instances before the fraud in 
which he had engaged came to light.
  Section 3 of the amendment provides for the conduct by the SEC of 
surveys of unregistered investment advisers. This section is identical 
in its substance to that contained in the original House bill and its 
purpose and interpretation remain unchanged.
  Section 4 of the amendment authorizes the SEC to designate an SRO to 
conduct inspections of certain advisers. This section is identical in 
its substance to that contained in the original House bill and its 
purpose and interpretation, like that of section 3, remain unchanged.
  Among the changes to the original House bill that House Members 
agreed to in developing this consensus amendment was the deletion of a 
provision that would have expressly prohibited advisers from making 
unsuitable recommendations, as well as a requirement to make a 
reasonable inquiry about the financial circumstances of a client. The 
provision also included a record-keeping requirement designed to assist 
the SEC, in its inspections, in auditing for adherence to the 
suitability rule. The suitability provision contained in the House bill 
did not represent a new substantive requirement, but instead restated 
an existing requirement that is implicit in the antifraud provisions of 
the Advisers Act.
  As a result of the inclusion of this provision in the House bill, the 
SEC, on its own initiative and because it has ample statutory authority 
to do so, embarked upon a rule-making proceeding designed to codify, in 
the same way as the House bill, the extant suitability requirement and 
to establish a recordkeeping requirement similar to that contained in 
the original House bill. To date, the SEC has proceeded apace with this 
rulemaking, and we expect that it will adopt a final rule, comparable 
in text and interpretation to that contained in the House bill, 
shortly.

  Among the most important subjects of this bill is disclosure. The 
brevity of the provision set forth in section 5 relative to the more 
detailed provisions of the original House bill should not be 
interpreted as a lessened commitment to disclosure and the critical 
role it plays in equipping investors with the tools needed to protect 
themselves. From the outset of our efforts to ensure that the more 
rapacious elements of the investment adviser industry are not allowed 
to take advantage of investors, we saw conflicts of interest as perhaps 
the biggest obstacle. Advisers who receive commissions on the products 
they recommend, fees such as those paid by product sponsors or 
packagers in exchange for the sale of a unit of their product, or 
credits toward non-cash compensation such as trips or research have an 
interest in remuneration which conflicts with the interest of their 
client in receiving objective, disinterested advice. The magnitude of 
the conflict varies according to the extent or magnitude of the 
remuneration in question. If the remuneration is negligible, the 
conflict may be so minor as to be functionally nonexistent. If, 
however, it is not, and it may have an impact on the kind of advice 
rendered by the adviser, it is material. The nature and extent or 
amount of a commission or fee, or the value of a particular prize thus 
has a direct bearing on whether such conflict is material. A material 
conflict of interest conflicts with, among other things, the client's 
interest in receiving suitable investment advice, avoiding unnecessary 
or excessive transaction charges, and making informed investment 
decisions.
  Accordingly, section 5 of the amendment requires the SEC, within one 
year from the date of enactment, to examine the nature of the conflicts 
of interest with an adviser's fiduciary duties that may arise when an 
investment adviser is compensated on the basis of commissions or fees 
from the sale of investment products to clients or receives credits 
toward non-cash compensation. Thus, the SEC must study all conflicts 
related to the receipt by an adviser of commissions, fees or other 
items of value paid in exchange for or as a result of the sale of 
investment products to clients. On the basis of this examination, the 
SEC must prescribe any rules that may be necessary and appropriate in 
the public interest or for the protection of investors and consistent 
with the purposes of the title to require that the existence and extent 
of any material conflicts of interest be fully disclosed.
  Based upon the extensive hearing record in the House, compelling 
studies conducted by various groups such as the Consumer Federation of 
America, the American Association of Retired Persons, and the North 
American Securities Administrators Association, and based upon numerous 
media exposes, it is clear, even before detailed SEC examination, that 
grave deficiencies in current forms of disclosure exist. The House 
Report to accompany H.R. 578 cities examples of the kinds of disclosure 
problems that have plagued the industry. Some of the deficiencies in 
disclosure can and will be remedied in the SEC's revisions to the form 
required for the registration of investment advisers (Form ADV), part 
of which constitutes the brochure which is given to customers and 
prospective customers of an investment adviser. Other deficiencies, 
such as when clients are kept in the dark about the extent or magnitude 
of a conflict of interest--for example, the size of a commission--until 
after they make a purchase, will have to be addressed through SEC 
rulemaking. Full disclosure, as called for by this provision, would 
entail disclosure sufficient to permit a client to make an informed 
investment decision, a decision that does not subject him or her to 
unnecessary or excessive transaction charges, and a decision that is 
not influenced--without his or her knowledge of such influence--by the 
payment or promise of payment of prizes or other forms of non-cash 
remuneration to the recommending adviser.
  Useful and relevant information is the touchstone of disclosure with 
respect to conflicts of interest. It is also critical with respect to 
pertinent information about an adviser's background. Some background 
information is provided in the Form ADV distributed to clients. Other 
important information--specifically, information pertaining to an 
adviser's disciplinary history--is not currently accessible to the 
average customer. This bill, therefore, requires that the entity 
designated by the SEC to create and operate a filing depository 
establish and maintain a readily accessible telephonic or other 
electronic process designed to provide such information. This 
electronic system would receive inquiries regarding the disciplinary 
and other information involving investment advisers and persons 
associated with investment advisers. Key to this provision are the twin 
concepts of ready access and low cost. Investors should be encouraged 
to find out about an adviser's disciplinary history, not discouraged 
through systems that are either difficult to use, costly, or not 
extensively available. Taking advantage of emerging technologies and 
on-line services is useful, but those should not be the exclusive means 
of obtaining such information unless all (or virtually all) households 
have ready access to them. Accessibility also has a cost component. 
Many of those most in need of protection, such as older investors, 
might be discouraged from making inquiry if they have to pay for the 
privilege. Making the system provider assume all reasonable costs 
associated with providing that service is therefore an important 
element of this provision. The system provider should establish a 
system for which the costs are unreasonable. Similarly, individual 
investors could not be charged a fee for obtaining written information 
responding to their inquiry, although other service users could be 
charged a reasonable fee.

  Because this provision is analogous to a similar provision in the 
Penny Stock Reform Act, it is anticipated that it will be set up 
similarly and contain similar sorts of information as the system 
available with respect to registered broker-dealers. Specifically, it 
is expected that the toll-free telephone access investors are given 
through the NASD Hotline with respect to broker-dealers will be 
replicated for investment advisers. We see no reason to discriminate 
between these two types of securities professionals either on the basis 
of the type of information available about them or on the basis of the 
cost or means of obtaining such information. Indeed, the market 
distortion that could occur if there were disparate systems, containing 
dissimilar kinds of information and available at a different cost, 
would cause confusion to investors. As in the broker-dealer context, 
the system could also include other information, such as bankruptcy 
history, in addition to information about disciplinary history.
  Section 6 of the amendment also requires the SEC to include in each 
of the first three annual reports submitted after the date of enactment 
a statement describing the status of the SEC's proposals for the 
revision of Form ADV; consultations with State securities and other 
regulators concerning the collection and dissemination of information 
contained on such form; and implementation of systems to collect and 
disseminate such information to enforce compliance with the title. In 
addition, those reports must include an analysis of the methods by 
which the revisions of Form ADV will result in, first, the timely and 
effective disclosure to investment adviser clients of material facts 
concerning the background, compensation, services, and practices of the 
adviser, and, second, the prominent disclosure to such clients of (a) 
any conflicts of interest, (b) methods available for securing 
additional information concerning the adviser and its employees, (c) 
remedies available with respect to disputes arising out of the advisory 
relationship, and (d) any conviction of the adviser or any person 
associated with the adviser within 10 years preceding the filing of any 
application for registration or at any time thereafter of any crime 
that is punishable by imprisonment for 1 or more years, or of a 
substantially equivalent crime by a foreign court of competent 
jurisdiction.
  This provision derives from the brochure provision contained in the 
original House bill, in which the elements of an enhanced brochure were 
set forth in the statute. Because the SEC is well on its way to 
revamping Form ADV, it was deemed unnecessary to include that portion 
of the provision. Certain important elements of that provision have 
been retained, however, so that Congress can ensure that they be 
incorporated in a prominent manner into the brochure distributed to 
investment advisory clients. Prominence would require that each of 
these disclosures must be readily noticeable to the client. Disclosure 
of methods available for securing additional information concerning the 
adviser and its employees would entail setting forth the toll-free 
number to call and, in addition, any other supplementary means (e.g., 
the Internet address) through which such information is available. With 
respect to disclosure of remedies, we do not intend a recitation of all 
available causes of action but, rather, a general statement in the 
brochure that makes clear the existence of remedies under State and 
Federal law where wrongs have been committed against a client by an 
adviser. In the absence of an express private right of action in the 
Advisers Act, it is especially important to inform clients that they 
are not without remedies.
  Section 7 of the amendment contains a requirement that certain 
investment advisers obtain a fidelity bond. As in the original House 
bill, the fidelity bond would provide a source of funds to make clients 
who have been defrauded through larceny or embezzlement whole. Unlike 
the original House bill, however, the SEC's authority in this section 
of the amendment is permissive, rather than mandatory. The authority 
given to the SEC would extend to advisers with custody of client funds 
or securities, that have discretionary authority to direct client 
investments, or that advise investment companies.

  Paragraph (2) sets forth the considerations the SEC must take into 
account in implementing this section: The degree of risk to client 
assets that is involved; the cost and availability of fidelity bonds; 
existing fidelity bonding requirements; any alternative means to 
protect client assets; and the results, findings, and conclusions of a 
study, described in paragraph (3), on the availability of fidelity 
bonds and the impact of fidelity bonding on the competitive position of 
small-scale investment advisers. Finally, the SEC is given the 
authority to exempt any person or class of persons from any fidelity 
bonding requirements under such terms or conditions and for such period 
as the SEC determines. In addition, the SEC is required to exempt any 
investment adviser from any bonding requirement if the SEC determines 
that fidelity bonds are not readily or reasonably available in the 
urban or rural areas in which such investment adviser is located or the 
cost of obtaining a fidelity bond would have a substantial adverse 
impact on such investment adviser's competitive position.
  This provision is not meant to permit an investment adviser that is 
marginally profitable to claim an exemption because it cannot afford a 
fidelity bond. Nor is it intended to permit an investment adviser that 
is charged a premium for or is refused a fidelity bond because its 
background, business practices, or lack of controls suggest a high 
degree of risk. Rather, we read this provision as requiring the SEC to 
exempt from the bonding requirement any class or group of advisers that 
for some reason other than normal and customary underwriting 
considerations is denied a fidelity bond at a reasonable cost.
  Deleted from this amendment is the provision in the original House 
bill requiring the SEC to analyze 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. The purpose of this provision was to address an 
anomaly that surfaced in the course of hearings held by the 
Subcommittee on Telecommunications and Finance on the massive fraud 
perpetrated by Steven Wymer. Testimony by Wymer made it clear that 
crucial to his fraudulent scheme was either the witting or unwitting 
cooperation of custodians in making Wymer the sole recipient of all 
confirmations, account statements, and other communications concerning 
client accounts. Because clients received no independent reports of 
account activities, Wymer was able to fabricate false account 
statements to hide losses, unauthorized transactions, and defalcation 
of clients' cash and securities.
  Because the SEC currently has the statutory authority to promulgate 
rules directly to address this problem, it has initiated a rulemaking 
process designed to address these concerns. This provision of the House 
bill was therefore deleted in anticipation of adoption by the SEC of a 
strong rule that would make it impossible for a comparable fraud to be 
repeated by the same means. The rule would prohibit an investment 
adviser registered or required to be registered under the Advisers Act 
from exercising investment discretion with respect to a client account 
unless it reasonably believed that the custodian of the account is 
providing account statements to the client no less frequently than 
quarterly. An adviser would be deemed to have a reasonable belief that 
the custodian is providing account statements if the adviser has 
received copies of client account statements indicating that they were 
sent to clients. We applaud the SEC's initiative in this area and 
expect to see the rule adopted in final form soon.
  Mr. FIELDS of Texas. Mr. Speaker, I strongly support the gentleman 
from Massachusetts' request and want to associate myself with the 
gentleman's remarks.
  By providing additional funds to the SEC specifically targeted for 
enhanced oversight of the adviser industry, S. 423 will go a long way 
toward improving the present situation.
  I want to emphasize that the Wymer scandal and the increased 
attention our committee has given the inadequacy of the SEC Adviser 
Examination Program should underscore for the commission the fact that 
Congress is not simply writing a blank check to the agency. We demand 
significant improvement in the regulation of financial planners. In 
enacting this legislation Congress tells the SEC to do more with its 
appropriation than increase the number of employees on its payroll. We 
need better regulation, not just more regulation.
  Earlier in the first session of this Congress, I cosponsored and the 
House passed H.R. 578, an investment adviser bill similar to the bill 
we are considering here today. Since then, House and Senate staff have 
been negotiating the differences between bills passed by both Houses 
and S. 423 represents the outcome of that long and arduous process.
  Mr. Speaker, I want to compliment Congressman Rick Boucher for his 
efforts over the years on behalf of this bill. I am happy to be an 
original cosponsor of the legislation and to see it enacted by the 
House today. I also commend Subcommittee Chairman Ed Markey, as well as 
Committee Chairman John Dingell and Ranking Republican Carlos Moorhead 
for their leadership.
  Mr. DINGELL. Mr. Speaker, I rise in strong support of this 
legislation and urge its immediate adoption.
  At present, approximately 22,000 investment advisers are registered 
with the Securities and Exchange Commission (SEC) under the Investment 
Advisers Act of 1940, with a total of over $9 trillion of public 
savings under management. However, the resources available to the SEC 
for inspecting and examining these advisers have remained seriously 
limited and totally inadequate to provide even minimally adequate 
deterrence against wrongdoing. At present, the SEC has a total of only 
50 examiners nationwide to provide field examinations or other direct 
oversight of all investment advisers. Therefore, most advisers are 
examined only once every 25-30 years. This is an outrage. It is also 
very dangerous.
  The General Accounting Office estimated in a June 1990 report 
(Investment Advisers: Current Level of Oversight Puts Investors at 
Risk, GAO/GGD-90-83) that investment adviser fraud costs investors 
between $90 million and $200 million a year. Since February 1993, the 
SEC has brought 53 fraud actions against investment advisers. This does 
not include the well-publicized case against a single adviser, Steven 
D. Wymer, who defrauded his clients, who were largely states, counties 
and municipalities, of more than $100 million.
  Starting with the introduction of H.R. 4441 back in March 1990, Mr. 
Boucher has been doggedly pushing for legislation to improve investor 
protection in this area, and I commend him for his great leadership and 
perseverance. In the 102d Congress, the House passed comprehensive 
investment adviser reform legislation (H.R. 5776) only to see if die in 
the Senate under the weight of the nongermane-amendment demands of two 
Members of that body. This year we are back again because the stakes 
for American investors are very high and rising. We must pass this bill 
this year.
  I also want to commend and thank Mr. Markey and Mr. Fields for their 
cosponsorship of H.R. 578 and for making it possible to put together 
and bring to the floor bipartisan legislation that is balanced and 
cost-effective.
  On May 4, 1993, the House unanimously passed H.R. 578, the Investment 
Adviser Regulatory Enhancement and Disclosure Act, and, on November 20, 
1993, the Senate passed S. 423, the Investment Adviser Oversight Act. 
Although no formal conference was convened to reconcile differences 
between the House bill and a Senate bill that was considerably more 
limited in scope, staffs from both bodies conducted extensive 
negotiations and ultimately reconciled the differences between the two 
bills. No formal conference was necessary due to the success of this 
process. I commend the staff for their hard work and diligence. The 
legislation before the House thus encompasses the amendments resulting 
from that process. In lieu of a conference report, our floor statements 
are intended to serve as the legislative history, along with House 
Report 103-75 (April 29, 1993) and Congressional Record (May 4, 1993) 
at H2212-2220, and Senate Report 103-177 (November 10, 1993) and 
Congressional Record (November 20, 1993) at S16861-16862.

  The amendments before the House will provide additional resources for 
investment adviser supervision through user fees from registrants and 
applicants. The industry supports the fee schedule in this bill. The 
bill gives the SEC authority to designate one or more self-regulatory 
organizations [SRO] if necessary to conduct periodic examinations of 
the SRO's members and their affiliates that are registered or required 
to be registered as investment advisers. The bill requires surveys to 
be conducted to identify unregistered persons and requires SEC action 
to correct any patterns of noncompliance. The bill modernizes the 
Investment Advisers Act's disclosure requirements to provide better 
disclosure of conflicts of interest between investment advisers and 
their clients. The bill would authorize the SEC to develop a ``one-
stop'' filing system that would reduce paperwork for advisers and 
regulators. The bill also provides for a toll-free telephonic or other 
electronic listing to provide investors with ready access to 
disciplinary and other information regarding investment advisers. The 
bill requires fidelity bonding to assure that, where losses from fraud 
do occur, there will be some source of compensation for defrauded 
clients.
  Finally, I wish to express my support for the SEC rulemaking 
initiatives identified in Chairman Levitt's January 24, 1993, letter to 
the committee, a copy of which follows my statement. The SEC's current 
statutory authority encompasses these rulemakings (obviating the need 
for additional legislation on these subjects) and I encourage the SEC 
to complete action on these matters with all deliberate speed.

                                                    Securities and


                                          Exchange Commission,

                                 Washington, DC, January 24, 1994.
     Hon. John D. Dingell,
     Chairman, Committee on Energy and Commerce, Rayburn House 
         Office Building, Washington, DC.
       Dear Mr. Chairman: As the 103rd Congress prepares to return 
     for the second session, I am writing to express my hope that 
     the conference to reconcile House and Senate versions of 
     legislation amending the Investment Advisers Act of 1940 
     (``Advisers Act'') will convene and complete its work as soon 
     as possible. Both H.R. 578 and S. 423 would, by imposing 
     modest fees on investment advisers, raise revenues that are 
     critically needed by the Commission to supervise the 
     activities of over 20,000 investment advisers currently 
     registered with the Commission.
       As you know the House bill contains several amendments to 
     the Advisers Act not include in the Senate bill. The 
     amendments address a number of subjects that are of 
     increasing concern to the Commission. We believe the 
     Commission's current rulemaking authority is broad enough to 
     address many of these subjects, and we have decided to go 
     forward and develop the following rules:
       Custody Rule. This rule would prohibit custodian 
     arrangements under which only the investment adviser (and not 
     the client) receives periodic account statements from the 
     custodian. This type of arrangement facilitated the Steven 
     Wymer fraud.
       Suitability Rule. This rule would make explicit the 
     requirement implicit in the general anti-fraud provisions of 
     the Advisers Act that advisers must make a reasonable 
     determination that the advice they give is suitable to their 
     clients, based on a reasonable inquiry into the client's 
     financial situation. Appropriate recordkeeping would also be 
     required.
       Improved Brochure. Under this proposal, the current 
     disclosure brochure that an adviser delivers to its clients 
     describing the adviser's business would be amended to place 
     greater emphasis on the education, business background and 
     business practices of the adviser, the means by which the 
     adviser is compensated, and the conflicts of interest that 
     may be created for the adviser in entering into various 
     compensation arrangements (i.e., commission-based 
     compensation). The ``800'' number contemplated by the House 
     bill as a means by which clients may obtain adviser 
     disciplinary information would be provided in the brochure.
       Reports on Fees and Commissions. The rule would require an 
     adviser to provide clients with periodic account statements 
     that would include information concerning the sales 
     commissions and other fees, if any, paid to the adviser or 
     persons associated with or under common control with the 
     adviser. These reports should provide clients with a better 
     picture of the total cost of advisory services and the way 
     compensation arrangements may affect investment advice.
       The House bill, if adopted in its current form, would 
     require the Commission to periodically conduct a survey to 
     determine the extent to which persons fail to comply with the 
     registration requirements of the Advisers Act. We are 
     currently discussing with the North American Securities 
     Administrators Associated the feasibility of conducting a 
     joint inquiry of unregistered investment advisers in the 
     states. We believe that their participation could be very 
     helpful in enforcing the registration provisions of the 
     Advisers Act.
       We trust that the anticipated Commission rulemaking will 
     assist the conferees in their efforts toward enactment of 
     this important legislation. The resources the legislation 
     will provide will permit the Commission to begin to examine 
     the activities of the growing number of registered investment 
     advisers on a more frequent and meaningful basis. Further, we 
     believe the development of the rules described above will 
     substantially enhance investor protection.
       We appreciate your efforts in connection with developing 
     this legislation, and we look forward to working with you 
     toward final passage of a compromise bill. Please do not 
     hesitate to contact us if we can assist you in any way.
           Sincerely,
                                                    Arthur Levitt.

  (Mr. FIELDS of Texas asked and was given permission to revise and 
extend his remarks.)
  Mr. FIELDS of Texas. Mr. Speaker, I withdraw my reservation of 
objection.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Massachusetts?
  There was no objection.
  The Clerk read the Senate bill, as follows:

                                 S. 423

       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 Oversight 
     Act of 1993''.

     SEC. 2. FINDINGS.

       The Congress finds that--
       (1) the activities of investment advisers are of continuing 
     national concern;
       (2) increased supervision of investment advisers by the 
     Securities and Exchange Commission (hereafter in this Act 
     referred to as the ``Commission'') is necessary to protect 
     investors from fraud and other illegal conduct;
       (3) additional resources are necessary to recover the 
     Commission's costs of an enhanced program for the oversight 
     of investment advisers and their activities, including the 
     costs of registration and inspections; and
       (4) because the direct beneficiaries of these activities 
     are investment advisers, it is appropriate for investment 
     advisers to pay fees for much activities.

     SEC. 3. REGISTERED INVESTMENT ADVISER FEES.

       (a) In General.--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:

     ``SEC. 203A. FEES FOR REGISTRANTS AND APPLICANTS.

       ``(a) In General.--The Commission is authorized, in 
     accordance with this section, to collect fees to recover the 
     costs of enhanced efforts to register all persons required to 
     be registered under this title and enhanced supervision and 
     regulation of investment advisers and their activities. Such 
     fees shall be collected and shall be made available only to 
     the extent provided in advance in appropriations Acts. Such 
     fees shall be deposited as an offsetting collection to the 
     Commission's appropriation and shall remain available until 
     expended. The costs covered by such fees shall be the costs 
     of Commission expenses for the registration and inspection of 
     investment advisers and related activities.
       ``(b) Time for Payment.--
       ``(1) Applicants.--At the time of filing an application for 
     registration under this title, the applicant shall pay to the 
     Commission the fee directed in advance in appropriations Acts 
     to be collected as 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) Investment advisers.--Each investment adviser whose 
     registration is effective on the last day of its fiscal year 
     shall pay such fee to the Commission 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) Schedule of Fees.--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 $100,000,000...................2,500
$100,000,000 or more, but less than 250,000,000...................4,000
$250,000,000 or more, but less than $500,000,000..................5,000
$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 penalties due), if such suspension was based 
     solely on the failure to pay the fee.
       ``(e) Rulemaking.--The Commission may adopt such rules and 
     regulations as are necessary to carry out this section.''.
       ``(b) Effective Date.--This section (and the amendment made 
     by this section) shall become effective upon the adoption by 
     the Commission of implementing rules and regulations, under 
     section 203A(e) of the Investment Advisers Act of 1940, as 
     added by subsection (a).

     SEC. 4. FACILITIES FOR FILING RECORDS AND REPORTS.

       Section 204 of the Investment Advisers Act of 1940 (15 
     U.S.C. 80b-4) is amended--
       (1) by inserting ``(a)'' after ``Sec. 204.''; and
       (2) by adding at the end the following:
       ``(b) 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 the purpose; and
       ``(2) to pay the reasonable costs associated with such 
     filing.''.

     SEC. 5. BOND REQUIREMENT.

       ``(A) In General.--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)(1) The Commission may require, by rules and 
     regulations for the protection of investors, any investment 
     adviser registered under section 203 that--
       ``(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) 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;
       ``(D) any alternative means to protect client assets; and
       ``(E) the results, findings, and conclusions of the study 
     required by paragraph (3).
       ``(3) Before implementing paragraph (1), the Commission 
     shall study (and shall make such study and its conclusions 
     and findings available to the public)--
       ``(A) the availability of fidelity bonds, both for large-
     scale and small-scale investment advisers, and also for 
     investment advisers not located in urban areas; and
       ``(B) the impact of the provisions of paragraph (1) on the 
     competitive position of small-scale investment advisers.
       ``(4) the Commission shall not require investment advisers 
     to obtain a fidelity bond if--
       ``(A) fidelity bonds are not readily or reasonably 
     available in the urban or rural areas in which such 
     investment advisers are located; or
       ``(B) the cost of obtaining a fidelity bond would have a 
     substantial adverse impact on such investment advisers; 
     competitive positions.''.


                      motion offered by mr. markey

  Mr. MARKEY. Mr. Speaker, I offer a motion.
  The CLERK read as follows:
  Mr. MARKEY moves to strike all after the enacting clause of the 
Senate bill S. 423, and to insert in lieu thereof the following:

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Investment Advisers 
     Amendments of 1994''.

     SEC. 2. ADDITIONAL RESOURCES FOR INVESTMENT ADVISER 
                   SUPERVISION.

       (a) Fees for Registrants and Applicants.--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. Any such fees shall 
     be collected, and shall be available, only to the extent 
     provided in advance in appropriations Acts. No appropriations 
     Act may authorize fees to be collected under this section 
     during any fiscal year after fiscal year 1995, 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. Any 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 title.
       ``(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 
     subsection (c).
       ``(2) Ongoing registrants.--Each investment adviser, the 
     registration of which is effective on the last day of its 
     fiscal year, shall pay 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 
     appropriations Act, the amount of any fees due from 
     investment advisers in accordance with 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 $100,000,000............$2,500....

  $100,000,000 or more, but less than $250,000,000...........$4,000....

  $250,000,000 or more, but less than $500,000,000...........$5,000....

  $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) 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.
       ``(f) Rulemaking.--The Commission may adopt such rules as 
     are necessary to carry out this section.''.
       (b) Effective Date.--The amendments made by this section 
     shall become effective--
       (1) in the case of section 203A(f) of the Investment 
     Advisers Act of 1940 (as added by this section), upon the 
     date of enactment of this Act; and
       (2) in the case of subsections (a) through (e) of section 
     203A of the Investment Advisers Act of 1940 (as added by this 
     section), upon the adoption by the Securities and Exchange 
     Commission of implementing rules in accordance with section 
     203A(f) of such Act.

     SEC. 3. SURVEYS.

       The Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et 
     seq.) is amended by inserting after section 222 the following 
     new section:


                               ``surveys

       ``Sec. 223. (a) Surveys of Unregistered Persons.--
       ``(1) In general.--The Commission shall, not later than 3 
     years after the date of enactment of this section, and 
     thereafter as appropriate, 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 title.
       ``(2) Actions based on survey.--The Commission shall, on 
     the basis of the results of the survey conducted under 
     paragraph (1), establish objectives for the reduction or 
     elimination of any failures identified therein and shall 
     include in any annual reports to the Congress under section 
     23(b) of the Securities Exchange Act of 1934 submitted after 
     completion of the first survey--
       ``(A) a statement of such objectives;
       ``(B) an evaluation of the success in attaining those 
     objectives during the preceding year; and
       ``(C) such recommendations as the Commission considers 
     appropriate to assist in the attainment of those objectives.
       ``(3) Patterns of noncompliance.--If the survey conducted 
     under paragraph (1) identifies any pattern of noncompliance 
     with the registration requirements of this title and the 
     rules issued under this title, the Commission shall undertake 
     such rulemaking proceedings as may be necessary to correct 
     such patterns of noncompliance.
       ``(b) Provisions Not Limitation.--The provisions of this 
     section shall not be construed to limit the authority of the 
     Commission to issue rules under this title, to conduct an 
     examination or investigation at any time, or to institute 
     proceedings under this title or any other provision of 
     law.''.

     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.--
       ``(1) In general.--The Commission may by rule, consistent 
     with the public interest, the protection of investors, and 
     the purposes of this title, 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 issued 
     under this title. Any 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.
       ``(2) Authority of organization.--Any self-regulatory 
     organization designated under paragraph (1) may discipline 
     the members and affiliates of members described in parargraph 
     (1) for violations of the applicable provisions of this title 
     and the rules and regulations issued under this title 
     pursuant to the standards and procedures set forth in 
     sections 6, 15A, and 19 of the Securities Exchange Act of 
     1934.
       ``(3) Penalties.--Any 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) with respect to a member or affiliate of a 
     member 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) with respect to an affiliate of a member of a 
     self-regulatory organization 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) with respect to an 
     affiliate of a member of a self-regulatory organization 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 
     to the Commission 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 issued by the 
     Commission under this section shall become effective not 
     earlier than 90 days after the date on which the Commission 
     submits to the House of Representatives and the Senate 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' means any person directly or indirectly 
     controlling, controlled by, or under common control with a 
     member of a self-regulatory organization.''.

     SEC. 5. ADDITIONAL DISCLOSURE OBLIGATIONS OF INVESTMENT 
                   ADVISERS.

       (a) Disclosure Obligations.--Section 204 of the Investment 
     Advisers Act of 1940 (15 U.S.C. 80b-4) is amended--
       (1) by striking the section heading 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) Review of Conflicts of Interest.--
       ``(1) Examination.--The Commission shall, not later than 1 
     year after the date of enactment of this subsection, examine 
     the nature of the conflicts of interest with an investment 
     adviser's fiduciary duties that may arise when an investment 
     adviser is compensated on the basis of commissions or fees 
     from the sale of investment products to clients or receives 
     credits toward non-cash compensation.
       ``(2) Rules.--On the basis of the examination conducted 
     under paragraph (1), the Commission shall prescribe any rules 
     that may be necessary and appropriate in the public interest 
     or for the protection of investors and consistent with the 
     purposes of this title to require that the existence and 
     extent of any material conflicts of interest between 
     investment advisers and their clients be fully disclosed. 
     Such rules shall take into account the rules applicable to 
     registered brokers and dealers and their associated persons 
     under the Federal securities laws (including the rules of 
     self-regulatory organizations registered thereunder).
       ``(c) 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 all reasonable costs associated with--
       ``(i) such filing; and
       ``(ii) the maintenance of a process to receive and respond 
     to inquiries under paragraph (2).
       ``(2) Response to inquiries.--
       ``(A) In general.--An entity designated by the Commission 
     under paragraph (1) shall--
       ``(i) establish and maintain a readily accessible 
     telephonic or other electronic process to receive inquiries 
     regarding disciplinary actions and proceedings involving 
     investment advisers and persons associated with investment 
     advisers; and
       ``(ii) respond promptly to such inquiries.
       ``(B) Fees.--An entity designated by the Commission under 
     paragraph (1) may charge a person, other than an individual 
     investor, reasonable fees for the cost of providing written 
     responses to inquiries.
       ``(C) Liability.--An entity designated by the Commission 
     under paragraph (1) shall not be liable for any action taken 
     or omitted in good faith under this paragraph.''.

     SEC. 6. COMPLETION OF RULEMAKING INITIATIVES REQUIRED.

       Section 204 of the Investment Advisers Act of 1940 (15 
     U.S.C. 80b-4), as amended by section 5, is amended by adding 
     at the end the following new subsections:
       ``(d) Registration Form Revisions.--
       ``(1) Statements in annual reports.--The Commission shall 
     include in each of the first 3 annual reports submitted 
     pursuant to section 23(b) of the Securities Exchange Act of 
     1934 after the date of enactment of this subsection a 
     statement describing the status of--
       ``(A) the Commission's proposals for the revision of the 
     form required for the registration of investment advisers 
     under this title;
       ``(B) consultations with State securities commissions and 
     other State authorities concerning the collection and 
     dissemination of information contained on such form; and
       ``(C) the implementation of systems to collect and 
     disseminate such information to enforce compliance with this 
     title.
       ``(2) Analysis required.--The first statement required by 
     paragraph (1) shall include an analysis of the methods by 
     which the revisions of such registration form will result 
     in--
       ``(A) the timely and effective disclosure to investment 
     adviser clients of material facts concerning the background, 
     compensation, services, and practices of the adviser; and
       ``(B) the prominent disclosure to such clients of--
       ``(i) any conflicts of interest;
       ``(ii) methods available for securing additional 
     information concerning the adviser and its employees;
       ``(iii) remedies available with respect to disputes arising 
     out of the advisory relationship; and
       ``(iv) any conviction of the investment adviser or any 
     person associated with the investment adviser within 10 years 
     preceding the filing of any application for registration, or 
     at any time thereafter, of any crime that is punishable by 
     imprisonment for 1 or more years, or of a substantially 
     equivalent crime by a foreign court of competent 
     jurisdiction.''.

     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 
     new subsection:
       ``(e)(1) The Commission may require, by rules and 
     regulations for the protection of investors, any investment 
     adviser registered under section 203 that--
       ``(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) 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;
       ``(D) any alternative means to protect client assets; and
       ``(E) the results, findings, and conclusions of the study 
     required by paragraph (3).
       ``(3) Before implementing paragraph (1), the Commission 
     shall study (and shall make such study and its conclusions 
     and findings available to the public)--
       ``(A) the availability of fidelity bonds, both for large-
     scale and small-scale investment advisers, and also for 
     investment advisers not located in urban areas; and
       ``(B) the impact of the provisions of paragraph (1) on the 
     competitive position of small-scale investment advisers.
       ``(4) If the Commission adopts any rule or regulation 
     pursuant to paragraph (1), the Commission may, by rule, 
     exempt any person or class of persons from the requirements 
     of this subsection and the rules issued under this 
     subsection, under such terms or conditions and for such 
     period as the Commission shall prescribe. The Commission 
     shall exempt any investment adviser from the requirements of 
     this subsection if--
       ``(A) fidelity bonds are not readily or reasonably 
     available in the urban or rural areas in which such 
     investment adviser is located; or
       ``(B) the cost of obtaining a fidelity bond would have a 
     substantial adverse impact on such investment adviser's 
     competitive position.''.
  Mr. MARKEY (during the reading). Mr. Speaker, I ask unanimous consent 
that the motion be considered as read and printed in the Record. 
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Massachusetts?
  There was no objection.
  The SPEAKER pro tempore. The question is on the motion offered by the 
gentleman from Massachusetts [Mr. Markey].
  The motion was agreed to.
  The Senate bill, as amended, was ordered to be read a third time, was 
read the third time, and passed, and a motion to reconsider was laid on 
the table.

                          ____________________