[Congressional Record Volume 143, Number 35 (Tuesday, March 18, 1997)]
[House]
[Pages H1069-H1071]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
EXTENDING EFFECTIVE DATE OF INVESTMENT ADVISORS SUPERVISION
COORDINATION ACT
Mr. GILLMOR. Mr. Speaker, I ask unanimous consent to take from the
Speaker's table the Senate bill (S. 410) to extend the effective date
of the Investment Advisors Supervision Coordination Act, and ask for
its immediate consideration in the House.
The Clerk read the title of the Senate bill.
The SPEAKER pro tempore (Mr. Everett). Is there objection to the
request of the gentleman from Ohio?
Mr. MANTON. Mr. Speaker, reserving the right to object, I am pleased
to join the gentleman from Ohio [Mr. Gillmor] on this unanimous consent
request, and I rise in strong support of S. 410, a bill that will
simply extend the effective date of the Investment Advisors'
Supervision Coordination Act for 90 days.
This act was passed last year as title III of the National Securities
Markets Improvement Act. In essence, this title shifts the registration
and regulatory responsibility for smaller advisors from the SEC to the
State where the advisors have their principal place of business.
Without S. 410, the Securities and Exchange Commission will have
inadequate time to comply with this title which could, in turn,
jeopardize State regulatory and enforcement programs.
Mr. Speaker, our goal in enacting this provision was to allow for
more efficient and effective regulation of the investment advisory
industry and the 22,500 investment advisors currently registered with
the SEC. Under the new set of rules, the SEC is the primary regulator
of advisors with assets under management of $25 million or more, while
those advisors handling assets below this amount are required to
register and be regulated by their State.
The new system, set up by last year's bill, requires a great deal of
coordination and interaction between State and Federal regulators. By
providing the Commission with an additional 90 days to complete its
work under this provision, we will give investment advisors much needed
time to comply with the new rules and thereby avoid any disruption of
the State's regulatory efforts.
I would like to commend the SEC for all of its hard work in getting
their rulemakings out for public comment by December of last year.
However, understanding the amount of work still needed to be done, I
urge all of my colleagues to support S. 410 so that the SEC has
sufficient time to implement the important reforms intended by this
title.
I would like to thank the gentleman from Ohio [Mr. Oxley] for
addressing the SEC's concerns in this matter in such a timely fashion.
Mr. DINGELL. Mr. Speaker, I rise in strong support of S. 410, a bill
that would extend the April 9 effective date of the Investment Advisers
Supervision Coordination Act by 90 days to July 8, and urge its
immediate adoption by the House.
These investment adviser provisions were enacted as title III of the
National Securities Markets Improvement Act in October of last year.
The process by which a final agreement was brokered between the House
and the Senate involved a take-it-or-leave-it package that was
delivered by the Senate to the majority on Friday, October 27, and to
the minority conferees on Saturday, October 28, a mere 3 hours before
the conference report was due to be taken up on the House Floor. We
were reading the final language on the House Floor in the minutes
before it was brought up, leaving no time or process for the correction
of technical errors or substantive problems. S. 410 corrects the
problems created by the other body having allowed just 180 days, or 6
months, for the Securities and Exchange Commission to adopt all the
necessary rules and rule changes, and for the necessary registrations
and deregistrations to be effected at both Federal and State levels as
required by the act. This timing makes absolutely no sense and would
result in the statutory reforms being frustrated and would provide
regulatory breaches for crooks to operate in.
To remind my colleagues, the number of investment advisers registered
with the SEC has increased dramatically from 5,680 in 1980 to
approximately 22,500 today. By 1995, the SEC was able to examine
smaller advisers on a routine basis only once every 44 years on
average. Investment advisers, no matter what their size and complexity,
only pay a one-time fee of $150 to register when they apply for SEC
registration. House efforts over three Congresses to enact an industry-
crafted graduated-user-fee table to give the SEC more resources to
supervise investment advisers were repeatedly frustrated by opposition
in the other body. Alternatively, therefore, title III of NSMIA, among
other things, reallocates Federal and State responsibilities for the
regulation of approximately 22,500 investment advisers currently
registered with the SEC by providing that the SEC will be the primary
regulator of first, investment advisers managing assets of $25 million
or more and second, investment advisers to registered investment
companies, with smaller investment advisers required to be registered
with and regulated by the State in which the adviser has its principle
office and place of business. The role of the States is not entirely
preempted for federally regulated investment advisers. A State where an
adviser has a place of business may continue to require licensing of
the adviser's individual representatives. Moreover, NSMIA also
preserves the right of States to bring enforcement actions for fraud
and deceit against any adviser, and to require notice filings of all
documents filed with the SEC, as well as a consent to service of
process. Furthermore, the availability of the Federal preemption is
conditioned on the payment of current fees for the next 3 years. Title
III also requires the SEC to establish and maintain a readily
accessible telephone hot-line for investors to access information about
disciplinary actions and investor complaints, if any, involving
investment advisers they contemplate doing business with.
As Members can clearly see, this new scheme involves a lot of hard
work and coordination between State and Federal regulators. The SEC is
to be commended for getting a very complex set of rulemakings out for
public comment in December. The proposals have received a large number
of thoughtful comment letters and the agency is actively reviewing them
and working toward final rules and forms as well as interpretative
responses to a myriad of complex questions. However, it is nowhere
within the realm of possibility for all this work to be completed by
April 9. It is unfortunate that the author of the investment adviser
provisions did not provide for an adequate and reasonable effective
date. S. 410 corrects that deficiency so that the important reforms of
title III can be achieved.
Mr. MARKEY. Mr. Speaker, I rise in support of S. 410, the Investment
Advisers Coordination Act.
[[Page H1070]]
This bill would extend the April 9 effective date of the Investment
Advisers Supervision Coordination Act by 90 days to July 8. This change
is needed to give the SEC time to adopt appropriate rules, and for the
necessary registrations at both the Federal and State levels to be
made, as required under the act. Unfortunately, because this title of
the National Securities Markets Improvement Act was added by the Senate
at the last minute, it contains several technical and other drafting
errors, some of which require correction. Giving the SEC additional
time to issue its rules before the title becomes effective will prevent
any regulatory gaps from developing.
While I strongly commend the SEC's Herculean efforts to promulgate a
complex package of rules within the tight time limits set by the
Improvement Act, I am compelled to express serious concerns with
certain aspects of the SEC's proposed rules that, if uncorrected, will
have a highly negative impact on investors. I note and concur with the
comment letters submitted to the SEC by the Secretary of the
Commonwealth of Massachusetts and the Office of the Attorney General.
For the benefit of Members, I included copies of these letters in the
Record at the end of my remarks.
It is important to keep in mind that Congress struck a careful
balance in the Improvement Act's investment adviser provisions between
the roles of the SEC and of the States. I am very concerned that the
SEC's proposed definitions of investment adviser representative [IAR]
and of place of business seek to limit the authority of State
regulators beyond the intent of Congress. The definition of IAR is so
different from the NASAA Uniform Securities Act as to virtually
guarantee a wide divergence between State investment adviser
registration requirements and SEC investment adviser registration
requirements for firms having investment adviser representatives. I
therefore strongly urge the SEC to withdraw the proposed definition and
for the SEC and NASAA to move quickly to develop a national uniform
definition of the term that both levels of government can support.
I am also concerned that the place of business definition in the
SEC's proposed rule could impede the ability of State regulators to
take action against fraudulent or deceptive practices by investment
advisers over the phone or the Internet. I urge the SEC to assure that
State regulators will be fully capable of protecting investors from
false or deceptive telemarketing or Internet-directed activities by
investment advisers.
I also strongly oppose the SEC's attempts to broaden the scope of the
Improvement Act's Federal preemption for SEC-registered investment
advisers and supervised persons beyond that contemplated by the
Congress. Congress refused to place overly broad and unwise
restrictions on the ability of the States to police the licensing of
and prosecute fraudulent advisers and their representatives. It is
incomprehensible that the SEC would willfully roll back State
protections that Congress intended to apply, thereby leaving investors
prey to abusive practices by unscrupulous advisers and planners seeking
to avoid State regulation and enforcement authority.
Finally, I would note that the Improvement Act contains a provision
mandating establishment of a toll-free 800 number or Internet site that
investors can use to check on the disciplinary records--if any--of
their investment adviser and its supervised persons. It is consistent
with the intent of the Congress for the Commission to delegate this
responsibility to the self-regulatory organization which already
administers the broker-dealer hotline--the NASD. In doing so, the SEC
must assure that the NASD is effectively disseminating all the
information that investors need to make informed choices about the
financial professionals they are considering doing business with,
whether the NASD is carrying through on the commitments it has made to
expand the types of disclosable information disseminated to investors,
whether the NASD is carrying out its promise to do more to publicize
the existence of the hotline, and whether the NASD is moving quickly to
provide for Internet access.
Again, while I have some concerns about some of the pending
rulemaking efforts and intend to closely monitor implementation, I rise
in support of this bill.
The Commonwealth of Massachusetts, Secretary of the
Commonwealth,
Boston, MA, February 7, 1997.
Re rules implementing amendments to the Investment Advisers
Act of 1940; release No. IA-1601; file No. S7-31-96.
Mr. Jonathan G. Katz,
Secretary, U.S. Securities and Exchange Commission,
Washington, DC.
Dear Secretary Katz: I am writing to formally comment as
the Chief Securities Regulator of the Commonwealth of
Massachusetts on the above-captioned proposed rules.
I am gravely concerned that several of the proposed rules
will seriously and adversely affect Massachusetts investors.
In many instances these proposed rules are in direct conflict
with the intent of the NSMIA as annunciated by various
members of Congress in the Congressional Record. As an active
participant in the external discussions relating to NSMIA, I
am very disturbed to see rulemaking that so clearly
contradicts the often stated and well understood purpose of
this statute. In particular, the attempt of the Commission to
define the term ``investment adviser representative'' and
thus limit the authority of state regulators is a direct
contradiction of the Act in which Congress deliberately
declined to define the term. Under the terms of the Act, only
the states are specifically required to license or otherwise
qualify investment adviser representatives. The authority to
license must, by implication, contain the ability to define.
The Commission should not impede the rights of the states in
this regard.
Of even greater concern to Massachusetts consumers would be
the effect of the proposed preemptions of state enforcement
authority against dishonest or unethical conduct which does
not rise to the level of fraud. This proposed rule is clearly
anti-consumer and would provide safe harbor to those who
deftly mislead. Moreover, it has the potential to drain the
resources of state enforcement authority by possibly causing
them to repeatedly litigate the enforceability of state
regulation on a case by case basis. I strongly urge this
portion of the rule be significantly amended or stricken.
Another portion of the proposed rule which represents an
inappropriate preemption of state authority would be the
effect of the proposed rule to limit state authority over
investment adviser representatives to those that provide
advice to natural persons. Such a preemption would leave a
significant void in the regulatory plan. Not only small
businesses would be left unprotected, but also many family
trusts, retirement trusts and charitable institutions. This
is a most unwise and unnecessary restriction.
On behalf of Massachusetts investors, I strongly object to
the proposed exemption for individuals licensed as broker
dealer agents from the definition of investment adviser
representatives. This is a wholly inappropriate exemption
since investment adviser representatives are fiduciaries who
are much more likely to have discretion over client funds
and, therefore, should be held to a different and higher
standard.
Lastly, I would urge the Commission to eliminate the term
``regularly'' from the definition of ``place of business''.
The use of this undefined term can only cause confusion in
the interpretation of the rules particularly in an era of
multiple media communications by investment agents.
All of these are significant issues which I urge the
Commission to address before proceeding further with the
rules.
Respectfully submitted,
William Francis Galvin,
Secretary of the Commonwealth.
____
The Commonwealth of Massachusetts, Office of the Attorney
General,
Boston, MA, February 10, 1997.
Mr. Jonathan Katz,
Secretary, U.S. Securities and Exchange Commission,
Washington, DC.
Dear Secretary Katz: Thank you for the opportunity to
comment on the SEC's proposed Rules Implementing Amendments
to the Investment Advisers Act. The Commission should be
commended for continuing the efforts begun last Congress,
with the National Securities Market Improvement Act of 1996
(``NSMIA''), to eliminate existing duplicative and
inconsistent federal and state oversight efforts which
sometimes result in greater delay, expense, and confusion
without any apparent tangible benefit to investors. I have
been very supportive of the federal/state efforts to
streamline specific regulatory areas, such as mutual fund
disclosure practices.
However, I am writing today to reiterate the important
protections and preventative measures afforded by state
regulatory and enforcement action. As a state Attorney
General who often prosecutes enforcement cases involving
fraud and deception in the securities and financial services
area, I believe, as I did when the legislation was under
consideration, that it is critical to preserve the necessary
state enforcement powers in the area of sales and
distribution practices.
On many of the occasions when my office investigates and
prosecutes consumer protection related issues, elders are all
too often the victims of fraudulent or deceptively sold
investment schemes, financial planning abuses and other
financial exploitation. In my opinion, protection of these
small dollar, often elderly investors generally is provided
by vigorous state involvement in the securities area. Yet,
some of the language of the proposed Rules, through which the
Commission attempts to achieve national uniformity, suggest
an unknown, if not troublesome, impact on the states' ability
to investigate, prosecute and regulate these areas. I
especially feel compelled to bring this to the Commission's
attention, given that I have made elder protection a top
priority in my present tenure as President of the National
Association of Attorneys General, and in my past 14 years as
a public prosecutor.
For example, language which purports to prohibit states
from prosecuting or regulating ``dishonest'' or ``unethical''
business practices could seriously impede the broader state
antideception and fraud enforcement efforts. The Commission's
attempt to implement a new, narrow federal standard in this
area is unwise and constitutes a clear threat to investor
protection. In Massachusetts, for
[[Page H1071]]
example, cases involving deception may be difficult to pursue
under the Commission's standard. Moreover, cases that
typically are pursued by a rigorous Attorney General or state
securities division, may not trigger the Commission's or the
U.S. Attorney's inquiry or involvement, particularly given
that the Commission only audits smaller investments once
every four years.
Additionally, the Commission should proceed cautiously
before implementing rules which may have an adverse impact on
state revenue, and more importantly may place broad and
unwise restrictions on the ability of state regulators,
securities agencies and legislatures to police the licensing
of and prosecute fraudulent brokers, dealers, advisers,
planners and their agents. In particular, the definition
proposed by the Commission seeks to limit state registration
and licensing requirements to include only those ``investment
adviser representatives'' who provide advice to clients who
are ``natural persons.'' This specifically excludes
``investment adviser representatives,'' whose clients are
investment companies, businesses, educational institutions,
charitable institutions and other entities, but who
historically have been regulated by the states, not the
Commission. Indeed, this would preempt even minimal criteria
established by securities enforcement authorities in
virtually all states which often protects less-sophisticated
retail entities, such as small businesses and charitable
institutions. In the wake of the New Era debacle and other
large-scale scams targeting our non-profit sector, I urge the
Commission not to leave our public charities easy prey to
abusive sales practices in the investment area.
The Commission's definition of ``place of business''
limiting state registration and qualifications to those who
have ``regular'' contact with residents of Massachusetts also
is troublesome in light of the telemarketing and Internet
activities by unscrupulous investment advisers, many of whom
prey on the elderly and less sophisticated investors. Of
questionable legality in our federalist system, this
limitation on the reach of state law to protect its own
citizens may make it even more difficult for state
prosecutors to target and punish fraudulent out of state
telemarketers who frequently relocate and purposefully avoid
physical presence in various states. This proposed federal
definition of ``place of business'' inevitably will cause
confusion and legal challenge given that jurisdictional
issues raised by Internet activities remain unresolved.
Without a more comprehensive definition, this could result in
unfettered telephone or Internet-directed contact to any
Massachusetts residents given the uncertainties surrounding
where a person who sends out a general message on the
Internet is doing business. Courts only now are beginning to
address such questions arising out of where the computer is
located, where the home page is listed, and where all or some
of the customers or potential customers reside.
Finally, in the Commission's otherwise prudent efforts to
streamline and eliminate duplicative state/Commission
registering and de-registering within the same year, it
proposes a standard by which new applicants could avoid state
qualification (and registration) based on a ``reasonable
expectation'' they will exceed $25 million in assets.
However, this standard is subject to manipulation, may be
difficult to monitor, may result in arbitrary enforcement,
and may become vulnerable to abuse by unscrupulous advisers
seeking to avoid state regulation and authority.
Congress attempted to maintain the correct balance while
promoting uniform regulation and more efficient division of
responsibility for regulation between the Federal and State
governments. The Commission should avoid now setting forth
sweeping and legally unsound federal preemption standards,
that could endanger elderly and other small dollar investors
by adversely impacting state enforcement of state securities
anti-fraud and consumer protection statutes. In addition, the
continued state-level registration and review of small
dollar/regional securities offerings, investment advisers and
financial planners is essential to consumer protection.
I urge the Commission to promulgate rules that will ensure
that federal laws continue to permit states to gather the
resources and retain the authority to effectively and
comprehensively continue their role in securing investor
protection and market integrity.
Thank you for your consideration.
Sincerely,
Scott Harshbarger,
Attorney General.
Mr. GILLMOR. Mr. Speaker, will the gentleman yield to me under his
reservation for an explanation?
Mr. MANTON. I yield to the gentleman from Ohio.
Mr. GILLMOR. Mr. Speaker, I thank the gentleman for yielding. As the
gentleman has said, this bill does provide a 90-day extension of the
effective date of title III of the National Securities Markets
Improvement Act of 1996. The reason for the extension, which has been
requested by SEC Chairman Arthur Levitt, is necessary to ensure the
orderly implementation of the provisions of the Investment Advisors
Supervision Coordination Act, which is title III of the Improvement
Act.
Pursuant to that act, the regulatory status of over 22,000 investment
advisors in the country will change. The SEC has proposed rules that
will guide the investment advisors as to whether they are subject to
either Federal or State regulation under the act, as opposed to being
subject to regulation at both the Federal and State levels under the
current law.
Chairman Levitt has expressed concerns that the effective date of
title III, which is April 9, will not permit adequate time to permit
investment advisors to consult with counsel to determine their
regulatory status, and to submit the necessary forms to the commission
to deregister if they are deemed to be small advisors and therefore
subject to State, rather than Federal, regulation.
Lack of sufficient time would cause these small investment advisors,
who are intended by the act to be regulated by the States, to be unable
to deregister from the Commission prior to the effective date. That
would result in the State being preempted from regulating the very
advisors that they are intended to regulate under the act.
Accordingly, the Chairman has requested this extension in a letter to
the gentleman from Virginia [Mr. Bliley], the Chairman of the Committee
on Commerce, dated February 12. This is a responsible request that I
strongly support. I think Congress in the last session marked a
significant achievement with the passage of the improvement act, which
is going to bring greater efficiency and effectiveness to the
regulation of U.S. security markets, including the regulation of
investment advisors, and I would urge my colleagues to support S. 410.
Mr. MANTON. Mr. Speaker, I withdraw my reservation of objection.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Ohio?
There was no objection.
The Clerk read the Senate bill, as follows:
S. 410
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. EXTENSION OF EFFECTIVE DATE.
Section 308(a) of the Investment Advisers Supervision
Coordination Act (110 Stat. 3440) is amended by striking
``180'' and inserting ``270''.
The Senate bill was ordered to be read a third time, was read the
third time, and passed, and a motion to reconsider to laid on the
table.
____________________