[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.

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