[Congressional Record Volume 143, Number 105 (Wednesday, July 23, 1997)]
[Extensions of Remarks]
[Pages E1481-E1482]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




         CLARIFICATION OF THE TREATMENT OF INVESTMENT MANAGERS

                                 ______
                                 

                         HON. HARRIS W. FAWELL

                              of illinois

                    in the house of representatives

                        Wednesday, July 23, 1997

  Mr. FAWELL. Mr. Speaker, I am pleased to today introduce legislation 
which amends title I of the Employee Retirement Income Security Act of 
1974 [ERISA] to permit investment advisers registered with State 
securities regulators to continue to serve as investment managers to 
ERISA plans.
  At the end of last Congress, landmark bipartisan legislation was 
enacted which adopted a new approach for regulating investment 
advisers: the Investment Advisers Supervision Coordination Act (title 
III of P.L. 104-290). Under the act, beginning July 8, 1997, States are 
assigned primary responsibility for regulating smaller investment 
advisers and the Securities and Exchange Commission [SEC] is assigned 
primary responsibility for regulating larger investment advisers. Under 
this framework, however, smaller investment advisers registered only 
with the States, and prohibited by the new law from registering with 
the SEC, would no longer meet the definition of ``investment manager'' 
under ERISA, since the current Federal law definition only recognizes 
advisers registered with the SEC.
  As a temporary measure, a 2-year sunset provision was included in the 
securities reform law extending for 2 years the qualification of State 
registered investment advisers as investment managers under ERISA. This 
provision was intended to address the problem on an interim basis while 
the congressional committees with jurisdiction over ERISA reviewed the 
issue. We have reviewed this issue and have developed the legislation 
that I am introducing today to permanently correct this oversight.
  Without the legislation I am introducing, State licensed investment 
advisers who, because of the securities reform law, no longer are 
permitted to register with the SEC would be unable to continue to be 
qualified to serve as investment managers to pension and welfare plans 
covered by ERISA. Without this legislation, the practices of thousands 
of small investment advisers and investment advisory firms would be 
seriously disrupted after October 10, 1998--as would the 401(k) and 
other pension plans of their clients.
  It is necessary for an investment adviser seeking to advise and 
manage the assets of employee benefit plans subject to ERISA to meet 
ERISA's definition of ``investment manager.'' It is also important, for 
business reasons, for small investment advisers to eliminate the 
uncertainty about their status as investment managers under ERISA. This 
uncertainty makes it difficult for such advisers to acquire new ERISA-
plan client and could well cause the loss of existing clients.
  The bill will amend title I of ERISA to permit an investment adviser 
to serve as an investment manager to ERISA plans if it is registered 
with either the SEC or the State in which it maintains its principal 
office and place of business, if it could no longer register with the 
SEC as a result of the requirements of the 1996 securities reform law. 
In addition, at the request of the Department of Labor, the bill 
requires that whatever filing is made by the investment adviser with 
the State be filed with the Secretary of Labor as well.
  Arthur Levitt, Chairman of the Securities and Exchange Commission, 
has written a letter expressing the need for this legislation and his 
support for this effort to correct this problem. I ask that a copy of 
Chairman Levitt's letter be inserted in the Record.
  This legislation also has the support of the Department of Labor. In 
addition, this bill is supported by the International Association for 
Financial Planning, the Institute of Certified Financial Planners, the 
National Association of Personal Financial Advisors, the American 
Institute of Certified Public Accountants, and the North American 
Securities Administrators Association, Inc. Identical legislation is 
being introduced on the other side of the Hill by Senator Jeffords, the 
chairman of the Senate Labor Committee.
  Congress must act quickly to correct this oversight, to protect small 
advisers from unintended ruin and to bring stability to the capital 
management marketplace.

                                               U.S. Securities and


                                          Exchange Commission,

                                    Washington, DC, April 7, 1997.
     Hon. William F. Goodling,
     Chairman, Committee on Education and the Work Force, U.S. 
         House of Representatives, Rayburn House Office Building, 
         Washington, DC.
       Dear Chairman Goodling: I am writing to urge that the House 
     Committee on Education and the Work Force consider enacting 
     legislation to amend the Employee Retirement Income Security 
     Act of 1974 (``ERISA;'') in a small but terribly important 
     way. Unless the Congress acts quickly, thousands of small 
     investment adviser firms, and their employees, risk having 
     their businesses and their livelihoods inadvertently 
     disrupted by changes to federal securities laws that were 
     enacted during the last Congress.
       At the very end of its last session, Congress passed the 
     Investment Advisers Supervision Coordination Act. This was 
     landmark bipartisan legislation that replaced an overlapping 
     and duplicative state and federal regulatory scheme with a 
     new approach that divided responsibility for investment 
     adviser supervision; states were assigned primary 
     responsibility for regulating smaller investment advisers, 
     and the Securities and Exchange Commission was assigned 
     primarily responsibility for regulating larger investment 
     advisers. We supported this approach.
       Until the Coordination Act takes effect in the next few 
     months, most of the nation's 23,500 investment adviser 
     firms--regardless of their size--will continue to be 
     registered with the SEC, as they have for many decades. Once 
     the Act becomes effective, however, we estimate that as many 
     as 16,000 firms will be required to withdraw their federal 
     registration. Indeed, this requirement is crucial if the 
     Act's overall intent of reducing overlapping and duplicative 
     regulation is to be realized. But the withdrawal of federal 
     registration is also what causes the problem for these firms 
     under ERISA.
       As a practical business matter, it is a virtual necessity 
     for a professional money manager (such as an investment 
     adviser) seeking to serve employee benefit plans subject to 
     ERISA to meet ERISA's definition of ``investment manager.'' 
     The term is defined in ERISA to include only investment 
     advisers registered with the SEC, and certain banks and 
     insurance companies. Once the Coordination Act becomes 
     effective, large advisers registered with the SEC will of 
     course continue to meet the definition. But small advisory 
     firms will not be able to meet the definition of investment 
     manager because they will be registered with the states 
     rather than with the SEC. Thus they may well be precluded 
     from providing advisory services to employee benefit plans 
     subject to ERISA, even if they have been doing so 
     successfully for many years.
       The sponsors of the Coordination Act were aware that the 
     interplay between the Act and ERISA could have substantial 
     detrimental consequences for small advisors, and thus added 
     an amendment to ERISA during the House-Senate Conference on 
     the Act. The ERISA amendment provided that investment 
     advisers registered with a state can serve as ``investment 
     managers'' for two years, or through October 12, 1998. My 
     staff has been told that this ``sunset'' provision was 
     included in the ERISA amendment so that the

[[Page E1482]]

     appropriate congressional committees with jurisdiction over 
     ERISA could have a reasonable amount of time to review the 
     amendment before deciding whether to make it permanent. Apart 
     from that important procedural issue, I am not aware of any 
     other considerations that would suggest the need for the 
     ERISA amendment to expire in two years.
       I believe that the Congress should move as quickly as 
     possible to enact legislation that eliminates the sunset 
     provision, and permanently enables properly registered state 
     investment advisers to continue their service as investment 
     managers under ERISA. There is no reason to wait until 1998 
     to do so. In fact, many small investment advisers believe 
     that the ongoing uncertainty about their status as 
     ``investment managers'' under ERISA is making it difficult 
     for them to acquire new ERISA plan clients, and may even 
     cause them to lose existing clients. Some advisers think the 
     harm they could suffer, even before the expiration of the 
     sunset provision next year, could be irreparable, and it is 
     easy to see why.
       It is only through the swift action of your Committee that 
     these unintended and unnecessary consequences for thousands 
     of successful small businesses can be avoided. If you or your 
     staff would like additional information about this matter, 
     please do not hesitate to contact me at 942-0100, or Barry P. 
     Barbash, Director of the Division of Investment Management, 
     or Robert E. Plaze, an Associate Director in the Division, at 
     942-0720.
           Sincerely,
                                                    Arthur Levitt.

     

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