[Congressional Record Volume 143, Number 134 (Wednesday, October 1, 1997)]
[Senate]
[Pages S10300-S10301]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




        CLARIFYING TREATMENT OF INVESTMENT ADVISERS UNDER ERISA

 Mr. JEFFORDS. Mr. President, on Friday, September 26, 1997, I 
introduced 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, the 
Investment Supervision Coordination Act, landmark bipartisan 
legislation that adopted a new approach for regulating investment 
advisers, was passed and signed into law. Under this legislation, 
beginning July 8, 1997, States are assigned primary responsibility for 
regulating smaller investment advisers and the Securities and Exchange 
Commission is assigned primary responsibility for regulating larger 
investment advisers. Prior to the passage of the legislation, the issue 
arose that smaller investment advisers registered only with the 
States--and prohibited from registering with the SEC--would no longer 
meet the definition of investment manager under ERISA because the 
current Federal law definition only recognized advisers registered with 
the Securities and Exchange Commission. As a temporary measure, a 2-
year sunset provision was included in the securities reform legislation 
extending the qualification of State registered investment advisers as 
investment managers under ERISA for 2 years. The purpose of this 
provision was to address the problem on an immediate basis while 
concurrently giving the congressional committees with jurisdiction over 
ERISA matters the opportunity to review and act on the issue. We have 
reviewed this issue and have developed the legislation that I am 
introducing today to permanently correct this problem.
  Without this legislation, State licensed investment advisers who, 
because of the securities reform legislation, no longer are permitted 
to register with the Securities and Exchange Commission will 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, investment 
advisory firms and their supervision of client 401(k) and certain other 
pension plans will be seriously disrupted after October 10, 1998.
  For business reasons, it is necessary for an investment adviser 
seeking to advise and manage assets of employee benefit plans subject 
to ERISA to meet ERISA's definition of investment manager. It is also 
important, for business reasons, to eliminate the uncertainty about the 
status of small investment advisers as investment managers under ERISA. 
This uncertainty makes it difficult for such advisers to acquire new 
ERISA plan clients and may well cause the loss of existing clients.
  Arthus 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.
  It is my understanding that this bill is supported by the Department 
of Labor. In addition, this bill is supported by the Institute of 
Certified Financial Planners, the National Association of Personal 
Financial Advisors, the International Association for Financial 
Planning, the American Institute of Certified Public Accountants, and 
the North American Securities Administrators Association, Inc. Mr. 
President, the sooner that Congress responds in a positive fashion to 
correct this problem, the better for small advisers and the capital 
management marketplace.
  The letter follows:
                                               U.S. Securities and


                                          Exchange Commission,

                                    Washington, DC, April 7, 1997.
     Hon. James M. Jeffords,
     Chairman, Committee on Labor and Human Resources,
     U.S. Senate, Washington, DC.
       Dear Chairman Jeffords: I am writing to urge that the 
     Senate Committee on Labor and Human Resources 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.
       Under 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 advisers, and thus

[[Page S10301]]

     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 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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