IAA 2019 Policy Priorities

Investment Advisers Act

The statutory framework of the Investment Advisers Act of 1940 has proven remarkably robust in protecting investors and in allowing the advisory profession to grow to benefit investors, the capital markets and the U.S. economy. However, the financial services landscape has evolved significantly over the last 78 years, and certain of the regulations adopted pursuant to the Advisers Act have not kept pace with these developments. For this reason, the IAA supports a review of the regulatory regime governing investment advisers to ensure that regulation is effective, efficient, tailored and appropriately targeted to protecting investors and fostering capital formation.

Among other things, we support: modernizing the advertising rule and replacing its 1961 prohibitions of testimonials and past specific recommendations – which do not reflect modern communications and investor needs – with a more principles-based approach; clarifying the needlessly complex custody rule to facilitate advisers’ compliance and more effectively protect investors; reviewing the recordkeeping and electronic delivery rules in light of current technology; and streamlining and updating the rules on political contributions. We are pleased that the SEC has indicated that it will take up revisions to the advertising rule in the short term and to the custody rule in the longer term and will continue to provide our views to SEC staff on these important initiatives.

Fiduciary Standard

The IAA has long advocated that all financial professionals who provide investment advice about securities to clients should be required to act pursuant to fiduciary principles.

The SEC last year proposed a package of proposals regarding the standards of conduct for broker-dealers and investment advisers designed to enhance retail investor protection and reduce investors’ confusion about the advice and services they receive from their investment professional.

The IAA commends the SEC for taking action to raise the standard of conduct for broker-dealers and address investor confusion. But we are concerned about whether the proposals will actually achieve those objectives, which we view as crucial for investor protection. The IAA has engaged with the SEC and its staff, including through comment letters, to share our concerns, including regarding the scope of the proposed broker-dealer standard, the efficacy of proposed new disclosures for brokers and advisers, and certain aspects of the proposed interpretation. We also urged the SEC not to impose unnecessary and ill-fitting broker-dealer regulation on investment advisers as part of its package of proposals. The IAA is committed to continuing to work with the Commission to get this right.

Tax Reform/Retirement Savings

As advocated by the IAA, Congress rejected both mandatory FIFO and “Rothification” in the Tax Cuts and Jobs Act (TCJA), thereby preserving pre-existing tax incentives for voluntary retirement savings. We will continue to oppose any legislation that would jeopardize retirement savings. We strongly favor restoring and expanding the deductibility of advisory fees as an itemized business deduction to incentivize investors to seek advice about saving for retirement. We are also seeking reconsideration of the broad exclusion for service businesses from the new 20 percent pass-through deduction, which unfairly disadvantages advisory firms.

SEC Oversight of Advisers

Effective oversight of the advisory profession is critical to investor protection. The IAA believes that the SEC, an experienced and accountable governmental regulator, is in the best position to provide that oversight, and should retain its primacy in investment adviser regulation. To that end, the agency must be able to dedicate sufficient resources for effective oversight of advisory firms and must use those resources efficiently.

The IAA strongly opposes outsourcing of governmental oversight because, fundamentally, examinations are a government function. Further, imposition of a self-regulatory organization (such as FINRA) would impose a costly, unnecessary, and ill-fitting additional layer of regulation and bureaucracy on advisers without providing a commensurate investor protection benefit.

Level Playing Field: Active and Passive Management

The IAA supports regulatory approaches that promote a level playing field among investment strategies. Both active and passive strategies have valuable and important roles to play in investment management in the best interest of clients and the markets. Regulation should not explicitly or implicitly favor one strategy over the other.

Cybersecurity & Privacy

The growing threat of cyber attacks has created a need for more cooperation and collaboration within the private sector and between the private and public sectors. The IAA supports laws that facilitate cybersecurity information sharing, both among companies and between companies and law enforcement agencies. We also advocate for, and are pleased that the Treasury Department has recommended, creation of a single, national data breach notification regime that would make it easier for affected companies to comply with the law while ensuring that clients and customers are protected. We also support a uniform, national approach to data privacy law in order to create consistency and reduce complexity.

Impact of SEC Regulations on Small Business

The IAA strongly supported the “Investment Adviser Regulatory Flexibility Improvement Act,” bi-partisan legislation passed by the House in 2018 as part of JOBS Act 3.0. This bill is designed to ease the regulatory burden on smaller advisory firms by requiring the SEC to analyze the impact of regulations on small businesses and consider alternative approaches that minimize the burden on these smaller firms in accordance with the Regulatory Flexibility Act (RegFlex).

More than 7,000 advisers employ 10 or fewer non-clerical employees. However, the SEC has been able to avoid application of RegFlex to advisory firms because the agency defines small businesses to include only investment advisers with less than $25 million in AUM despite the fact that the basic threshold for SEC registration is $100 million. The Investment Adviser Regulatory Flexibility Improvement Act would require the SEC to come up with an alternative definition of small business for purposes of RegFlex that takes into account the number of a firm’s employees. We are seeking to have the bill re-introduced and enacted into law in the 116th Congress.

Proxy Voting

Advisers that are responsible for voting proxies in volume may engage third-party proxy advisory firms to help them with voting mechanics, research, and analytics. These services are particularly important to assist advisers in their substantial proxy voting responsibilities. While the research provided by proxy advisory firms is a valuable part of the analysis advisers undertake, advisers retain ultimate fiduciary responsibility to vote proxies in their clients’ best interest and they make those decisions independently. The IAA opposes efforts by corporate issuers and others to restrict the use of these firms by investment advisers or to impose a new regulatory regime on proxy advisory firms that would increase the cost of these services prohibitively for advisers and their clients or increase barriers to entry.

FSOC/Stress Tests

The IAA supported H.R. 4061, the “Financial Stability Oversight Council Improvement Act,” legislation adopted by the House in the 115th Congress that would provide FSOC with additional ways to address potential risks to the financial system, while also making the systemically important financial institution (SIFI) process more accountable and transparent. Importantly, the bill would ensure that nonbank SIFI designations are reserved for the limited cases in which identified risks to financial stability cannot be addressed more effectively by an entity’s primary regulator or action by the entity itself.

We also supported H.R. 4566, the “Alleviating Stress Test Burdens to Help Investors Act,” legislation passed by the House and included in the JOBS Act 3.0 package, that would eliminate the Dodd-Frank Act mandate that the SEC require stress testing by nonbank financial institutions, including advisory firms with more than $10 billion in AUM. Stress tests for advisers are unwarranted given the agency nature of investment advisory firms and the SEC’s adoption of new rules, including those that require stress testing, designed to promote effective liquidity risk management by mutual funds. We support the re-introduction of these bills in the 116th Congress.

Derivatives Regulation

Investment advisers are subject to overlapping and often conflicting regulation by the SEC and CFTC. This duplicative regulation imposes costly compliance burdens that provide little benefit to investors. The IAA supports SEC and CFTC coordination to streamline regulation of commodity pool operators and commodity trading advisors that are SEC-registered advisers through exemptions, uniform rules, and substituted compliance.

For additional information, please contact:

Karen Barr, President & CEO

Neil Simon, Vice President for Government Relations

Gail Bernstein, General Counsel