IAA 2021 Policy Priorities
Investment Advisers Act Modernization
The statutory framework of the Investment Advisers Act of 1940 has proven remarkably robust in protecting investors while 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 80 years and certain of the regulations adopted pursuant to the Advisers Act have not kept pace with these developments.
Among other things, the IAA has long advocated modernizing the advertising rule – adopted in 1961 – and replacing it with a principles-based approach that better reflects modern communications and investor needs for meaningful information. In a significant victory for advisers following extensive input by the IAA, the SEC has done just that. The agency has removed per se prohibitions on testimonials and past specific recommendations in favor of a principles-based approach, disclosure-based guidelines, and other protections. It has also incorporated the piecemeal guidance issued over decades into a comprehensive approach, provided sensible guidance on the use of performance advertising, and looked to the Advisers Act compliance program rule to provide the framework for advisers’ review of their marketing activities. The IAA will continue to work with the SEC on interpretive issues as we help our members implement the new rule.
We also continue to press the SEC to refashion its outdated framework for electronic delivery. The IAA has joined other groups in issuing recommendations on a modernized framework for delivery of regulatory disclosures and we will continue to engage with the SEC on this issue. The IAA also supported the DOL’s adoption of a rule that permits electronic delivery of certain retirement plan information. We also support and are engaged in efforts to update the needlessly complex custody rule to facilitate advisers’ compliance and more effectively protect investors. We commend the SEC for including modernization of this rule on its regulatory agenda. In addition, we believe the pay-to- play rule on political contributions should be streamlined and updated.
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 adopted a comprehensive rulemaking package in June 2019 that is intended to raise the standard of conduct for broker-dealers, reaffirm investment advisers’ fiduciary duty under the Advisers Act, and reduce investor confusion as to the services offered by – and standards applicable to – their financial professional.
The IAA has worked closely with its members to help them implement the new client relationship summary (Form CRS) disclosure document for retail investors, which went into effect on June 30, 2020. We will continue to advocate before the SEC to ensure that its interpretation, implementation, and enforcement of this rulemaking package preserve the overarching Advisers Act fiduciary duty, hold financial professionals to a robust investor protective standard, clearly delineate the essential differences between brokerage and advisory activities, and effectively achieve the SEC’s goals for Form CRS.
The IAA weighed in on the DOL’s proposal for a new prohibited transaction class exemption for investment advice fiduciaries, the final version of which incorporates several of our recommendations. We continue to closely monitor state efforts to impose their own fiduciary rules on financial professionals to ensure that these rules do not affect federally registered investment advisers and their representatives in contravention of the National Securities Markets Improvement Act of 1996 (NSMIA).
Tax Reform/Retirement Savings
The IAA strongly supports efforts to bolster Americans’ retirement savings. In this regard, we strongly favor restoring and expanding the deductibility of advisory fees as an itemized 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 20 percent pass- through deduction created by the 2017 Tax Cuts and Jobs Act as it unfairly disadvantages investment advisory firms. The IAA is also strongly opposed to a financial transaction tax because of the unfair financial burden it would impose on investors and the securities markets.
Diversity, Equity, and Inclusion
The IAA recognizes that the investment adviser profession has a long way to go in matters of diversity, equity, and inclusion (DE&I). Our community must address the issues that have resulted in lack of diversity and must make meaningful progress. To that end, the IAA is committed to working collectively with our members to seek to promote diversity, equity, and inclusion as a value for our industry and to providing education, information, and resources to help foster significant change. The IAA also supports the SEC’s goal of promoting DE&I in the investment community.
The IAA strongly supports a uniform, national approach to data privacy law in order to create consistency and reduce complexity. In addition, we support laws that facilitate cybersecurity information sharing, both among companies and between companies and law enforcement agencies. The IAA also supports 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.
Impact of SEC Regulations on Small Businesses
The IAA strongly supports the “Investment Adviser Regulatory Flexibility Improvement Act,” bi-partisan legislation passed
by the House in 2018 as part of JOBS Act 3.0, which has been introduced in the current Congress as H.R. 2436. This bill is designed to ease the regulatory burden on smaller advisory firms by requiring the SEC to analyze the impact of regulations and consider alternative approaches that minimize the burden on small businesses in accordance with the Regulatory Flexibility Act.
Proxy voting is an intrinsic benefit of share ownership that is important to enhancing and protecting shareholder value.
Investment advisers that are responsible for voting proxies in the best interest of their clients value the assistance provided by third-party proxy advisory firms to help them with voting mechanics, research, and/or analytics. Accordingly, the IAA opposed the SEC’s 2019 proxy rule proposal, which would have made it more difficult for advisers to engage proxy advisory firms and vote their clients’ proxies. We are pleased that the final rule that the SEC adopted in July 2020 addressed many of the issues raised by the IAA. Nevertheless, we remain concerned that both the SEC’s 2019 and 2020 guidance on investment adviser proxy voting and use of proxy advisory firms will increase burdens and costs for advisers and their clients.
We also continue to urge the SEC to focus on updating proxy infrastructure, where there is evidence of significant problems. Similarly, we opposed the DOL’s proxy voting proposal, which would have substantially increased costs for plans and fiduciaries without providing measurable benefits to participants and beneficiaries. While the final DOL rule is an improvement over the proposal, we will continue to advocate for measures that ensure that advisers are able to vote proxies efficiently and effectively in their clients’ best interest.
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 IAA supports efforts to ensure that the agency is able to dedicate sufficient resources for effective oversight of advisory firms and that it continues to use those resources efficiently.
CFTC and Derivatives Regulation
The IAA advocates before the CFTC and supports CFTC and SEC coordination to streamline costly, burdensome, and duplicative regulation of commodity pool operators and commodity trading advisors that are SEC-registered advisers through exemptions, uniform rules, and substituted compliance.
An increasing number of investment advisers engage in Environ- mental, Social, and Governance (ESG) investing strategies, and take into consideration ESG factors as part of the investment process. This is driven, in no small part, by advisers’ prudent risk management as well as an increase in investors’ interest in ESG investing. The IAA strongly supports informed investor choice and objects to actions by regulators that would limit the ability of investment advisers to consider ESG factors or pursue ESG investment strategies on behalf of their clients. The IAA also believes that, in order to preserve the ability of investment advisers to act in the best interest of their clients, regulators should not require investment advisers to consider a particular set of ESG factors when making investment decisions. For example, retirement legislation or regulation should not make it difficult for retirement plans to consider ESG factors in investment decisions. To this end, the IAA strongly objected to the DOL’s proposal to limit a fiduciary’s ability to engage in ESG investment strategies. While the final DOL rule incorporates several of our comments, we will continue to advocate against policies that have the potential to chill the ability of ERISA fiduciaries to consider ESG factors as part of a prudent investment process.
Level Playing Field:
Active and Passive Management
The IAA supports policy 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. Laws and regulations should not explicitly or implicitly favor one investment strategy over the other and should not limit investor choice or the tools available to investment advisers for risk management.
For additional information, please contact:
Karen Barr, President & CEO
Neil Simon, Vice President for Government Relations
Gail Bernstein, General Counsel