Investment Advisers Act Framework
The principles-based statutory framework of the Investment Advisers Act of 1940 has proven remarkably robust in protecting investors while allowing the fiduciary advisory profession to grow, benefiting investors, the capital markets, and the U.S. economy. The IAA supports this evergreen and adaptable approach, which facilitates tailoring regulatory requirements to an investment adviser’s business. We oppose recent proposals by the SEC that would move away from this highly effective approach and impose prescriptive, one-size-fits-all requirements on investment advisers.
This shift to a more prescriptive regulatory framework for advisers is evidenced in the SEC’s proposals to amend the Custody Rule and to adopt rules relating to cybersecurity, oversight of outsourcing, and regulation of private fund advisers. We are working constructively to present the SEC with alternatives that can achieve its regulatory objectives in a principles-based and more effective way.
Fiduciary Standard
At the core of the Advisers Act framework is the overarching principle that investment advisers are fiduciaries to their clients. An investment adviser’s fiduciary duty extends to all aspects of the advisory relationship and to all methods by which the investment adviser provides advice. The IAA has long advocated that all financial professionals who provide investment advice about securities to clients should be required to act under fiduciary principles.
In June 2019, the SEC adopted a comprehensive rulemaking package 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. We will continue to advocate before the SEC to ensure that its interpretation, implementation, and enforcement of this rulemaking package preserve the principles-based Advisers Act fiduciary duty, hold financial professionals to a robust investor-protective standard, and clearly delineate the essential differences between brokerage and advisory activities.
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 that it should retain its primacy in investment adviser regulation. To that end, the IAA supports efforts to ensure that the agency can efficiently deploy sufficient resources for effective investment adviser oversight.
Impact of Regulation on Small Businesses
Small businesses are the backbone of the fiduciary investment advisory community, with 91 percent of SEC-registered advisers having 100 or fewer non-clerical employees. Policy decisions should preserve the vital place of these small businesses in the financial services ecosystem and allow them to thrive.
Unfortunately, the SEC is not, as a practical matter, required to analyze the economic impact of its regulations on small businesses under the Regulatory Flexibility Act (RegFlex) because virtually no SEC-registered advisers fall under the definition of small business adopted by the SEC. Inexplicably, the SEC definition includes only advisory firms with less than $25 million in assets under management (AUM) – when, with rare exceptions, an advisory firm must have a minimum of $100 million AUM to fall under the SEC’s jurisdiction.
Congress gave the agency authority under the RegFlex Act to update this definition, but the agency has failed to do so. For this reason, the IAA strongly supports Senate passage of H.R. 2792, the “Small Entity Update Act,” passed by the House on May 30. It would require the SEC to analyze the impact of regulations and consider alternative approaches that minimize the burden on small businesses in accordance with the federal Regulatory Flexibility Act.
Cumulative Impact of Regulation
The IAA urges policymakers to consider regulation holistically. Policymakers should conduct cost-benefit analyses, not only of each regulatory proposal individually, but also of their cumulative effects on investment advisers and on the financial services landscape more broadly. Policymakers should also consider the interrelationship of their many proposals and streamline new regulation to strike an appropriate balance between potential benefits and costs.
Tax Reform/Retirement Savings
The IAA supports efforts to bolster Americans’ retirement savings, including efforts to expand access to retirement plans and fiduciary advice. For this reason, we strongly supported passage of the bipartisan SECURE Act 2.0 legislation. We also strongly favor restoring and expanding the deductibility of advisory fees as an itemized deduction to encourage investors to seek fiduciary advice about saving for retirement. In addition, we are seeking reconsideration of the broad exclusion for service businesses from the 20 percent pass-through deduction as it unfairly disadvantages investment advisory firms.
ESG/Sustainable Investing
Many investment advisers engage in Environmental, Social, and Governance (ESG) investing strategies and consider these factors as part of the investment process. This is driven by investment advisers’ prudent risk management as well as an increase in investors’ interest in ESG investing.
The IAA objects to actions by policymakers that would limit the ability of investment advisers to consider any factors they deem important or pursue investment strategies – including ESG factors or strategies – on behalf of their clients. Most recently, the IAA supported the Department of Labor’s rulemaking that is strategy-neutral, permitting but not mandating retirement plan fiduciaries to consider climate change and other ESG factors. The IAA also supports more consistent, comparable, and reliable ESG disclosures by corporate issuers to provide more transparency to investors and to facilitate analysis of issuers by investment advisers to better meet the needs of clients.
Active and Passive Management
Both active and passive investment strategies have valuable and important roles to play in investment management. The IAA supports policy approaches that promote a level playing field for both strategies or combinations of strategies and opposes laws and regulations that limit investor choice or the tools available to investment advisers to maximize the ability of their clients to reach their investment goals.
Data Privacy/Cybersecurity
The IAA strongly supports a uniform, national approach to data privacy and cybersecurity laws and regulations that would create consistency and reduce complexity. 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 are protected. The IAA recommends that the SEC coordinate with other federal regulators rather than pursuing separate cybersecurity reporting and disclosure requirements. Nevertheless, we are constructively engaged with the SEC on its current cybersecurity and data privacy proposals for advisers, offering recommendations to further the SEC’s objectives while streamlining unnecessary burdens on advisers.
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 (DEI). Our community must address the issues that have resulted in lack of diversity and make meaningful progress. To that end, the IAA is working collectively with our members to seek to promote DEI as a value for our industry and to provide education, information, and resources to help foster significant change. The IAA supports legislation that helps measure progress in our industry.
Anti-Money Laundering
An anti-money laundering (AML) rule for investment advisers is on the action list of Treasury’s Financial Crimes Enforcement Network (FinCEN). We believe that policymakers should refrain from imposing AML regulation on investment advisers whose business models or activities do not raise money laundering risks. Any AML regulation should be targeted to fill gaps, if any, and tailored to avoid costly and unnecessary duplication of compliance efforts as other financial services intermediaries are already required to perform AML reviews of the advisers’ clients.
Accredited Investor
The IAA believes that the definition of accredited investor should be expanded to provide greater opportunities for retail clients to invest in private offerings with appropriate guardrails. We believe this would be best accomplished by reference to a client’s use of a fiduciary investment adviser or other qualified financial services professional in making the investment.
For additional information, please contact:
Karen Barr, President & CEO
karen.barr@investmentadviser.org
Neil Simon, Vice President, Government Relations
neil.simon@investmentadviser.org
Gail Bernstein, General Counsel
gail.bernstein@investmentadviser.org