Union Calendar No. 33

103D CONGRESS

1ST SESSION H. R. 578

[Report No. 103–75]

A BILL

To provide for recovery of costs of supervision and

ties, and for other purposes.regulation of investment advisers and their activiAPRIL 29, 1993

Reported with an amendment, committed to the Commitordered to be printed tee of the Whole House on the State of the Union, and
IB

Union Calendar No. 33

103D CONGRESS

1ST SESSION H. R. 578

[Report No. 103–75]

To provide for recovery of costs of supervision and regulation of investment

advisers and their activities, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 26, 1993

Mr. BOUCHER (for himself, Mr. MARKEY, Mr. DINGELL, Mr. FIELDS of

Texas, Mr. COOPER, Mr. WYDEN, Mr. LEHMAN, and Mr. SYNAR) introduced the following bill; which was referred to the Committee on Energy

and Commerce

APRIL 29, 1993

Additional sponsors: Mr. MOORHEAD, Mr. MARTINEZ, Mrs. JOHNSON of Connecticut, Mr. BARRETT of Wisconsin, Mr. HUGHES, Mr. GLICKMAN, Mrs.

MEEK, and Mr. STUDDS

APRIL 29, 1993

Reported with an amendment, committed to the Committee of the Whole

House on the State of the Union, and ordered to be printed

[Strike out all after the enacting clause and insert the part printed in italic]

[For text of introduced bill, see copy of bill as introduced on January 26, 1993]

A BILL

To provide for recovery of costs of supervision and regulation

of investment advisers and their activities, and for other

purposes.
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1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Investment Adviser Reg5 ulatory Enhancement and Disclosure Act of 1993’’.

6 SEC. 2. ADDITIONAL RESOURCES FOR INVESTMENT AD7 VISER SUPERVISION.

8 (a) AMENDMENT.—The Investment Advisers Act of

9 1940 (15 U.S.C. 80b–1 et seq.) is amended by inserting

10 after section 203 the following new section:

11 ‘‘FEES FOR REGISTRANTS AND APPLICANTS

12 ‘‘SEC. 203A. (a) IN GENERAL.—The Commission is

13 authorized, in accordance with this section, to collect fees

14 to recover the costs of registration, supervision, and regula15 tion of investment advisers and their activities. Such fees

16 shall be collected, and shall be available, only to the extent

17 provided in advance in appropriations Acts. No appropria18 tion Act may authorize fees to be collected under this section

19 during any fiscal year unless the amount appropriated by

20 such Act for such costs for such fiscal year equals or exceeds

21 the aggregate amount that may reasonably be expected to

22 be collected by such fees. Such fees shall be deposited as an

23 offsetting collection to the Commission’s appropriation and

24 may remain available for such purposes for the succeeding

25 fiscal year. The costs covered by such fees shall be limited

26 to the costs of Commission expenses for registration, exami-
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1 nations, and surveys of persons registered or required to

2 register under this Act.

3 ‘‘(b) TIME FOR PAYMENT.—

4 ‘‘(1) NEW REGISTRANTS.—At the time of filing

5 an application for registration under this title, the

6 applicant shall pay to the Commission the fee speci7 fied in subsection (c). No part of such fee shall be re8 funded to the applicant. The filing of an application

9 for registration under this title shall not be deemed to

10 have occurred unless the application is accompanied

11 by the fee required under this section.

12 ‘‘(2) ONGOING REGISTRANTS.—Each investment

13 adviser whose registration is effective on the last day

14 of its fiscal year shall pay to the Commission the fee

15 specified in subsection (c). Such payment shall be

16 made not later than 90 days after the end of its fiscal

17 year, or at such other time as the Commission, by

18 rule, shall determine, unless its registration has been

19 withdrawn, canceled, or revoked prior to that date. No

20 part of such fee shall be refunded to the investment

21 adviser.

22 ‘‘(c) COST-BASED SCHEDULE OF FEES.—For any fis23 cal year for which fees are authorized to be collected by an

24 appropriation Act, the amount of fees due from investment

25 advisers in accordance with paragraphs (1) and (2) of sub-
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1 section (b) shall be determined according to the following

2 schedule:

‘‘Assets under management Fee due:

Less than $10,000,000 ................................................................... $300

$10,000,000 or more, but less than $25,000,000 ......................... $500

$25,000,000 or more, but less than $50,000,000 ......................... $1,000

$50,000,000 or more, but less than $100,000,000 ....................... $2,500

$100,000,000 or more, but less than $250,000,000 ..................... $4,000

$250,000,000 or more, but less than $500,000,000 ..................... $5,000

$500,000,000 or more .................................................................... $7,000.

3 ‘‘(d) SUSPENSION FOR FAILURE TO PAY.—The Com4 mission, by order, may suspend the registration of any in5 vestment adviser if it finds, after notice, that such invest6 ment adviser has failed to pay when due any fee required

7 by this section. The Commission shall reinstate such reg8 istration upon payment of the fee (and any penalty due),

9 if such suspension was based solely on the failure to pay

10 the fee.

11 ‘‘(e) RULEMAKING.—The Commission may adopt such

12 rules as are necessary to carry out this section.

13 ‘‘(f) DEFINITION OF ASSETS UNDER MANAGEMENT.—

14 As used in this section, the term ‘assets under management’

15 means the client assets with respect to which an investment

16 adviser provides continuous and regular supervisory or

17 management services.’’.

18 (b) EFFECTIVE DATE.—This section shall become effec19 tive upon the adoption by the Commission of implementing

20 rules, under section 203A(f) of the Investment Advisers Act

21 of 1940, as added by subsection (a).
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1 SEC. 3. EXAMINATIONS AND SURVEYS.

2 The Investment Advisers Act of 1940 is amended by

3 inserting after section 222 (15 U.S.C. 80b–22) the following

4 new section:

5 ‘‘EXAMINATIONS AND SURVEYS

6 ‘‘SEC. 223. (a) PERIODIC EXAMINATIONS.—The Com7 mission shall establish and periodically revise a schedule

8 for the regular examination of investment advisers. Such

9 schedule shall provide for more frequent examinations of

10 certain investment advisers based on factors that the Com11 mission determines increase the need for examination of

12 those investment advisers, which shall include (at a mini13 mum) each of the following:

14 ‘‘(1) the frequency of customer complaints;

15 ‘‘(2) the risks associated with newly registered

16 investment advisers;

17 ‘‘(3) custody of funds and the authority to exer18 cise investment discretion;

19 ‘‘(4) the existence of deficiencies detected during

20 an examination under this title that may continue to

21 present high risks to clients; and

22 ‘‘(5) the receipt of commissions for the sale of in23 vestments recommended to clients.

24 ‘‘(b) SURVEYS OF UNREGISTERED PERSONS.—The

25 Commission shall, within 3 years after the date of enact26 ment of this section and periodically thereafter, provide for
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1 the conduct of a survey to determine the extent of, and rea2 sons for, the failure of persons to register as required by

3 this Act. The Commission shall, on the basis of such survey

4 results, establish objectives for the reduction or elimination

5 of such failures and shall include in annual reports to Con6 gress (under section 23(b) of the Securities Exchange Act

7 of 1934) submitted after completion of the first survey, a

8 statement of such objectives, an evaluation of the success in

9 attaining those objectives during the preceding year, and

10 such recommendations as the Commission considers appro11 priate to assist in the attainment of those objectives. If the

12 survey identifies any pattern of noncompliance with the

13 registration requirements of the title and the rules there14 under, the Commission’s objectives shall include such rule15 making proceedings as may be required to correct such non16 compliance.

17 ‘‘(c) PROVISIONS NOT LIMITATION.—The provisions of

18 this section shall not be construed to limit the authority

19 of the Commission to prescribe rules under this Act or to

20 conduct an examination or investigation at any time or

21 to institute proceedings under this title or any other title.’’.
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1 SEC. 4. DESIGNATION OF SELF-REGULATORY ORGANIZA2 TIONS.

3 The Investment Advisers Act of 1940 (15 U.S.C. 80b–

4 1 et seq.) is amended by inserting after section 223 (as

5 added by section 3 of this Act) the following new section:

6 ‘‘DESIGNATION OF SELF-REGULATORY ORGANIZATIONS

7 ‘‘SEC. 224. (a) DESIGNATION TO CONDUCT EXAMINA8 TIONS.—The Commission, by rule, consistent with the pub9 lic interest, the protection of investors, and the purposes of

10 this title, may designate one or more self-regulatory organi11 zations registered with the Commission under section 6 or

12 15A of the Securities Exchange Act of 1934, to conduct peri13 odic examinations of its members, and affiliates of mem14 bers, that are registered or required to register under this

15 title, to determine compliance with applicable provisions of

16 this title and the rules and regulations thereunder. Such

17 rule shall specify the minimum scope and frequency for

18 such examinations and shall, to the extent consistent with

19 the protection of investors, be designed to avoid unnecessary

20 regulatory duplication or undue regulatory burdens. Such

21 self-regulatory organization may discipline such members

22 and affiliates of members for violations of the applicable

23 provisions of this title and the rules and regulations there24 under pursuant to the standards and procedures set forth

25 in sections 6, 15A, and 19 of the Securities Exchange Act

26 of 1934. The money penalties imposed by a self-regulatory
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1 organization for violations of this title shall not exceed those

2 contained in section 203(i).

3 ‘‘(b) LIMITATIONS.—

4 ‘‘(1) PRIMARY BUSINESS LIMITATION.—The Com5 mission shall not exercise the designation authority

6 contained in subsection (a) for members or affiliates

7 of members if the primary business of the member

8 and its affiliates is investment advisory activities.

9 ‘‘(2) LIMITATION WITH RESPECT TO AFFILIATES

10 OF MEMBERS.—The Commission shall not exercise the

11 authority contained in subsection (a) for an affiliate

12 of a member if—

13 ‘‘(A) the primary business of the affiliate is

14 investment advisory activities;

15 ‘‘(B) the affiliate is an affiliate of the mem16 ber solely as a result of the adviser’s (or an asso17 ciated person of the adviser’s) registration with

18 the member as a registered representative; and

19 ‘‘(C) the affiliate is a registered representa20 tive of the member solely to enable the adviser to

21 execute transactions that are incidental to the

22 investment adviser’s primary business;

23 unless the Commission determines, in accordance with

24 such other criteria as the Commission establishes by

25 rule, that such exercise of designation authority is
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1 consistent with the public interest, the protection of

2 investors, the purposes of this title, and the objectives

3 of the Commission’s investment adviser examination

4 program.

5 ‘‘(3) LIMITATION WITH RESPECT TO SAVINGS AS6 SOCIATION AFFILIATES OF MEMBERS.—The Commis7 sion shall not exercise the authority contained in sub8 section (a) for an affiliate of a member if the affiliate

9 is a savings association, as such term is defined in

10 section 3(b)(1) of the Federal Deposit Insurance Act

11 (12 U.S.C. 1813(b)(1)).

12 ‘‘(4) DEFINITIONAL RULES.—For purposes of

13 this subsection, the Commission may, by rule, estab14 lish criteria for defining the terms ‘primary business’

15 and ‘incidental to the investment adviser’s primary

16 business’.

17 ‘‘(c) AUTHORITY TO IMPOSE FEES.—

18 ‘‘(1) IN GENERAL.—Any self-regulatory organi19 zation designated by the Commission to perform the

20 examinations specified in subsection (a) shall have

21 the authority to collect fees in accordance with this

22 subsection.

23 ‘‘(2) LIMITATION.—The total fee paid by a reg24 istered investment adviser under this subsection shall

25 not exceed an amount determined in accordance with
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1 rules prescribed by the Commission. Such rules shall

2 require that the fees collected by a self-regulatory or3 ganization under this subsection—

4 ‘‘(A) cover only the costs of the self-regu5 latory organization’s expenses for examinations

6 conducted pursuant to subsection (a);

7 ‘‘(B) as to any investment adviser, bear a

8 reasonable relationship to the costs of conducting

9 an examination of that adviser pursuant to sub10 section (a); and

11 ‘‘(C) not exceed such portion of the fee au12 thorized under section 203A as the Commission

13 determines is allocable to the Commission’s ex14 penses for conducting such an examination.

15 ‘‘(3) REDUCTION OF SECTION 203A FEES.—The

16 amount of any fee that a registered investment ad17 viser is required to pay under section 203A with re18 spect to any fiscal year shall be reduced by the

19 amount paid to a self-regulatory organization in ac20 cordance with this subsection with respect to such fis21 cal year.

22 ‘‘(d) EFFECTIVE DATE OF RULE.—A rule prescribed

23 by the Commission under this section shall not be effective

24 until 90 days after the date on which the Commission sub25 mits to each House of Congress a report—
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1 ‘‘(1) containing the text of the proposed rule and

2 the reasons therefor;

3 ‘‘(2) describing the procedures to be used to co4 ordinate the collection of fees by the Commission

5 under section 203A and by a self-regulatory organiza6 tion under the rule; and

7 ‘‘(3) containing such other information as may

8 be necessary to describe the implementation and en9 forcement of the rule.

10 ‘‘(e) DEFINITION.—For purposes of this section, the

11 term ‘affiliate’ shall mean any person directly or indirectly

12 controlling, controlled by, or under common control with

13 a member.’’.

14 SEC. 5. SUITABILITY AND OTHER ADVISER OBLIGATIONS.

15 (a) AMENDMENT.—Section 206 of the Investment Ad16 visers Act of 1940 (15 U.S.C. 80b–6) is amended to read

17 as follows:

18 ‘‘PROHIBITED TRANSACTIONS BY INVESTMENT ADVISERS

19 ‘‘SEC. 206. (a) PROHIBITED CONDUCT.—It shall be

20 unlawful for any investment adviser or any person associ21 ated with an investment adviser, by use of the mails or any

22 means or instrumentality of interstate commerce, directly

23 or indirectly—

24 ‘‘(1) to employ any device, scheme, or artifice to

25 defraud any client or prospective client;
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1 ‘‘(2) to engage in any transaction, practice, or

2 course of business which operates as a fraud or deceit

3 upon any client or prospective client;

4 ‘‘(3) acting as principal for his own account,

5 knowingly to sell any security to or purchase any se6 curity from a client, or acting as broker for a person

7 other than such client, knowingly to effect any sale or

8 purchase of any security for the account of such cli9 ent, without disclosing to such client in writing before

10 the completion of such transaction the capacity in

11 which he is acting and obtaining the consent of the

12 client to such transaction;

13 ‘‘(4) to engage in any act, practice, or course of

14 business which is fraudulent, deceptive, or manipula15 tive;

16 ‘‘(5) to provide investment advice to any client,

17 other than in connection with impersonal advisory

18 services, unless the adviser—

19 ‘‘(A) prior to providing any investment ad20 vice, and as appropriate thereafter, makes a rea21 sonable inquiry into the client’s financial situa22 tion, investment experience, and investment ob23 jectives;

24 ‘‘(B) reasonably determines that the invest25 ment advice is suitable for the client; and
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1 ‘‘(C) maintains reasonable records, in ac2 cordance with such rules as the Commission shall

3 prescribe, of the information obtained from the

4 inquiries the adviser made in complying with

5 this paragraph; or

6 ‘‘(6) to guarantee a client that a specific result

7 will be achieved as a result of the advisory services

8 provided by the investment adviser.

9 ‘‘(b) EXEMPTIONS AND SPECIAL RULES.—

10 ‘‘(1) EXEMPTION.—The prohibitions of sub11 section (a)(3) shall not apply to any transaction with

12 a customer of a broker or dealer if such broker or

13 dealer is not acting as an investment adviser in rela14 tion to such transaction.

15 ‘‘(2) AUTHORITY TO DEFINE AND PRESCRIBE.—

16 The Commission shall, for the purposes of subsection

17 (a)(4), by rules define, and prescribe means reason18 ably designed to prevent, such acts, practices, and

19 courses of business as are fraudulent, deceptive, or

20 manipulative.

21 ‘‘(3) DEFINITION OF IMPERSONAL ADVISORY

22 SERVICES.—As used in subsection (a)(5), the term

23 ‘impersonal advisory services’ means any investment

24 advisory services provided—
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1 ‘‘(A) by means of written material or oral

2 statements which do not purport to meet the ob3 jectives or needs of specific individuals or ac4 counts;

5 ‘‘(B) through the issuance of statistical in6 formation containing no expression of opinion as

7 to the investment merits of a particular security;

8 or

9 ‘‘(C) by any combination of the foregoing

10 services.’’.

11 (b) RULEMAKING REQUIRED.—The Commission shall

12 prescribe rules for purposes of paragraph (5)(C) of section

13 206(a) of the Investment Advisers Act of 1940 (as added

14 by subsection (a) of this section) within one year after the

15 date of enactment of this Act.

16 SEC. 6. ADDITIONAL DISCLOSURE OBLIGATIONS OF IN17 VESTMENT ADVISERS.

18 (a) ADDITIONAL OBLIGATIONS.—Section 204 of the In19 vestment Advisers Act of 1940 (15 U.S.C. 80b–4) is amend20 ed—

21 (1) by striking the heading of such section and

22 inserting the following:

23 ‘‘PERIODIC REPORTS AND OTHER DISCLOSURE

24 REQUIREMENTS’’;

25 (2) by inserting ‘‘(a) PERIODIC AND OTHER RE26 PORTS.—’’ after ‘‘SEC. 204.’’; and
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1 (3) by adding at the end the following new sub2 sections:

3 ‘‘(b) BROCHURE REQUIRED.—

4 ‘‘(1) IN GENERAL.—Each person registered under

5 section 203 of this title shall disseminate to each cli6 ent or prospective client a document disclosing mate7 rial facts concerning matters listed in paragraphs (2)

8 and (3) and such other matters as the Commission

9 shall prescribe. In order to provide for timely and ef10 fective disclosure of such facts and matters to clients,

11 the Commission shall by rule prescribe the format of

12 the document and the timing of its dissemination.

13 ‘‘(2) CONTENTS OF BROCHURE.—The document

14 required by paragraph (1) shall include information

15 concerning—

16 ‘‘(A) the education and business background

17 of such person and of any associated person pro18 viding significant investment advisory services

19 to the client,

20 ‘‘(B) compensation arrangements between

21 the client and the investment adviser,

22 ‘‘(C) the nature of services offered,

23 ‘‘(D) business practices,

24 ‘‘(E) methods for obtaining information on

25 the disciplinary history and registration of the
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1 investment adviser and persons associated with

2 the investment adviser, and

3 ‘‘(F) conflicts of interest which could rea4 sonably be expected to impair the rendering of

5 disinterested advice.

6 ‘‘(3) PROMINENT DISCLOSURES.—Such document

7 shall also prominently disclose—

8 ‘‘(A) that—

9 ‘‘(i) the registered person receives or

10 may receive, directly or indirectly, sales

11 commissions or other fees in connection

12 with a purchase or sale effected on behalf of

13 a client; or

14 ‘‘(ii) the registered person will not re15 ceive, directly or indirectly, any sales com16 mission or other fees in connection with

17 such purchase or sale, but the client may be

18 charged a sales commission or other fee by

19 another person in connection with such pur20 chase or sale; and

21 ‘‘(B) that remedies may be available to the

22 client with respect to disputes arising out of the

23 advisory relationship.

24 ‘‘(4) DEFINITION.—The Commission shall define

25 ‘associated person providing significant investment
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1 advisory services to the client’ by rule for purposes of

2 this subsection.

3 ‘‘(c) TRANSACTION REPORTS.—

4 ‘‘(1) INITIAL DISCLOSURE.—Before a purchase or

5 sale is effected on behalf of any client, each registered

6 investment adviser shall, in accordance with rules

7 prescribed by the Commission, disclose to the client

8 the total amount of commissions, fees, or other charges

9 that may reasonably be expected to be charged in con10 nection with the transaction (or, in the case of pay11 ments from third parties, that a payment will be re12 ceived) and that the adviser or a related person will

13 receive a portion of the commission, fee, charge, or

14 payment. Such initial disclosure shall be in writing

15 if the purchase or sale was recommended in writing.

16 ‘‘(2) CONFIRMATION.—After a purchase or sale is

17 effected, each registered investment adviser shall

18 transmit to each client a written statement that dis19 closes the amount of commissions, fees, or other

20 charges charged in connection with the transaction

21 (or, in the case of payments from third parties, that

22 a payment has been or will be received). Such written

23 statement shall be in such form and contain such in24 formation, and be provided in accordance with such

25 rules, as the Commission shall prescribe. Such rules
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1 shall, to the extent consistent with the protection of

2 investors, permit delivery of a confirmation statement

3 of a broker or a dealer that includes information that

4 meets the requirements of this subsection (and the

5 rules adopted thereunder) in order to satisfy such re6 quirements.

7 ‘‘(3) WAIVER.—The Commission may, by rule,

8 permit an investment adviser to omit disclosure re9 quired by this subsection with the knowing written

10 consent of the client.

11 ‘‘(4) EXCEPTIONS.—This subsection shall not

12 apply—

13 ‘‘(A) with respect to any purchase or sale

14 for which the investment adviser, and any per15 son associated or under common control with the

16 investment adviser, will not receive any portion

17 of the amount charged or deducted in connection

18 with the purchase or sale, and will not receive

19 any payment from a third party required to be

20 disclosed under paragraph (1);

21 ‘‘(B) with respect to accounts for which the

22 person is authorized to exercise investment dis23 cretion; or
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1 ‘‘(C) with respect to any account for which

2 the person is not acting as an investment ad3 viser.

4 ‘‘(5) SPECIAL RULE.—The provisions of this sub5 section shall also apply to any person associated with

6 an investment adviser effecting transactions for advi7 sory clients through a broker or dealer with which the

8 person is associated.

9 ‘‘(d) PERIODIC REPORTS.—

10 ‘‘(1) IN GENERAL.—Each registered investment

11 adviser shall provide to each client a periodic written

12 statement in such form and containing such informa13 tion as the Commission shall prescribe by rule con14 sistent with the public interest, the protection of in15 vestors, and the purposes of this title. Such rule shall

16 require the disclosure of—

17 ‘‘(A) commissions, fees, or other charges

18 paid by the client during the period for services

19 provided by the investment adviser and any per20 son associated or under common control with the

21 investment adviser;

22 ‘‘(B) compensation directly or indirectly re23 ceived during the period by the investment ad24 viser, or any person associated or under common

25 control with the investment adviser, from any
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1 third party with respect to any recommended

2 transaction;

3 ‘‘(C) in the case of a client account for

4 which the investment adviser provides invest5 ment supervisory services, securities positions

6 held in the account at the beginning and at the

7 end of the period; and

8 ‘‘(D) such other matters as the Commission

9 shall prescribe.

10 ‘‘(2) COMMISSION RULES.—The rule prescribed

11 by the Commission pursuant to paragraph (1) shall

12 require that the format and timing of delivery be de13 signed to present the required information in a man14 ner that readily permits clients to compare the costs

15 charged by the investment adviser with the costs

16 charged by other advisers. In adopting such rule, the

17 Commission shall require an investment adviser

18 whose clients purchase or sell investment products

19 through persons other than such adviser, or persons

20 associated or under common control with such ad21 viser, to disclose to its clients that such information

22 concerning costs charged does not include commis23 sions or other fees paid in connection with such pur24 chases or sales. Such rule shall, to the extent consist25 ent with the protection of investors, permit delivery of
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1 a report of a broker or dealer that includes informa2 tion that meets the requirements of this subsection

3 (and the rules adopted thereunder) in order to satisfy

4 such requirements.

5 ‘‘(3) WAIVER.—The Commission may, by rule,

6 permit an investment adviser to provide the statement

7 required by paragraph (1) no more frequently than

8 annually if the client knowingly waives, in writing,

9 the right to obtain such statement more frequently

10 than annually.

11 ‘‘(4) EXCEPTION.—This subsection shall not

12 apply with respect to any account for which the per13 son is not acting as an investment adviser.

14 ‘‘(e) FACILITIES FOR FILING RECORDS AND REPORTS;

15 ACCESS TO DISCIPLINARY AND OTHER INFORMATION.—

16 ‘‘(1) FILING DEPOSITORIES.—The Commission,

17 by rule, may require any investment adviser—

18 ‘‘(A) to file with the Commission any fee,

19 application, report, or notice required by this

20 title or by the rules issued under this title

21 through any entity designated by the Commis22 sion for that purpose; and

23 ‘‘(B) to pay the reasonable costs associated

24 with (i) such filing, and (ii) the maintenance of
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1 the toll-free telephone listing required by para2 graph (2).

3 ‘‘(2) LISTING FOR TOLL-FREE INQUIRIES.—The

4 Commission shall require the entity designated by the

5 Commission to receive fees, applications, reports, or

6 notices pursuant to paragraph (1) to—

7 ‘‘(A) establish and maintain a toll-free tele8 phone listing to receive inquiries regarding the

9 disciplinary and other information involving in10 vestment advisers and persons associated with

11 investment advisers; and

12 ‘‘(B) respond promptly to such inquiries in

13 writing.

14 Such designated entity may charge persons, other

15 than individual investors, reasonable fees for the cost

16 of providing written responses to inquiries. Such des17 ignated entity shall not have any liability to any per18 son for any actions taken or omitted in good faith

19 under this paragraph.’’.

20 (b) RULEMAKING REQUIRED.—The Commission shall

21 prescribe rules for purposes of subsections (b), (c), and (d)

22 of section 204 of the Investment Advisers Act of 1940 (as

23 added by subsection (a) of this section) within one year

24 after the date of enactment of this Act.
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1 SEC. 7. BOND REQUIREMENT.

2 Section 208 of the Investment Advisers Act of 1940 (15

3 U.S.C. 80b–8) is amended by adding at the end the follow4 ing:

5 ‘‘(e) BOND REQUIREMENT.—

6 ‘‘(1) IN GENERAL.—The Commission, by rules

7 for the protection of investors, shall require any in8 vestment adviser registered under section 203 who—

9 ‘‘(A) is authorized to exercise investment

10 discretion, as defined in section 3(a)(35) of the

11 Securities Exchange Act of 1934, with respect to

12 an account,

13 ‘‘(B) has access to the securities or funds of

14 a client, or

15 ‘‘(C) is an investment adviser of an invest16 ment company, as defined in section 2(a)(20) of

17 the Investment Company Act of 1940,

18 to obtain a bond from a reputable fidelity insurance

19 company against larceny and embezzlement in such

20 reasonable amounts and covering such officers, part21 ners, directors, and employees of the investment ad22 viser as the Commission may prescribe.

23 ‘‘(2) CONSIDERATIONS IN RULEMAKING.—In im24 plementing paragraph (1), the Commission shall con25 sider—
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1 ‘‘(A) the degree of risk to client assets that

2 is involved;

3 ‘‘(B) the cost and availability of fidelity

4 bonds;

5 ‘‘(C) existing fidelity bonding requirements;

6 and

7 ‘‘(D) any alternative means to protect client

8 assets.

9 ‘‘(3) EXEMPTION AUTHORITY.—The Commission

10 by rule may exempt any person or class of persons,

11 under such terms and conditions and for such periods

12 as the Commission shall provide in such rule, from

13 the requirements of this subsection and the rules

14 thereunder.’’.

15 SEC. 8. DISQUALIFYING CONDUCT.

16 (a) AMENDMENT.—Section 203(e) of the Investment

17 Advisers Act of 1940 (15 U.S.C. 80b–3(e)) is amended—

18 (1) by redesignating paragraphs (3) through (7)

19 as paragraphs (4) through (8), respectively; and

20 (2) by inserting after paragraph (2) the follow21 ing new paragraph:

22 ‘‘(3) has been convicted within ten years preced23 ing the filing of any application for registration or

24 at any time thereafter of any crime that is punishable

25 by imprisonment for one or more years and that is
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1 not described in paragraph (2) of this subsection or

2 of a substantially equivalent crime by a foreign court

3 of competent jurisdiction.’’.

4 (b) CONFORMING AMENDMENTS.—Section 203 of such

5 Act is further amended—

6 (1) in subsection (e)(6) (as redesignated by sub7 section (a) of this section), by striking ‘‘this para8 graph (5)’’ and inserting ‘‘this paragraph (6)’’;

9 (2) in subsection (f)—

10 (A) by striking ‘‘paragraph (1), (4), (5), or

11 (7)’’ and inserting ‘‘paragraph (1), (5), (6), or

12 (8)’’; and

13 (B) by striking ‘‘paragraph (3)’’ and insert14 ing ‘‘paragraph (4)’’; and

15 (3) in subsection (i)(1)(D), by striking ‘‘section

16 203(e)(5) of this title’’ and inserting ‘‘subsection

17 (e)(6) of this section’’.

18 SEC. 9. CONFIDENTIALITY.

19 Section 208 of the Investment Advisers Act of 1940 (15

20 U.S.C. 80b–8), as amended by section 7, is further amended

21 by adding at the end the following new subsection:

22 ‘‘(f) DISCLOSURE OF CLIENT INFORMATION PROHIB23 ITED.—

24 ‘‘(1) ADVISER DISCLOSURE.—It shall be unlaw25 ful for any investment adviser to disclose any person-
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1 ally identifiable financial information with respect to

2 any client unless required by law to do so, or un3 less—

4 ‘‘(A) the client has been adequately in5 formed of the proposed information disclosure, in

6 accordance with rules prescribed by the Commis7 sion, and (i) has been afforded the opportunity,

8 in accordance with such rules, to object to the

9 disclosure, and (ii) has not objected or has af10 firmatively consented;

11 ‘‘(B) the information disclosed is necessary

12 and appropriate in order to establish an advi13 sory or brokerage account or to effect or attempt

14 to effect a transaction for the client;

15 ‘‘(C) the information (i) is requested by rep16 resentatives of the Commission, a State agency

17 whose primary assignment is the regulation of

18 the securities business, or a self-regulatory orga19 nization, or (ii) is requested by subpoena; or

20 ‘‘(D) the information is requested by the cli21 ent’s auditors or accountants.

22 ‘‘(2) SECONDARY DISCLOSURE.—It is unlawful

23 for any person to whom information is disclosed for

24 the purpose described in paragraph (1)(B) to use such
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1 information for any purpose other than the effec2 tuation of the client’s transaction.’’.

3 SEC. 10. CUSTODIANSHIP.

4 (a) FINDINGS.—The Congress finds that—

5 (1) most clients of investment advisers who give

6 their advisers discretionary authority over their secu7 rities and funds provide for the safekeeping of their

8 securities and funds with a custodian;

9 (2) it is a customary business practice for

10 custodians to provide reports of the transactions in

11 client accounts directly to clients;

12 (3) such direct reporting provides an important

13 safeguard against improper use of client assets; and

14 (4) permitting advisers to serve as the sole recip15 ient of custodial account communications has allowed,

16 and may continue to allow, unscrupulous persons to

17 misuse client assets, causing substantial losses for

18 those clients.

19 (b) REPORT.—The Commission, within 18 months of

20 enactment of this Act, after consultation with the appro21 priate Federal banking agencies (as such term is defined

22 in section 3(q) of the Federal Deposit Insurance Act), shall

23 submit a report to Congress—

24 (1) analyzing the risks to investors when an in25 vestment adviser is made the sole recipient of commu-
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1 nications from the custodian or when an investment

2 adviser or affiliate thereof serves as the custodian;

3 and

4 (2) making any recommendations the Commis5 sion believes are necessary to eliminate or reduce these

6 risks.

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