II
103D CONGRESS
1ST SESSION
H. R. 578
IN THE SENATE OF THE UNITED STATES
MAY 5 (legislative day, APRIL 19), 1993
Received
MAY 7 (legislative day, APRIL 19), 1993
Read twice and referred to the Committee on Banking, Housing and Urban
Affairs
AN ACT
To provide for recovery of costs of supervision and regulation
of investment advisers and their activities, and for other
purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Investment Adviser
Regulatory Enhancement and Disclosure Act of 1993’’.
SEC. 2. ADDITIONAL RESOURCES FOR INVESTMENT AD-
VISER SUPERVISION.
(a) AMENDMENT.—The Investment Advisers Act of
1940 (15 U.S.C. 80b–1 et seq.) is amended by inserting
after section 203 the following new section:
‘‘FEES FOR REGISTRANTS AND APPLICANTS
‘‘SEC. 203A. (a) IN GENERAL.—The Commission is
authorized, in accordance with this section, to collect fees
to recover the costs of registration, supervision, and regu-
lation of investment advisers and their activities. Such fees
shall be collected, and shall be available, only to the extent
provided in advance in appropriations Acts. No appropria-
tion Act may authorize fees to be collected under this sec-
tion during any fiscal year unless the amount appropriated
by such Act for such costs for such fiscal year equals or
exceeds the aggregate amount that may reasonably be ex-
pected to be collected by such fees. Such fees shall be de-
posited as an offsetting collection to the Commission’s ap-
propriation and may remain available for such purposes
for the succeeding fiscal year. The costs covered by such
fees shall be limited to the costs of Commission expenses
for registration, examinations, and surveys of persons reg-
istered or required to register under this Act.
‘‘(b) TIME FOR PAYMENT.—
‘‘(1) NEW REGISTRANTS.—At the time of filing
an application for registration under this title, the
applicant shall pay to the Commission the fee speci-
fied in subsection (c). No part of such fee shall be
refunded to the applicant. The filing of an applica-
tion for registration under this title shall not be
deemed to have occurred unless the application is ac-
companied by the fee required under this section.
‘‘(2) ONGOING
REGISTRANTS.—Each invest-
ment adviser whose registration is effective on the
last day of its fiscal year shall pay to the Commis-
sion the fee specified in subsection (c). Such pay-
ment shall be made not later than 90 days after the
end of its fiscal year, or at such other time as the
Commission, by rule, shall determine, unless its reg-
istration has been withdrawn, canceled, or revoked
prior to that date. No part of such fee shall be re-
funded to the investment adviser.
‘‘(c) COST-BASED SCHEDULE OF FEES.—For any
fiscal year for which fees are authorized to be collected
by an appropriation Act, the amount of fees due from in-
vestment advisers in accordance with paragraphs (1) and
(2) of subsection (b) shall be determined according to the
following 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.
‘‘(d) SUSPENSION FOR FAILURE TO PAY.—The Com-
mission, by order, may suspend the registration of any in-
vestment adviser if it finds, after notice, that such invest-
ment adviser has failed to pay when due any fee required
by this section. The Commission shall reinstate such reg-
istration upon payment of the fee (and any penalty due),
if such suspension was based solely on the failure to pay
the fee.
‘‘(e) RULEMAKING.—The Commission may adopt
such rules as are necessary to carry out this section.
‘‘(f) DEFINITION
OF
ASSETS
UNDER
MANAGE-
MENT.—As used in this section, the term ‘assets under
management’ means the client assets with respect to which
an investment adviser provides continuous and regular su-
pervisory or management services.’’.
(b) EFFECTIVE DATE.—This section shall become ef-
fective upon the adoption by the Commission of imple-
menting rules, under section 203A(f) of the Investment
Advisers Act of 1940, as added by subsection (a).
SEC. 3. EXAMINATIONS AND SURVEYS.
The Investment Advisers Act of 1940 is amended by
inserting after section 222 (15 U.S.C. 80b–22) the follow-
ing new section:
‘‘EXAMINATIONS AND SURVEYS
‘‘SEC. 223. (a) PERIODIC
EXAMINATIONS.—The
Commission shall establish and periodically revise a sched-
ule for the regular examination of investment advisers.
Such schedule shall provide for more frequent examina-
tions of certain investment advisers based on factors that
the Commission determines increase the need for examina-
tion of those investment advisers, which shall include (at
a minimum) each of the following:
‘‘(1) the frequency of customer complaints;
‘‘(2) the risks associated with newly registered
investment advisers;
‘‘(3) custody of funds and the authority to exer-
cise investment discretion;
‘‘(4) the existence of deficiencies detected dur-
ing an examination under this title that may con-
tinue to present high risks to clients; and
‘‘(5) the receipt of commissions for the sale of
investments recommended to clients.
‘‘(b) SURVEYS OF UNREGISTERED PERSONS.—The
Commission shall, within 3 years after the date of enact-
ment of this section and periodically thereafter, provide
for the conduct of a survey to determine the extent of,
and reasons for, the failure of persons to register as re-
quired by this Act. The Commission shall, on the basis
of such survey results, establish objectives for the reduc-
tion or elimination of such failures and shall include in
annual reports to Congress (under section 23(b) of the
Securities Exchange Act of 1934) submitted after comple-
tion of the first survey, a statement of such objectives,
an evaluation of the success in attaining those objectives
during the preceding year, and such recommendations as
the Commission considers appropriate to assist in the at-
tainment of those objectives. If the survey identifies any
pattern of noncompliance with the registration require-
ments of the title and the rules thereunder, the Commis-
sion’s objectives shall include such rulemaking proceedings
as may be required to correct such noncompliance.
‘‘(c) PROVISIONS NOT LIMITATION.—The provisions
of this section shall not be construed to limit the authority
of the Commission to prescribe rules under this Act or
to conduct an examination or investigation at any time
or to institute proceedings under this title or any other
title.’’.
SEC. 4. DESIGNATION OF SELF-REGULATORY ORGANIZA-
TIONS.
The Investment Advisers Act of 1940 (15 U.S.C.
80b–1 et seq.) is amended by inserting after section 223
(as added by section 3 of this Act) the following new sec-
tion:
‘‘DESIGNATION OF SELF-REGULATORY ORGANIZATIONS
‘‘SEC. 224. (a) DESIGNATION TO CONDUCT EXAMI-
NATIONS.—The Commission, by rule, consistent with the
public interest, the protection of investors, and the pur-
poses of this title, may designate one or more self-regu-
latory organizations registered with the Commission under
section 6 or 15A of the Securities Exchange Act of 1934,
to conduct periodic examinations of its members, and af-
filiates of members, that are registered or required to reg-
ister under this title, to determine compliance with appli-
cable provisions of this title and the rules and regulations
thereunder. Such rule shall specify the minimum scope
and frequency for such examinations and shall, to the ex-
tent consistent with the protection of investors, be de-
signed to avoid unnecessary regulatory duplication or
undue regulatory burdens. Such self-regulatory organiza-
tion may discipline such members and affiliates of mem-
bers for violations of the applicable provisions of this title
and the rules and regulations thereunder pursuant to the
standards and procedures set forth in sections 6, 15A, and
19 of the Securities Exchange Act of 1934. The money
penalties imposed by a self-regulatory organization for vio-
lations of this title shall not exceed those contained in sec-
tion 203(i).
‘‘(b) LIMITATIONS.—
‘‘(1) PRIMARY
BUSINESS
LIMITATION.—The
Commission shall not exercise the designation au-
thority contained in subsection (a) for members or
affiliates of members if the primary business of the
member and its affiliates is investment advisory ac-
tivities.
‘‘(2) LIMITATION
WITH
RESPECT
TO
AFFILI-
ATES OF MEMBERS.—The Commission shall not ex-
ercise the authority contained in subsection (a) for
an affiliate of a member if—
‘‘(A) the primary business of the affiliate
is investment advisory activities;
‘‘(B) the affiliate is an affiliate of the
member solely as a result of the adviser’s (or an
associated person of the adviser’s) registration
with the member as a registered representative;
and
‘‘(C) the affiliate is a registered represent-
ative of the member solely to enable the adviser
to execute transactions that are incidental to
the investment adviser’s primary business;
unless the Commission determines, in accordance
with such other criteria as the Commission estab-
lishes by rule, that such exercise of designation au-
thority is consistent with the public interest, the pro-
tection of investors, the purposes of this title, and
the objectives of the Commission’s investment ad-
viser examination program.
‘‘(3) LIMITATION WITH RESPECT TO SAVINGS
ASSOCIATION AFFILIATES OF MEMBERS.—The Com-
mission shall not exercise the authority contained in
subsection (a) for an affiliate of a member if the af-
filiate is a savings association, as such term is de-
fined in section 3(b)(1) of the Federal Deposit In-
surance Act (12 U.S.C. 1813(b)(1)).
‘‘(4) DEFINITIONAL RULES.—For purposes of
this subsection, the Commission may, by rule, estab-
lish criteria for defining the terms ‘primary business’
and ‘incidental to the investment adviser’s primary
business’.
‘‘(c) AUTHORITY TO IMPOSE FEES.—
‘‘(1) IN GENERAL.—Any self-regulatory organi-
zation designated by the Commission to perform the
examinations specified in subsection (a) shall have
the authority to collect fees in accordance with this
subsection.
‘‘(2) LIMITATION.—The total fee paid by a reg-
istered investment adviser under this subsection
shall not exceed an amount determined in accord-
ance with rules prescribed by the Commission. Such
rules shall require that the fees collected by a self-
regulatory organization under this subsection—
‘‘(A) cover only the costs of the self-regu-
latory organization’s expenses for examinations
conducted pursuant to subsection (a);
‘‘(B) as to any investment adviser, bear a
reasonable relationship to the costs of conduct-
ing an examination of that adviser pursuant to
subsection (a); and
‘‘(C) not exceed such portion of the fee au-
thorized under section 203A as the Commission
determines is allocable to the Commission’s ex-
penses for conducting such an examination.
‘‘(3) REDUCTION OF SECTION 203A FEES.—The
amount of any fee that a registered investment ad-
viser is required to pay under section 203A with re-
spect to any fiscal year shall be reduced by the
amount paid to a self-regulatory organization in ac-
cordance with this subsection with respect to such
fiscal year.
‘‘(d) EFFECTIVE DATE OF RULE.—A rule prescribed
by the Commission under this section shall not be effective
until 90 days after the date on which the Commission sub-
mits to each House of Congress a report—
‘‘(1) containing the text of the proposed rule
and the reasons therefor;
‘‘(2) describing the procedures to be used to co-
ordinate the collection of fees by the Commission
under section 203A and by a self-regulatory organi-
zation under the rule; and
‘‘(3) containing such other information as may
be necessary to describe the implementation and en-
forcement of the rule.
‘‘(e) DEFINITION.—For purposes of this section, the
term ‘affiliate’ shall mean any person directly or indirectly
controlling, controlled by, or under common control with
a member.’’.
SEC. 5. SUITABILITY AND OTHER ADVISER OBLIGATIONS.
(a) AMENDMENT.—Section 206 of the Investment
Advisers Act of 1940 (15 U.S.C. 80b–6) is amended to
read as follows:
‘‘PROHIBITED TRANSACTIONS BY INVESTMENT ADVISERS
‘‘SEC. 206. (a) PROHIBITED CONDUCT.—It shall be
unlawful for any investment adviser or any person associ-
ated with an investment adviser, by use of the mails or
any means or instrumentality of interstate commerce, di-
rectly or indirectly—
‘‘(1) to employ any device, scheme, or artifice to
defraud any client or prospective client;
‘‘(2) to engage in any transaction, practice, or
course of business which operates as a fraud or de-
ceit upon any client or prospective client;
‘‘(3) acting as principal for his own account,
knowingly to sell any security to or purchase any se-
curity from a client, or acting as broker for a person
other than such client, knowingly to effect any sale
or purchase of any security for the account of such
client, without disclosing to such client in writing be-
fore the completion of such transaction the capacity
in which he is acting and obtaining the consent of
the client to such transaction;
‘‘(4) to engage in any act, practice, or course of
business which is fraudulent, deceptive, or manipula-
tive;
‘‘(5) to provide investment advice to any client,
other than in connection with impersonal advisory
services, unless the adviser—
‘‘(A) prior to providing any investment ad-
vice, and as appropriate thereafter, makes a
reasonable inquiry into the client’s financial sit-
uation, investment experience, and investment
objectives;
‘‘(B) reasonably determines that the in-
vestment advice is suitable for the client; and
‘‘(C) maintains reasonable records, in ac-
cordance with such rules as the Commission
shall prescribe, of the information obtained
from the inquiries the adviser made in comply-
ing with this paragraph; or
‘‘(6) to guarantee a client that a specific result
will be achieved as a result of the advisory services
provided by the investment adviser.
‘‘(b) EXEMPTIONS AND SPECIAL RULES.—
‘‘(1) EXEMPTION.—The prohibitions of sub-
section (a)(3) shall not apply to any transaction with
a customer of a broker or dealer if such broker or
dealer is not acting as an investment adviser in rela-
tion to such transaction.
‘‘(2) 
AUTHORITY
TO
DEFINE
AND
PRE-
SCRIBE.—The Commission shall, for the purposes of
subsection (a)(4), by rules define, and prescribe
means reasonably designed to prevent, such acts,
practices, and courses of business as are fraudulent,
deceptive, or manipulative.
‘‘(3) DEFINITION
OF
IMPERSONAL
ADVISORY
SERVICES.—As used in subsection (a)(5), the term
‘impersonal advisory services’ means any investment
advisory services provided—
‘‘(A) by means of written material or oral
statements which do not purport to meet the
objectives or needs of specific individuals or ac-
counts;
‘‘(B) through the issuance of statistical in-
formation containing no expression of opinion
as to the investment merits of a particular secu-
rity; or
‘‘(C) by any combination of the foregoing
services.’’.
(b) RULEMAKING REQUIRED.—The Commission shall
prescribe rules for purposes of paragraph (5)(C) of section
206(a) of the Investment Advisers Act of 1940 (as added
by subsection (a) of this section) within one year after the
date of enactment of this Act.
SEC. 6. ADDITIONAL DISCLOSURE OBLIGATIONS OF IN-
VESTMENT ADVISERS.
(a) ADDITIONAL OBLIGATIONS.—Section 204 of the
Investment Advisers Act of 1940 (15 U.S.C. 80b–4) is
amended—
(1) by striking the heading of such section and
inserting the following:
‘‘PERIODIC REPORTS AND OTHER DISCLOSURE
REQUIREMENTS’’;
(2) by inserting ‘‘(a) PERIODIC
AND OTHER
REPORTS.—’’ after ‘‘SEC. 204.’’; and
(3) by adding at the end the following new sub-
sections:
‘‘(b) BROCHURE REQUIRED.—
‘‘(1) IN
GENERAL.—Each person registered
under section 203 of this title shall disseminate to
each client or prospective client a document disclos-
ing material facts concerning matters listed in para-
graphs (2) and (3) and such other matters as the
Commission shall prescribe. In order to provide for
timely and effective disclosure of such facts and
matters to clients, the Commission shall by rule pre-
scribe the format of the document and the timing of
its dissemination.
‘‘(2) CONTENTS OF BROCHURE.—The document
required by paragraph (1) shall include information
concerning—
‘‘(A) the education and business back-
ground of such person and of any associated
person providing significant investment advisory
services to the client,
‘‘(B) compensation arrangements between
the client and the investment adviser,
‘‘(C) the nature of services offered,
‘‘(D) business practices,
‘‘(E) methods for obtaining information on
the disciplinary history and registration of the
investment adviser and persons associated with
the investment adviser, and
‘‘(F) conflicts of interest which could rea-
sonably be expected to impair the rendering of
disinterested advice.
‘‘(3) PROMINENT
DISCLOSURES.—Such docu-
ment shall also prominently disclose—
‘‘(A) that—
‘‘(i) the registered person receives or
may receive, directly or indirectly, sales
commissions or other fees in connection
with a purchase or sale effected on behalf
of a client; or
‘‘(ii) the registered person will not re-
ceive, directly or indirectly, any sales com-
mission or other fees in connection with
such purchase or sale, but the client may
be charged a sales commission or other fee
by another person in connection with such
purchase or sale; and
‘‘(B) that remedies may be available to the
client with respect to disputes arising out of the
advisory relationship.
‘‘(4) DEFINITION.—The Commission shall de-
fine ‘associated person providing significant invest-
ment advisory services to the client’ by rule for pur-
poses of this subsection.
‘‘(c) TRANSACTION REPORTS.—
‘‘(1) INITIAL DISCLOSURE.—Before a purchase
or sale is effected on behalf of any client, each reg-
istered investment adviser shall, in accordance with
rules prescribed by the Commission, disclose to the
client the total amount of commissions, fees, or
other charges that may reasonably be expected to be
charged in connection with the transaction (or, in
the case of payments from third parties, that a pay-
ment will be received) and that the adviser or a re-
lated person will receive a portion of the commission,
fee, charge, or payment. Such initial disclosure shall
be in writing if the purchase or sale was rec-
ommended in writing.
‘‘(2) CONFIRMATION.—After a purchase or sale
is effected, each registered investment adviser shall
transmit to each client a written statement that dis-
closes the amount of commissions, fees, or other
charges charged in connection with the transaction
(or, in the case of payments from third parties, that
a payment has been or will be received). Such writ-
ten statement shall be in such form and contain
such information, and be provided in accordance
with such rules, as the Commission shall prescribe.
Such rules shall, to the extent consistent with the
protection of investors, permit delivery of a con-
firmation statement of a broker or a dealer that in-
cludes information that meets the requirements of
this subsection (and the rules adopted thereunder)
in order to satisfy such requirements.
‘‘(3) WAIVER.—The Commission may, by rule,
permit an investment adviser to omit disclosure re-
quired by this subsection with the knowing written
consent of the client.
‘‘(4) EXCEPTIONS.—This subsection shall not
apply—
‘‘(A) with respect to any purchase or sale
for which the investment adviser, and any per-
son associated or under common control with
the investment adviser, will not receive any por-
tion of the amount charged or deducted in con-
nection with the purchase or sale, and will not
receive any payment from a third party re-
quired to be disclosed under paragraph (1);
‘‘(B) with respect to accounts for which
the person is authorized to exercise investment
discretion; or
‘‘(C) with respect to any account for which
the person is not acting as an investment ad-
viser.
‘‘(5) SPECIAL
RULE.—The provisions of this
subsection shall also apply to any person associated
with an investment adviser effecting transactions for
advisory clients through a broker or dealer with
which the person is associated.
‘‘(d) PERIODIC REPORTS.—
‘‘(1) IN GENERAL.—Each registered investment
adviser shall provide to each client a periodic written
statement in such form and containing such infor-
mation as the Commission shall prescribe by rule
consistent with the public interest, the protection of
investors, and the purposes of this title. Such rule
shall require the disclosure of—
‘‘(A) commissions, fees, or other charges
paid by the client during the period for services
provided by the investment adviser and any per-
son associated or under common control with
the investment adviser;
‘‘(B) compensation directly or indirectly re-
ceived during the period by the investment ad-
viser, or any person associated or under com-
mon control with the investment adviser, from
any third party with respect to any rec-
ommended transaction;
‘‘(C) in the case of a client account for
which the investment adviser provides invest-
ment supervisory services, securities positions
held in the account at the beginning and at the
end of the period; and
‘‘(D) such other matters as the Commis-
sion shall prescribe.
‘‘(2) COMMISSION RULES.—The rule prescribed
by the Commission pursuant to paragraph (1) shall
require that the format and timing of delivery be de-
signed to present the required information in a man-
ner that readily permits clients to compare the costs
charged by the investment adviser with the costs
charged by other advisers. In adopting such rule, the
Commission shall require an investment adviser
whose clients purchase or sell investment products
through persons other than such adviser, or persons
associated or under common control with such ad-
viser, to disclose to its clients that such information
concerning costs charged does not include commis-
sions or other fees paid in connection with such pur-
chases or sales. Such rule shall, to the extent con-
sistent with the protection of investors, permit deliv-
ery of a report of a broker or dealer that includes
information that meets the requirements of this sub-
section (and the rules adopted thereunder) in order
to satisfy such requirements.