June 6, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549
Re: File No. S7-10-02-Exemption for Certain Investment Advisers Operating Through the Internet
Dear Mr. Katz:
The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR®)1 appreciates the opportunity to comment on a rule proposal that would exempt from state registration certain advisers that offer advice through the Internet, even without at least $25 million in assets under management. The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.
The USAC recognizes that use of the Internet in the financial services industry is growing in scope and numbers, with the potential to drive competitive forces, lower the costs of doing business, and ultimately benefit investors. We fully support a uniform regulatory system for investment advisers that promotes a clear and consistent regulatory environment, which, in turn, fosters investor confidence and lowers the cost of capital.
We support efforts to reduce administrative and cost burdens on investment advisers and recognize that registration in multiple states may impose a financial burden on smaller or start-up investment advisers, as they shoulder legal and personnel costs associated with registration in each state. In the past, we have supported positions to exempt multi-state advisers from the prohibition on SEC registration. We believe, however, that registration issues for advisers conducting business over the Internet raise different and unique concerns.
While we recognize that the Internet may offer an increasingly effective way for investors to receive services and engage in the investment process, we believe that important investor safeguards cannot be sacrificed for efficiency. Thus, given that it appears Internet use will only increase and extend to areas not yet contemplated, we believe that ensuring that adequate investor safeguards are in place at each juncture becomes even more important. For these reasons, USAC has reservations about the provisions and approach of this Proposal, as discussed below.
A. Accountability of "Faceless" Business
Under the current regulatory structure, the SEC regulates larger investment advisers (i.e., those with more than $25 million in assets under management), who purportedly have internal compliance procedures and layers of supervision already in place. State securities commissions are vested with the authority to regulate smaller advisers that have a presence in the state, either through a place of business or having more than a de minimus number of clients in that particular state.
Since passage of the National Securities Markets Improvements Act (NSMIA), the states have worked together to create a system to protect their investors from clearly incompetent advisers or those seeking to make money at the expense of investors' misplaced trust. Most states now require investment advisers and their representatives to pass a "competency" exam as a requirement for becoming licensed in that state. In addition, most states conduct routine inspections of investment advisers on a set schedule, and maintain a visible enforcement arm to prosecute offenders. Moreover, states retain the authority to regulate investment adviser representatives, an area delegated to the states under NSMIA. We believe that continued oversight of this group within the development of the Internet advisory business may prove to be beneficial.
This direct sense of accountability fostered by the states comports with AIMR's Code of Ethics and Standards of Practice, to which all AIMR members must adhere. For example, Standard IV (A.1) requires members to have a reasonable and adequate basis for making investment recommendations. Standard IV (B.2) requires members to make a reasonable inquiry into a client's financial situation, investment experience, and investment objectives prior to making any investment recommendations, and to consider the appropriateness and suitability of investment recommendations for each client.
We encourage regulators to require advisers to comply with these Standards that seek to maintain a high level of protections for all investors. How to comply with these Standards while conducting business over the Internet raises questions that we believe have not yet been adequately addressed by regulatory authorities. Accordingly, we are concerned that removing the oversight responsibility over Internet advisers from the states and transferring it to the SEC further distances the sense of accountability and may invite abuses by those not committed to investor protections. Under the current system, states retain some control over licensing and enforcement activities. State registration of new and smaller investment advisers gives investors a place to go should there be a need to lodge a complaint.
B. Business Commitment/Cost of Doing Business
In its Proposal, the SEC notes that multi-state registration may impose a financial hardship on those seeking to launch an Internet advisory business. Requests by advisers who seek to register with the SEC, rather than individual states, appear to focus primarily on the fact that SEC-registrations will produce substantial cost benefits to the adviser. By the SEC's calculation, allowing the proposed exemption would reduce the financial outlay of these advisers from approximately $50,000 to $138.80.
As a threshold issue, we question the basis for the projected $50,000 that is attributable to "complying with the registration and other regulatory requirements" of states. Our understanding is that actual costs are substantially less, particularly given the Investment Adviser Registration Depository, which promotes the processing of multiple state registrations at one time. We encourage a further investigation into the actual costs involved before relying on this figure as part of the cost-benefit analysis.
We do not intend to downplay the financial commitment to launch an Internet advisory business under the current scheme. However, in eliminating a hurdle for certain small businesses, we question whether the Proposal instead may invite abuse by those not fully vested in making the types of commitments that are required of those in the investment advisory business. Thus, we do not believe that cost alone should be a driving force in the SEC's consideration of the appropriate balance to be achieved between investor protections and potential new providers of advice to investors.
The USAC appreciates the opportunity to comment on this Proposal. As noted above, we believe that allowing smaller or start-up Internet advisers to register with the SEC, rather than directly with the states, is premature and risks the erosion of investor confidence and certain investor safeguards. Instead, we encourage the SEC to work with the various states to devise a system that reduces the hardship on these Internet advisers, while ensuring the soundness of these entities, as individuals come to rely more on their services and investment advice. If the SEC decides to assume oversight responsibility for this group of advisers, we encourage it to implement safeguards currently used by the states to monitor the qualifications and business practices in this area. If we can provide additional information or meet to discuss this position, please do not hesitate to contact us.
|/s/ Deborah A. Lamb
| /s/ Linda L. Rittenhouse
Cc: U.S. Advocacy Committee
Patricia D. Walters, Ph.D., CFA - Sr. Vice President, AIMR Professional Standards & Advocacy
Rebecca T. McEnally, Ph.D., CFA - Vice President, AIMR Advocacy
|1||With headquarters in Charlottesville, Virginia, and other regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional organization of 57,000 financial analysts, portfolio managers, and other investment professionals in 107 countries of which 44,800 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 106 affiliated societies and chapters in 29 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which had more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.|