Statement of

David G. Tittsworth
Executive Director
Investment Counsel Association of America, Inc.

SEC Roundtable on Investment Adviser Regulatory Issues

May 23, 2000

The Investment Counsel Association of America, Inc.1 greatly appreciates the opportunity to appear before the Commission today to address several important issues and developments affecting the investment advisory profession.

We commend the Commission for convening this historic roundtable. The amount and pace of change occurring in the investment advisory profession - and in regulations governing the profession - is unprecedented. In light of the mega-trends that are reshaping the profession, the ICAA believes it is both timely and appropriate for the Commission to take a step back and assess the state of investment adviser regulation. In doing so, the Commission faces the basic issue of considering whether the current statutory and regulatory regime is effective and efficient in terms of its primary missions of protecting investors and maintaining fair and orderly markets.

Background and History of Investment Adviser Regulation

Federal regulation of the investment advisory profession commenced with the passage of the Investment Advisers Act in 1940.2 The profession itself was relatively new at the time, having evolved earlier in the century:

The growth in investment counselors prior to the enactment of the Advisers Act was due, in part, to the increase in the number and complexities of securities, and interest among investors in obtaining competent and unbiased guidance regarding the management of their investments. The losses suffered by investors during the depression years caused many public investors to seek continuous supervision and advice concerning their investments. A new breed of "investment counsel" emerged to meet this need for unbiased information and guidance. These new professionals were distinguished from others in the securities field by two fundamental principles. First, these professionals limited their actions to providing unbiased advice and did not engage in any other activity, such as selling securities or acting as broker-dealers, which might directly or indirectly bias their investment judgment. Second, their compensation for this work consisted solely of definite, professional fees, fully disclosed in advance. The name "investment counsel," then not widely in use, was selected to describe both the work based on these two principles and the persons engaged in that work.3

The Advisers Act was enacted following a report from the Commission4 and subsequent hearings by the Congress on investment trusts, investment companies, and investment advisers. It was the last in a series of federal laws designed to eliminate certain abuses in the securities industry, abuses which were found to have contributed to the stock market crash of 1929 and the depression of the 1930's.5 The law was relatively modest in scope. At its core was a requirement that all investment advisers register with the Commission by filing an application containing specific information about the firm and persons who provided investment advice. "Investment adviser" was defined as a person who (1) for compensation (2) is engaged in the business (3) of providing advice to others or issuing reports or analyses regarding securities.6 The current law also contains various anti-fraud provisions that prohibit or limit certain activities, including severe restrictions on transactions where the adviser acts as principal.

The ICAA was formed in 1937. Our organization played an active role in the development of the Advisers Act.7 Since its inception, the ICAA has always prescribed certain principles of conduct for its member firms in the practice of their profession. Over the years, many of these principles have been used by Congress and the Commission as the basis for legislation and regulations governing the conduct of investment advisers.8 Testimony of the ICAA was also cited in the leading case of the U.S. Supreme Court defining the standards of fiduciary conduct applicable to all investment advisers.9 Through the years, our organization has supported appropriate regulation in order to protect investors and promote the integrity of the investment advisory profession.

Assessing the Current Legal and Regulatory Framework

The basic statutory framework of the Advisers Act is relatively simple and straightforward. Certain investment advisers are required to register with the SEC and are subject to regulations issued and enforced by the Commission.10 The statute makes it unlawful for any adviser to "employ any device, scheme, or artifice to defraud any client or prospective client," to engage in "any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client," and to engage in principal trades without receiving the consent of the client.11 The law authorizes the Commission to promulgate rules and regulations that define and prescribe ways to prevent any act, practice, or course of business by an adviser that is "fraudulent, deceptive, or manipulative."12 Consistent with the other major federal securities laws, the Advisers Act largely relies on full and fair disclosure to effectuate its purposes.

Investment advisers also are subject to a strict fiduciary duty. This duty has been upheld by the U.S. Supreme Court13 and reiterated by the Commission in various pronouncements over the years.14 This fiduciary duty is one of the primary distinctions between investment advisers and others in the financial services industry.15 As a fiduciary, "an investment adviser must at all times act in its clients' best interests, and its conduct will be measured against a higher standard of conduct than that used for mere commercial transactions."16 Among obligations that flow from an adviser's fiduciary duty are: (1) the duty to have an adequate, reasonable basis for its investment advice; (2) the duty to obtain best execution for clients' securities transactions where the adviser directs such transactions; (3) the duty to render advice that is suitable to clients' needs, objectives, and financial circumstances; and (4) the duty to make full and fair disclosure to clients of all material facts, particularly regarding potential conflicts of interest.17

Thus, while the basic structure of the legal framework governing investment advisers is relatively uncomplicated, an adviser's legal obligations are rigorous and demanding. Disclosures required of advisers in registering with the SEC alone are without precedent in other regulated professions. Among numerous other matters, advisers are required to disclose the educational and business background of each person who determines general investment advice to clients (as well as executive officers), the adviser's basic fee schedule (including how fees are charged and whether such fees are negotiable), types of investments and methods of securities analysis used, how the adviser reviews client accounts, the adviser's other business activities, material financial arrangements the adviser has with a wide variety of entities, certain referral arrangements, and numerous other disclosures that describe activities that may pose potential conflicts of interest with the adviser's clients, including specific disclosures relating to trading and brokerage practices. Form ADV must be amended promptly to reflect material changes. An adviser is required to provide a brochure containing such information to prospective clients and offer updates at least annually to existing clients.18 The Commission's recent proposed rules to revamp Form ADV are intended to make further improvements in disclosure and, once fully implemented, will result in significantly more - and much more readily available - information about specific advisers and the investment advisory profession than ever before.19

One can only imagine the howls of protests that would result if similar requirements were to be imposed on doctors, lawyers, broker-dealers, accountants, bankers, or other professionals. Requiring other professions to disclose their fees - in and of itself - would generate major lobbying efforts designed to keep the heavy hand of government from bringing down the American system of capitalism! Coupled with the applicable strict fiduciary duty, the legal and regulatory requirements for investment advisers comprise a formidable set of standards.

The ICAA believes the basic framework for the advisory profession has withstood the test of time. The primary purpose of the Advisers Act and related standards and regulations is to protect investors. Apart from a relatively few isolated instances, there has never been a fundamental breakdown in investor protection in the 60 years since the Advisers Act was enacted. Compared to other segments of the financial services industry, the advisory profession has maintained a stellar record - free of systemic abuses and prolific investor complaints.

We also believe that any appropriate legal and regulatory regime for the advisory profession must be flexible enough to address the enormous diversity among advisers. Today, there are about 8,000 SEC-registered advisers. These advisers run the gamut from sole practitioners who may offer a single niche investment approach to a limited number of clients to firms with thousands of employees and offices in various countries that offer a variety of financial services and products to a diverse group of clients. There are obvious differences between how such firms conduct their business. Command-and-control requirements that seek to impose a one-size-fits-all solution for various legal and regulatory issues do not lend themselves to the widely divergent community of advisers. We thus believe that the current structure of the Advisers Act - and its reliance on disclosure and broad anti-fraud authority rather than specific and rigid regulatory requirements - is both appropriate and effective.

To our knowledge, the only major regulatory problem identified during the history of the Advisers Act has been the ability of the Commission to conduct appropriate oversight of the advisory profession. The immense growth in the number of registered investment advisers between 1980 and the mid-1990's outstripped the ability of the SEC to conduct regular inspections. As discussed below, we strongly believe that enactment of the Investment Advisers Supervision Coordination Act in 1996 solved this problem and, in fact, has resulted in a virtual revolution in adviser regulation accompanied by the prolific increase in inspection and enforcement activities by the Commission.

Given the dramatic changes occurring in the advisory profession, however, we believe the current legal and regulatory framework governing the advisory profession will be tested. Growth, consolidations, globalization, and technology are transforming the investment advisory profession and the financial services industry. Record growth in the industry is being fueled in the U.S. by a maturing generation of baby boomers and by wealth created from the longest bull market in history. Mergers and acquisitions are occurring in all segments of the industry. In the ICAA, for example, the number of firms that have merged with other firms or that are owned by other entities - insurance companies, banks, and holding companies - has escalated during the past few years. Globalization has helped to spurn the creation of mega-firms that are seeking to provide the full range of financial services to individuals and institutions around the world. And technology continues to transform the manner in and the price at which financial services are delivered, greatly increasing competition among all service providers and introducing new waves of increasingly diverse financial products and services. These and other developments are having a profound impact and may present significant challenges to the policy makers, regulators, and the advisory profession.

Self-Regulatory Organizations and the Advisory Profession

In 1989,20 the Commission transmitted a legislative proposal to the Congress to provide for the establishment of one or more self-regulatory organizations for registered investment advisers.21 In so doing, the Commission stated that "self-regulation of investment advisers under the Advisers Act through the creation of one or more self-regulatory organizations would permit the Commission and the investment adviser industry to achieve important regulatory objectives, and would provide increased investor protection at private, rather than public, cost."22

The impetus for the proposal was the tremendous growth of registered investment advisers - and corresponding increases in the number of advisory clients and assets under management - and the lack of adequate Commission resources to conduct effective oversight of the profession.23 The ICAA supported the goal of more effective oversight of the advisory profession, but strongly opposed the SEC's legislative proposal:

Consistent with its purpose and its past, the ICAA supports the SEC in its efforts to better regulate a growing and increasingly diverse industry. We recognize, as Senator Dodd says, that "there are thousands of individuals and firms that hold themselves out to be financial planners that are not registered with the SEC as investment advisers. . . ." We suspect that many of these advisers, who have not seen fit to comply with the critical first step of registration, pose a far greater risk of non-compliance than do the already registered advisers. Accordingly, we support increased effort by the SEC and the states to bring those unregistered advisers under regulation.

We also support the SEC's goal of improved inspection of investment advisers. The growing number of investment advisers and the increasingly complex and diverse nature of the industry require that improvement. It will help achieve the standards and the quality that the ICAA has always sought.

However, we believe that the goal is best achieved by strengthening the enforcement of existing SEC and state regulation, not by the addition of a new layer of self-regulation. We believe that the SEC, with its knowledge of the industry and its demonstrated capability is the appropriate body to do the job. Knowing the industry, we believe that increased scrutiny should come from an SEC staff that understands it, and has the experience necessary to set standards, administer them, and enforce them.

Self-regulation would introduce a host of unexplored problems. Unlike broker-dealers, advisers rarely transact business among themselves. Nor is there a common thread among advisers associated with broker-dealers, advisers who sell product, financial planners, and investment counsel. There is, then, a significant question whether all of these very different types of advisers should be forced into a single self-regulatory organization and whether, if they are, that organization could fairly inspect and regulate them. There is also a significant economic question whether groups of advisers with common business practices can support separate self-regulatory bodies. And even if several separate SRO's can be supported, there remains the very difficult question of how to assure fairness and uniformity of inspection and regulation among them.

In our view, the problem is not one requiring a change of structure; rather, it is how to fund better inspection. We do not see any need to make a broad transfer of the SEC's regulatory authority to solve that problem. The very same increased fees that would fund self-regulation will fund the needed additions to the SEC's staff. . . . The increased expense that advisers would necessarily incur to fund an experiment in self-regulation can instead be used by the SEC to achieve the level of inspection that it seeks and that we support.24

The Commission's proposal to authorize the formation of self-regulatory organizations for the investment advisory profession died quickly. However, we remain concerned about renewed attempts to authorize the formation of SROs for the advisory profession.

Notably, NASD Regulation, Inc. (NASDR) has maintained a steady drumbeat calling for additional regulation of investment advisers.25 Three years ago, for example, NASDR sent an extensive memorandum to SEC staff.26 The memo states that the financial services industry is undergoing significant change, that services provided by brokers and advisers often bear close resemblance to each other, and that the "lack of clear and current regulatory standards will encourage firms to adopt subtle modifications to their activities in order to avoid the important requirements of the Securities Exchange Act of 1934" - the primary law regulating broker-dealers. The clear implication of the letter and accompanying memorandum is that, at a minimum, certain investment adviser practices should be regulated by NASDR. In September 1998, the chairman of NASD stated that his organization was collecting information to make a case for NASD regulation of investment adviser practices.27 And last summer, NASDR's president denied that NASDR is in the market to become an SRO for the advisory profession, while expressing "concern" that brokers are fleeing their side of the securities business in order to become investment advisers, who she claimed are subject to "less regulation."28

We are also troubled by the fact that NASDR has been selected by the SEC and the North American Securities Administrators Association (NASAA) to administer the proposed Investment Adviser Registration Depository (IARD). We have consistently expressed our concerns about NASDR's involvement in this momentous undertaking.29 We truly appreciate the repeated assurances by the Commission that NASDR's role will be limited to a contract operator of the system.30 Nonetheless, we remain extremely wary of the fact that - by virtue of its central role in the IARD - NASDR will have direct access to and a certain amount of control over every aspect of the most comprehensive database on investment advisers ever created. We also have serious concerns that the IARD will in fact be a mere extension of the CRD that NASDR operates for broker-dealer and agent registration instead of a separate SEC-authorized system for investment advisers.

We continue to oppose the creation of a self-regulatory organization for the advisory profession. An investment adviser SRO is unwarranted and would impose a new layer of cost and bureaucracy on the profession. And the reasons that persuaded Congress to authorize the creation of an SRO for broker-dealers - the high level of interconnectivity between broker-dealers, the number of documented cases involving investor fraud, conflicts of interest, and overly aggressive sales practices, as well as the highly technical issues related to settlement, execution, and reconciliation involving broker-dealer transactions - simply do not exist in the investment advisory profession. NASDR seems to have its hands full in dealing with problems that exist at the core of the broker-dealer industry. Instead of worrying about extending its reach to another industry, it would do well to stick to its core mission of regulating the brokerage industry and to coordinate with the SEC and other regulators in addressing novel issues that may be created by changes occurring in financial services.

At the very minimum, it is certainly reasonable to suggest that the new regulatory regime created by the Coordination Act should be given more time before looking to Congress to consider a drastically different regulatory framework. Given the changes that have occurred in adviser regulation during the last three years, no one can now seriously argue that an adviser SRO is warranted because of the SEC's lax oversight of the industry.

The Investment Adviser Supervision Coordination Act

Historically, investment advisers have been subject to both federal regulation and to varying state laws and regulations. The ICAA views the scheme of dual federal and state regulation as unnecessary, burdensome, and ineffective. Many of our member firms that transact business in a large number of states have found that compliance with the wide array of state laws and regulations has been difficult and time-consuming without providing any concomitant increase in investor protection or effective oversight of the advisory profession. We therefore strongly supported efforts to develop legislation in order to eliminate duplicative and inconsistent state regulation of the profession.

Thanks in large measure to the efforts and leadership of Senators Gramm and Dodd, the Investment Advisers Supervision Coordination Act31 was enacted in 1996. The Coordination Act represents the greatest change in the laws authorizing regulation of investment advisers since passage of the Investment Advisers Act in 1940. The primary dilemma Congress faced in revamping the Advisers Act was how to deal with a rapidly growing profession.

[T]he bill creates a clear division of labor between the states and the federal government for supervision of investment advisers. Currently, while most investment advisers are nominally supervised by the SEC and most states, both are overwhelmed by the size of the task, with more than 22,000 investment advisers currently registered with the SEC. The reality has been that while investment advisers may boast of their registration with the SEC, the SEC has been unable to conduct active supervision of more than a fraction of the advisers registered with the Commission. State securities regulators have similarly found their resources spread thin. . . .

Today there are approximately 22,500 investment advisers registered with the Securities and Exchange Commission. The number of registered investment advisers has increased by over 500% since 1980, far outstripping the growth in the Commission's examination resources. As a result, smaller investment advisers are now examined, on average, once every 44 years - amounting to virtually no regulation at all. . . .

Recognizing the limited resources of both the Commission and the states, the Committee believes that eliminating overlapping regulatory responsibilities will allow the regulators to make the best use of their scarce resources to protect clients of investment advisers. The states should play an important and logical role in regulating small investment advisers whose activities are likely to be concentrated in their home state. Larger advisers, with national businesses, should be registered with the Commission and be subject to national rules.32

The Coordination Act was designed to enhance investor protection while reducing unnecessary, overlapping, and inconsistent regulation. As the name of the law implies, Congress sought to create a new and improved regulatory model that coordinates regulation of investment advisory firms and their employees by allocating responsibility for larger firms to the SEC and allocating responsibility for smaller firms and individual financial planners to the states. This overriding legislative intent was well summarized in the Commission's proposed rules to implement the law:

The reallocation of regulatory responsibilities grew out of Congress' concern that the Commission's resources are inadequate to supervise the activities of the growing number of investment advisers registered with the Commission, many of which are small, locally operated, financial planning firms. Congress concluded that if the overlapping regulatory responsibilities of the Commission and the states were divided by making the states primarily responsible for smaller advisory firms and the Commission primarily responsible for larger firms, the regulatory resources of the Commission and the states could be put to better, more efficient use.

Congress also was concerned with the cost imposed on investment advisers and their clients by overlapping, and in some cases, duplicative, regulation. In addition to the Commission, forty-six states regulate the activities of investment advisers under state investment adviser statutes. States generally have asserted jurisdiction over investment advisers that "transact business" in their states. Consequently, many large advisers operating nationally have been subject to the differing laws of many states. Compliance with differing state laws had imposed significant regulatory burdens on these large advisers. Congress intended to reduce these burdens by subjecting large advisers to a single regulatory program administered by the Commission.33

The Coordination Act prohibits an investment adviser from registering with the SEC unless it has more than $25 million in assets under management34 or is an adviser to a registered investment company or fits within another exemption. To effectuate the Act's central purpose of reducing regulatory redundancy, section 203A(b)(1) of the Advisers Act provides that "[n]o law of any State or political subdivision thereof requiring the registration, licensing, or qualification as an investment adviser or a supervised person of an investment adviser shall apply . . ." to any federally registered adviser or supervised person thereof. This preemption of state authority over federally registered advisers is the key component in the allocation of regulatory responsibility between the SEC and the states.

The Coordination Act carves out only four narrow exceptions for state authority over federally registered advisers and their employees:

  1. Enforcement actions for fraud and deceit. The Act preserves state authority to investigate and bring enforcement actions "with respect to fraud or deceit against an investment adviser or person associated with an investment adviser."35

  2. Notice filings. The Act preserves state authority to require "the filing of any documents filed with the Commission pursuant to the securities laws solely for notice purposes, together with a consent to service of process and any required fee."36

  3. Fees. The Act preserves the ability of states to impose and collect "filing, registration, or licensing fees . . ."37

  4. Investment adviser representatives who have a place of business in the state. The Act allows states to "license, register, or otherwise qualify an investment adviser representative who has a place of business in the state."38

The ICAA strongly supported enactment of the Coordination Act. The patchwork of inconsistent and varying state provisions that existed prior to the Coordination Act created unnecessary regulatory costs, burdens, and inefficiencies without enhancing investor protection. The Coordination Act's allocation of regulatory responsibility between the SEC and the states enhances investor protection, provides for more efficient use of limited regulatory resources, and reduces burdensome and unnecessary regulatory costs.

Coordination Act Scorecard: Eliminating Duplicative State Regulation

The Coordination Act represents a grand experiment in new federalism. By and large, we believe the results have been successful in achieving the objectives of the legislation.

The law's stated goal of eliminating duplicative regulation of larger advisers by the states has, with a few notable exceptions, worked well. Since passage of the Coordination Act, we have communicated regularly with NASAA and various states in an effort to achieve uniform implementation of the law and accompanying regulations. As early as November 20, 1997, we reported to NASAA that "a majority of states appear to be complying with both the spirit and the letter of the Coordination Act," while noting that the actions of a minority of states "may threaten these positive efforts."39 Our primary concerns have focused on laws or regulations in a few states that run counter to the provisions and purposes of the Coordination Act, including those that: (1) fail to recognize the national de minimis provision that exempts from state regulation advisers with five or fewer clients in a state; (2) require the filing of documents and/or payment of fees by investment adviser representatives who do not have a place of business in the state, (3) impose an additional layer of regulation on federally registered investment advisers and their supervised persons;40 (4) require the filing of documents and other materials that are not required to be filed with the SEC, and (5) otherwise interfere with uniformity.

We sincerely appreciate the continuing efforts of NASAA and the vast majority of states to achieve uniform implementation of the Coordination Act. Nonetheless, it is extremely regrettable that a few states continue to thwart this goal.41 Unless and until all states have implemented laws and regulations that are consistent with the spirit and letter of the Coordination Act, one of the major purposes of the law will not be fully realized.

We have taken steps to address this problem through legislation.42 We also urge the Commission to assume a more active role in urging recalcitrant states to comply with the mandates of federal law. We believe state regulators and legislators will be open to receiving information from the Commission regarding the purposes and provisions of the Coordination Act. We hope the Commission will take steps to communicate more actively with states that have implemented or are considering laws and regulations that are inconsistent with the Coordination Act.

Coordination Act Scorecard: The Revolution in SEC Adviser Regulation

On the other hand, the record is crystal clear that the SEC's regulatory, inspection, and enforcement activities with respect to investment advisers have increased dramatically since implementation of the Coordination Act. Collectively, these efforts represent a revolution in the treatment of investment advisers by the SEC:

In conclusion, the record is indisputable that the SEC has exceeded expectations in beefing up its programs governing the investment adviser industry since enactment of the Coordination Act. Today, investment advisers are subject to an increasingly complex regulatory environment and are subject to rigorous oversight by the Commission.

Definition of Investment Adviser

The unprecedented changes occurring in the financial services industry have, in some cases, resulted in the blurring of lines that traditionally have defined the respective roles, services, and characteristics of investment advisers, broker-dealers, banks, financial planners, and other entities who provide some type of "advice." This, in turn, presents fundamental questions about the scope of coverage of the Advisers Act. What is an investment adviser? Under what circumstances should an entity that provides investment advice be excluded from the definition of "investment adviser" and, by extension, the legal and regulatory requirements governing investment advisers? Considering that more and more non-traditional entities are migrating toward various types of advisory services, we believe that issues involving the scope of the Advisers Act are the most important issues facing policy makers, the Commission, and the investment advisory profession.

In considering the various exceptions to the definition of investment adviser set forth in the Advisers Act, it seems reasonable to assess whether there is in fact a legitimate basis for each exception. In doing so, the fundamental question should be whether an entity is providing investment supervisory services. A consistent, functional test should be employed. From an investor's perspective, if it looks like an investment adviser and acts like an investment adviser, then it should be subject to the same duties and obligations as an investment adviser.

The Broker-Dealer Exception

Section 202(a)(11) of the Advisers Act defines "investment adviser" as "any person who, for compensation, engages in the business of advising others, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities." The law also sets forth several exceptions to the definition of investment adviser, including "any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor."55

Last year, the Commission issued a proposed rule that addresses the application of the Advisers Act to broker-dealers who offer their customers full service brokerage, including advice, for an asset-based fee instead of or in addition to traditional commissions, mark-ups, and mark-downs.56 The ICAA believes the proposed rule involves extremely important issues that require careful and serious deliberation.

We certainly believe a rule is needed. It is clearly evident that broker-dealers are migrating toward asset-based fees. One of the reasons for this trend is increased competition in execution services, primarily from the proliferation of electronic communications networks (ECNs) and other Internet-based entities that offer execution services at a fraction of traditional full service brokerage costs. As commissions are being squeezed - and as the number of investors and assets continues to grow - many full service brokers have begun to diversify their products and services by offering on-line trading, asset-based fees, various advisory programs, and other additions to their traditional programs in an effort to respond to competitive forces and to capitalize on the major influx of assets from a new generation of investors.

As noted in the proposed rule, these new brokerage programs involve the receipt by broker-dealers of "special compensation."57 Up until the proposed rule was released, receipt of special compensation has meant that a broker-dealer could not claim the exception in the Advisers Act. The fact that fee-based brokerage programs have proliferated contrary to specific provisions of the Advisers Act is clearly an undesirable regulatory result. There is an obvious need for the Commission to provide explicit guidance to broker-dealers, investment advisers and, most importantly, to investors, as to where the distinguishing lines between brokerage and advisory services will be drawn and how they will be enforced in the future.

The need for explicit guidance is even more compelling when considering the growth of high profile marketing touting the virtues of broker-sponsored fee-based programs and advisory services. During the past several months alone, full service brokers have spent millions of dollars on advertising campaigns designed to attract consumers to their new programs, including commercials that emphasize advisory services and the merits of asset-based compensation.58 Given the prominence of these efforts, it is incumbent upon the Commission to take prompt and decisive action that will benefit investors by helping them understand the types of services that are available and the differences between brokerage and advisory services.

Despite dramatic changes occurring in financial services, we believe that fundamental differences still exist between most advisers and most broker-dealers. Broker-dealers execute trades while advisers do not. Broker-dealers typically have custody of client assets while most advisers do not. Broker-dealers generally do not exercise discretionary authority over client accounts, while most SEC-registered investment advisers do. Broker-dealers traditionally have employed sales forces compensated primarily by commissions while most advisers have not. In street parlance, brokers are the "sell" side while advisers are the "buy" side. Anyone who knows the industry understands that there is a wide cultural gap separating most advisers and most brokers.

It is understandable that many full service brokers are anxious for the Commission to adopt the proposed rule in order to ensure that their fee-based accounts are not "re-designated" as advisory accounts.59 Stated differently, the brokerage community would not have urged the Commission to issue the proposed rule were it not for the fact that there are substantial differences in the manner in which investment advisers and broker-dealers are regulated.60

There are at least four aspects of the Advisers Act and accompanying laws governing the conduct of investment advisers that are significantly different from those applicable to broker-dealers. First, advisers owe a strict fiduciary duty to each of their clients that extends well beyond any similar legal obligation of broker-dealers. Second, section 206(3) of the Advisers Act prohibits an investment adviser from selling or purchasing any security to or from a client when acting as a principal for its own account, unless each such transaction is disclosed in writing to the client and the client consents to it.61 Broker-dealers typically have an existing inventory of securities and thus have a natural incentive to buy and sell such securities to and from clients on a principal basis. Third, as outlined above, the Advisers Act requires investment advisers to make full and fair disclosures that differ substantially in timing and content from any disclosures required of broker-dealers. Finally, the Advisers Act flatly prohibits testimonials and past specific recommendations in advertising. Brokers frequently employ testimonials in advertising and such use appears to be increasing.

Our comment letter details various concerns we have with the proposed rule.62 While we agree with the Commission that a functional test that focuses on the nature of services provided - rather than the form of the broker-dealer's compensation - is appropriate in determining whether a brokerage account falls within the Advisers Act, we believe the Commission's functional analysis does not go far enough. We believe that, at a minimum, the test proposed by the Commission should be modified as follows:

There is broad agreement on these points from a wide cross-section of interests, including consumer groups,63 state regulators,64 financial planners,65 and others. We trust the Commission will carefully consider these views as it seeks to assess the long-term ramifications of this and other rules that deal with the distinctions between advisers and broker-dealers.

It is true that the broker-dealer exception was enacted in 1940 and that dramatic changes have occurred during the last 60 years. Obviously, until Congress chooses to amend it, the Commission is bound to uphold the Advisers Act. More fundamentally, however, we urge the Commission to step back and ask itself a few basic questions that we believe can and should help guide consideration of these important issues. The first is whether there is - or should be - a distinction between advisers and brokers. If one were writing on a clean slate today, would it be appropriate to make a distinction between entities that effect securities transactions and those who provide investment supervisory services? We believe the clear answer is "yes." The next basic question is what type of legal and regulatory framework should govern investment advisers. We believe the essential structure of the Advisers Act, and regulations and decisions thereunder, is both appropriate and effective in terms of protecting investors from potential abuses and conflicts of interests. While one can argue about the details, no one can seriously dispute that the basic protections afforded by the Advisers Act serve investors and the advisory profession well. If the Commission agrees there are fundamental distinctions between advisers and broker-dealers, we believe the outcome of the pending rule will fall into place.66 Issuing a rule that blurs these distinctions will only serve to confuse and confound investors.

Finally, we believe the Commission should be mindful of the cumulative effect of the broker-dealer exception rule and the anticipated rule on principal transactions under the Advisers Act. As noted above, one of the primary differences between broker-dealers and investment advisers is the restriction on principal trading that applies to investment advisers.67 No comparable provision exists in the Exchange Act or other laws or regulations governing broker-dealers. Congress included section 206(3) in the original Advisers Act due to its concerns about potential overreaching by advisers at the expense of their clients. As such, section 206(3) represents one of the major differences between advisers and broker-dealers and the laws and regulations governing each.

The broker-dealer industry clearly supports efforts to revise the current principal trading prohibition in the Advisers Act. For example, the broker-dealer industry proposed legislative changes to Congress last year that, among other things, would amend section 206(3) of the Advisers Act to allow principal trades and agency cross transactions by an investment adviser under much broader circumstances than the law currently allows.

We believe the Commission should exercise extreme caution in considering changes to the principal trading restrictions under section 206(3) of the Advisers Act. We certainly are aware that Chairman Levitt indicated last year that "this is the right time to consider whether it might be appropriate to provide an exemption from the restrictions on principal trading."68 The ICAA obviously cannot anticipate what may be proposed in this area and we will review any such rulemaking carefully, if and when it is issued. However, the possibility of the SEC granting a new exemption under section 206(3), particularly when combined with the proposed rule that gives broker-dealers increased latitude to avoid the protections of the Advisers Act, raises concerns of a "slippery slope" whereby the statutory distinctions between brokerage activities and advisory services are eroded - or even eliminated - by a series of rulings or actions by the Commission.

The ICAA commends the Commission for considering these important issues. The trend toward asset-based fees for advisory services by broker-dealers clearly conflicts with existing statutory provisions and interpretations thereof and this conflict needs to be addressed and resolved. While we applaud those in the brokerage industry who now have decided to employ a fee-based approach (an approach that has been in use by investment counsel firms for several decades), we believe the interests of investors and of the regulated community will best be served by a functional test that focuses on the nature of services provided and/or marketed, while recognizing and preserving the fundamental differences between brokerage activities and advisory services.

The Bank Exception

Banks also enjoy an exception under the Advisers Act.69 Without belaboring the point, the ICAA has consistently opposed this exemption. The reason was summarized in a 1972 letter to the Commission filed by the ICAA opposing a request by Chase Investors Management Corporation (CIMC) for an order declaring it to be a person not within the definition of investment adviser under Section 202(a) of the Advisers Act:70

The thrust of the . . . memorandum in support of the application is that CIMC would be subject to regulation under the National Banking Act and the Bank Holding Company Act, by the Comptroller of the Currency and by the Federal Reserve Board. However, the main interest of those federal authorities is in preventing an affiliate of a bank from engaging in unsound, fraudulent or other practices which would be inimical to the soundness and reputation of the bank and harmful to the depositors of the bank and, with respect to bank holding companies, that their activities should be conducted in a manner consistent with the public interest. These provisions, while laudatory in scope and purpose, fail to provide the specific investor protection afforded by the [Advisers] Act and SEC regulation thereunder. The fact that certain types of investment advisory services might possibly be offered by the bank, or a subsidiary of the bank, or a holding company itself free of SEC regulation under the [Advisers] Act is not a satisfactory reason for granting the exemption requested by CIMC. A firm which is organized and operates in the same manner as other registered investment advisory firms should be required to observe the same rules.71

We believe the bank exception in the Advisers Act has more to do with jurisdictional wrangling - between various federal regulatory banking and securities regulators as well as various Congressional committees - than sound public policy. If policy makers are truly concerned about appropriate and functional regulation of various entities in the financial services industry, it is clear that the banking exception in the Advisers Act should be amended to provide that banks that act as investment advisers will be subject to the same laws and regulations governing other investment advisers. This concept was clearly and consistently articulated by Chairman Levitt during debate on financial services modernization legislation:

The statutes that form the foundation for both banking and securities regulation remain based on the 60-year old assumption that the Glass-Steagall Act prohibits banks from engaging in most securities activities. Although that assumption is outmoded, the laws continue to exempt banks from the requirements applicable to brokers, dealers, and investment advisers even though banks conduct these activities. This means that a bank's securities activities are subject to the bank regulatory scheme with its primary focus on the safety and soundness of the bank, rather than the securities regulatory scheme, focused on disclosure, investor protection, and the maintenance of fair and orderly markets.

As the Commission has urged for more than a decade, a system of functional regulation would eliminate the inconsistencies between regulation of securities activities of banks and securities activities of Commission-regulated entities, providing enhanced investor protection.

.     .     .

To assure adequate investor protection, the Commission believes that bank securities activities must be brought within the securities regulatory framework. Such an approach would ensure that the securities activities of all market participants - regardless of the structure in which they are conducted - would be subject to a single set of standards, consistently applied by one expert regulator.72

As part of the Gramm-Leach-Bliley Act73 that was enacted last year after years of debate, Congress amended section 202(a)(11)(A) of the Advisers Act to provide that the term "investment adviser" will include a bank or bank holding company that "serves or acts as an investment adviser to a registered investment company. . ."74 While the ICAA believes this provision is a step forward in attaining appropriate functional regulation, it certainly begs the question of why banks that act as an investment adviser in other cases should not also be subject to the protections and regulations of the Advisers Act.

The Accountant Exception

The Advisers Act also contains an exception from the definition of "investment adviser" for "any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession"75 In determining whether this exception is available depends upon the facts and circumstances of each case. The SEC staff has identified three major factors to be considered: (1) most importantly, whether the professional holds himself out publicly as an investment adviser or financial planner (by means such as general advertising, mailings, letterheads or business cards, telephone listings, etc.); (2) whether the investment advice given is in connection with and reasonably related to the professional services rendered; and (3) whether the professional's fee structure for investment advisory services is different from the schedule for the professional services.76 The SEC staff also has permitted accounting firms, subject to specified conditions, to establish and register only an affiliated entity under the Advisers Act (rather than the accounting firm itself) to supervise the rendering of general investment consulting and tax planning services by partners or other professionals of the accounting firm.77

As with other segments of the financial services industry, an increasing number of accountants appear to be migrating toward the investment advisory profession.78 While accountants traditionally gave investment advice to clients only when asked and only on an informal basis, more accountants are now approaching their clients about their investments and providing various investment tools.

Consistent with the views expressed above, we believe the Commission should employ a functional test in determining whether accountants - and other professionals - should be regulated under the Advisers Act. An accountant should be subject to provisions of the Advisers Act if the advisory services rendered are more than solely incidental, if the accountant holds itself out to be an investment adviser, if the advisory services are not reasonably related to or are not provided in connection with accounting services, or if the accountant employs a separate compensation scheme in connection with the advisory services it provides.

The Publishers Exception

The Advisers Act also contains an exception from the definition of "investment adviser" for "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation."79 Particularly due to the proliferation of Internet-based activities that relate to investment advice, we believe this exception presents several important and challenging issues for the Commission and policy makers.

The leading case interpreting the publishers exception is Lowe v. Securities and Exchange Commission.80 In Lowe, the U.S. Supreme Court traced the history of the Advisers Act, noting that:

The legislative history plainly demonstrates that Congress was primarily interested in regulating the business of rendering personalized investment advice, including publishing activities that are a normal incident thereto. On the other hand, Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of nonpersonalized publishing activities.81

In concluding that Lowe was an investment adviser and not entitled to the publishers exception, the Court focused on the meaning of the words "bona fide"82 and "general and regular circulation"83 in the statute. But we believe the most important aspect of the decision that deserves a serious review is the Court's reliance on its finding that the scope of the Advisers Act revolves around the concept of "personalized" advice:

The [Advisers] Act was designed to apply to those persons engaged in the investment advisory profession - those that provide personalized advice attuned to the client's concerns, whether by written or verbal communication. The mere fact that a publication contains advice and comment about specific securities does not give it the personalized character that identifies a professional investment adviser. Thus, petitioners' publications do not fit within the central purpose of the Act because they do not offer individualized advice attuned to any specific portfolio or to any client's particular needs. On the contrary, they circulate for sale to the public at large in a free, open market - a public forum in which typically anyone may express his views.84

The pending case brought by the Commission against "Tokyo Joe"85 illustrates the conundrum of whether the holding in Lowe is appropriate in today's environment. According to the Commission`s memorandum in opposition to the defendant's motion to dismiss:

Since July 1998, the Defendants have operated a website on the Internet called "Tokyo Joe's." That site is a source of securities market information and investment advice concerning individual stocks and day trading techniques. Portions of the website are accessible to the public for free, including sections that purport to display Park's past trading performance and sections that purport to be testimonials from satisfied subscribers to the website's "members only" sections. For a monthly fee, ranging up to $200 per month, members of the public are invited to join S.A. and gain access to these "members only" sections of the website. In these sections, paying members receive Park's investment advice and stock picks before they are posted to the public portions of the website. In addition, these paying clients receive Park's e-mails containing additional investment advice and stock picks throughout the day - again, ahead of the general public. Finally, members have access to a "chatroom" on the website in which Park dispenses real time investment advice in a dialogue with his clients.

Citing Lowe, defendants have argued that they cannot be deemed investment advisers within the meaning of the Advisers Act "because they do not offer personalized advice" and that Park's "expression of ideas and opinions articulated over the Internet is not investment advice." They also argue that defendants do not owe a fiduciary duty to their subscribers and "are not otherwise in a relationship of `trust and confidence' with them."86

While the district court this month refused to grant the defendant's motion to dismiss, the case represents a few of the important issues facing the Commission and the advisory profession. The advent of cyberspace has ushered in a new era where an increasing number of entities are offering a wide variety of "advisory" services for compensation. While we are mindful of important First Amendment considerations, we also believe that, at some point, these types of services may cross the line of free speech and enter investment adviser territory. In particular, we strongly believe that the holding in Lowe - and its reliance on personalized advisory services - needs to be reexamined in light of these significant developments.

As demonstrated by the Tokyo Joe case, the Commission obviously is aware of

the fact that investors have new options in how they receive information and, in some cases, advice regarding securities. We believe there is an explosion in the provision of "advisory" services via the Internet. Because of the rapidly increasing availability of electronic platforms and the enormous capacity to communicate with millions of investors via such services, we urge the Commission to continue its efforts to ensure that entities that provide investment advice for compensation are appropriately regulated. As we have emphasized above, a functional test should be employed: if an entity is in the business of providing investment advice regarding securities for compensation - whether such advice is rendered in person or via a website - the entity should be subject to the provisions of the Advisers Act that have served investors well for 60 years.


In closing, we wish to commend Paul Roye for the central role he has played in convening today's roundtable. Without his leadership, we know that this important undertaking would not have been possible. We are certainly mindful of other important issues facing Mr. Roye and the staff of the Division of Investment Management and greatly appreciate their willingness to add this roundtable to their daunting list of tasks.

The ICAA stands ready to assist the Commission as it seeks to address the many important issues raised today. We look forward to continuing our dialogue with you on these and other matters affecting the investment advisory profession and truly appreciate the opportunity to participate in today's historic discussion.

May 23, 2000

1 The ICAA is a not-for-profit trade association that exclusively represents the interests of federally registered investment advisory firms. Founded in 1937, the ICAA's membership today is comprised of more than 250 firms that collectively manage in excess of $2 trillion for a wide variety of institutional and individual clients. For more information, please see
2 Public Law No. 76-768, 54 Stat. 847.
3 "2000 and Beyond: SEC Priorities for the Investment Adviser Profession," speech by Paul F. Roye, Director, Division of Investment Management, U.S. Securities and Exchange Commission before the ICAA (April 6, 2000).
4 U.S. Securities and Exchange Commission, Investment Trusts and Investment Companies (1939).
5 SEC v. Capital Gains Research Bureau, 375 U.S. 180, at 186 (1963).
6 Section 202(a)(11), Investment Advisers Act of 1940. Importantly, the definition of investment adviser includes various exemptions from the law's requirements, including banks and broker-dealers.
7 See A Brief History of the Investment Counsel Association of America, at pp. 33-39 (1982).
8 Following are the current ICAA Standards of Practice, which are endorsed by all member firms of the ICAA: I. Professional Responsibility. An investment adviser is a fiduciary and has the responsibility to render professional, continuous, and unbiased investment advice oriented to the investment goals of each client. II. Professional Qualifications. To enable a member firm to serve its clientele effectively, its investment and managerial personnel should be individuals of experience, ability, and integrity. III. Financial Responsibility. A member firm should maintain capital and reserves adequate to provide the services for which it was retained. IV. Compensation for Services. Compensation of a member firm for investment advisory services should consist exclusively of direct charges to clients for services rendered and should not be contingent upon the number or value of transactions executed. V. Promotional Activities. The content in written and oral statements made by a member firm soliciting new clients should be consistent with the investment adviser's professional responsibility. VI. Confidential Relationship. Information concerning the identity of security holdings and financial circumstances of clients is confidential.
9 Supra, fn. 5.
10 See Sections 203 and 209, Investment Advisers Act of 1940.
11 Section 206(1), (2), and (3), Investment Advisers Act of 1940.
12 Section 206(4), Investment Advisers Act of 1940. The Commission also is given authority to exempt persons or transactions from the Advisers Act or regulations thereunder, "to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title." Section 206A, Investment Advisers Act of 1940.
13 Supra, fn. 5.
14 See, e.g., In re: Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948). "The record discloses that registrant's clients have implicit trust and confidence in her. They rely on her for investment advice and consistently follow her recommendations as to the purchase and sale of securities. Registrant herself testified that her clients follow her advice `in almost every instance.' This reliance and repose of trust and confidence, of course, stem from the relationship created by registrant's position as an investment adviser. The very function of furnishing investment counsel on a fee basis - learning the personal and intimate details of the financial affairs of clients and making recommendations as to purchases and sales of securities - cultivates a confidential and intimate relationship and imposes a duty upon the registrant to act in the best interests of her clients and to make only recommendations as will best serve such interests. In brief, it is her duty to act in behalf of her clients. Under these circumstances, as registrant concedes, she is a fiduciary; she has asked for and received the highest degree of trust and confidence on the representation that she will act in the best interests of her clients."
15 Supra, fn. 3, at p. 4.
16 Lemke & Lins, Regulation of Investment Advisers, at 2-34 (1999).
17 Id., at 2-35.
18 Advisers Act Rule 204-3.
19 In announcing the proposed rules, Chairman Levitt stated that the proposals "further the Commission's belief in full and fair disclosure as the bedrock upon which our securities laws are based." Opening Statement of Chairman Arthur Levitt, Amendments to Form ADV (April 5, 2000).
20 Questions relating to the establishment of a self-regulatory organization for the investment advisory profession were raised well before 1989. For example, on June 11, 1962, the ICAA responded to a series of questions from Milton H. Cohen, Director of the SEC's Special Study of the Securities Markets, which included a question as to whether the ICAA would consider it desirable in the public interest for the ICAA to "obtain official status as an industry self-governing body."
21 See Letter from David S. Ruder, Chairman, U.S. Securities and Exchange Commission to The Honorable Dan Quayle, President of the U.S. Senate. (June 19, 1989).
22 Id..
23 In 1980, there were 5,600 SEC-registered investment advisers. By 1990, the number had grown to more than 17,000. When the Coordination Act was enacted in 1996, the number of SEC-registered investment advisers was more than 22,500.
24 Letter from Charles E. Haldeman, Jr., President, Investment Counsel Association of America, Inc. to Senators Christopher J. Dodd and John Heinz (September 22, 1989).
25 The NASD's interest in regulating investment advisers dates back at least to 1986 when it announced, during the SEC's May 7 roundtable on the securities industry, its support for a proposal for NASD to serve as an SRO of advisers that were members of NASD or affiliated with NASD members. As reported in the May 8, 1986 Wall Street Journal: "NASD leaders surprised a meeting of Securities and Exchange Commission officials and financial industry representatives when they disclosed that the NASD board had unanimously approved an experiment in investment adviser regulation."
26 Letter from R. Clark Hooper, Senior Vice President, NASDR to Barry P. Barbash, Director, SEC Division of Investment Management and Dr. Richard R. Lindsey, Director, SEC Division of Market Regulation, and accompanying NASDR memorandum from Thomas M. Selman, Joseph E. Price, and Lawrence N. Kosciulek to R. Clark Hooper (December 8, 1997)
27 "Top NASD Officials Call For Adviser Regulation," IA Week (October 19, 1998). The article cites a speech to the California Association of Independent Broker-Dealers by Frank Zarb, NASD Chairman, where he said that NASD is collecting information that will enable it to make a case to the SEC that the self-regulatory organization should have jurisdiction over investment advisers and includes the following quotation from Mr. Zarb: "I've had a conversation with [SEC Chairman] Arthur Levitt about the subject specifically, and we agreed that we are going to take a look at what kind of model we can put together where we can be delegated authority to . . . have some responsible reach over that part of the [investment] community."
28 "Broker Exodus," IA Week (May 24, 1999).
29 See, e.g., Letter from ICAA Executive David G. Tittsworth to Barry P. Barbash, Director, SEC Division of Investment Management (September 23, 1998) (available on the ICAA web site,, under "Comments and Statements").
30 See Opening Statement of Chairman Arthur Levitt, Amendments to Form ADV (April 5, 2000): "I want to be clear that NASDR will be operating in this venture as a contractor for us and not as a self-regulatory organization for investment advisers."
31 Title III, National Securities Markets Improvement Act, Public Law No. 104-290.
32 S.Rpt.104-293, pp. 3-4 (June 26, 1996).
33 SEC Proposed Rules Implementing Amendments to the Investment Advisers Act of 1940, Release No. IA-1601, File No. S7-31-96 (December 20, 1996). Since enactment of the Coordination Act, the states of Colorado, Iowa, and Ohio have enacted investment adviser laws; thus, the State of Wyoming is the only state without an investment adviser statute.
34 The $25 million threshold was intended to provide a bright line test for allocating regulatory responsibility of advisers between the Commission and the states, representing a rough cut between advisers that generally do business in interstate commerce and those that generally have more localized practices. We note that the report accompanying the Senate-passed bill notes that the Commission "may also use its exemptive authority under the bill to raise the $25 million threshold higher as it deems appropriate in keeping with the purposes of the Investment Advisers Act" and concurred in a recommendation of NASAA to review the appropriateness of this threshold at least every three years. S.Rpt. 104-293, p. 5 (June 26, 1996). To our knowledge, the Commission has not yet conducted such a review.
35 Section 203A(b)(2), Investment Advisers Act of 1940.
36 Section 307(a), Investment Advisers Supervision Coordination Act.
37 Section 307(b) and (c), Investment Advisers Supervision Coordination Act.
38 Section 203A(b)(1)(A), Investment Advisers Act of 1940. This provision was added during the final hours of debate on the legislation and represented a compromise between the Senate-passed bill (which did not contain such a provision) and state regulators, many of whom generally opposed preemption of state laws. The ICAA strongly supported the Senate-passed bill and we continue to believe that a "cleaner and deeper" demarcation between federal and state authority would be preferable.
39 Letter from ICAA Executive Director David G. Tittsworth to NASAA Executive Director Neal E. Sullivan (November 20, 1997).
40 The SEC's release proposing rules to implement the Coordination Act, supra, fn. 16, stated: "States may not, however, indirectly regulate activities of Commission-registered advisers by enforcing state requirements that define `dishonest' or `unethical' business practices unless the prohibited practices would be fraudulent absent the requirements." In providing technical assistance to Senate personnel drafting the Coordination Act, the SEC staff stated that the provision "limiting the [states'] authority to bringing enforcement actions [for fraud and deceit] precludes a state securities commission from re-regulating advisers by issuing anti-fraud rules." Memorandum from the Division of Investment Management to the Senate Securities Committee Staff, File Docket No. F7-98 (May 16, 1996) (emphasis added).
41 For example, the Texas State Securities Board recently transmitted legislative proposals to the Texas legislature that, if enacted, would run afoul of the Coordination Act in various ways, e.g., by authorizing the registration and payment of fees by investment advisers who do not have a place of business in the state, by authorizing notice filings and payment of fees from SEC-registered advisers with five or fewer clients in the states, and by treating investment advisers and dealers synonymously. See Letter from David G. Tittsworth, Executive Director, Investment Counsel Association of America, Inc. to Denise Voigt Crawford, Securities Commissioner, State Securities Board (April 20, 2000).
42 In an attempt to achieve greater uniformity, the ICAA, in close consultation with NASAA and others, has submitted legislative recommendations to the Congress that would clarify various provisions of the Coordination Act. See ICAA Legislative Amendments re: Proposed Securities Markets Improvement Act (March 24, 1999) (available on the ICAA's web site under "Comments and Statements).
43 See Electronic Filing by Investment Advisers; Proposed Amendments to form ADV, Release No. IA-1862; 34-42620; File No. S7-10-00, at p. 5 (April 5, 2000).
44 Rules Implementing Amendments to the Investment Advisers Act of 1940, Release No. IA-1601, File No. S7-31-96 (May 22, 1997); Exemption for Investment Advisers Operating in Multiple States; Revisions to Rules Implementing Amendments to the Investment Advisers Act of 1940; Investment Advisers with Principal Offices and Places of Business in Colorado or Iowa, Release No. IA-1733, File No. S7-28-97 (July 17, 1998).
45 Exemption To Allow Investment Advisers To Charge Fees Based Upon a Share of Capital Gains Upon or Capital Appreciation of a Client's Account, Release No. IA-1731, File No. S7-29-97 (July 15, 1998).
46 Investment Adviser Year 2000 Reports, Release No. IA-1769, File No. S7-20-98 (October 1, 1998).
47 Political Contributions by Certain Investment Advisers, Release No. IA-1812, File No. S7-19-99 (August 4, 1999).
48 Certain Broker-Dealers Deemed Not To Be Investment Advisers, Release Nos. 34-42099; IA-1845; File No. S7-25-99 (November 4, 1999).
49 Privacy of Consumer Financial Information (Regulation S-P), Release Nos. 34-42484, IC-24326, IA-1856; File No. S7-6-00 (March 2, 2000).
50 Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Release No. IA-1862; 34-42620; File No. S7-10-00 (April 5, 2000).
51 Remarks of SEC Chairman Arthur Levitt Before the Security Industry Association's Legal and Compliance Seminar (April 5, 1999): ". . . I believe this is the right time to consider whether it might be appropriate to provide an exemption from the [Adviser Act's] restrictions on principal trading."
52 Supra, fn. 3., at pp. 9-10.
53 Letter from Lori A. Richards to all SEC-registered investment advisers (May 1, 2000). Following are the 12 areas cited by Ms. Richards: (1) duty to disclose; (2) trade allocations; (3) advertising representations to clients; (4) performance claims; (5) personal trading; (6) advisory agreements; (7) books and records; (8) referral arrangements; (9) use of brokerage; (10) custody or possession of client assets; (11) recidivism; and (12) inadequate internal control and supervisory procedures.
54 See "SEC Enforcement Trends `Ominous' for Investment Advisers," IA Week (February 7, 2000), citing Richard Marshall (Kirkpatrick & Lockhart): "Investment advisers are more likely to be the subject of an enforcement action and, when such actions are brought, the penalties are likely to be harsher."
55 Section 202(a)(11)(B), Investment Advisers Act of 1940.
56 Certain Broker-Dealers Deemed Not To Be Investment Advisers, Release Nos. 34-42099; IA-1845 (November 4, 1999).
57 Id., p. 7: "Fee-based compensation may constitute special compensation under the Act because it involves the receipt by a broker of compensation other than traditional brokerage commissions."
58 Contrary to assertions and implications in certain broker-dealer advertisements, fee-based compensation is not a "new" development. The ICAA has specifically endorsed fee-only compensation since 1937.
59 Ironically, the broker-dealer industry's efforts to evade regulation under the Advisers Act stands in stark contrast to NASDR's claims that advisers are subject to "less regulation."
60 In contrast, when an investment adviser decides to engage in the brokerage business, it is required to comply fully with the Securities Exchange Act of 1934 and NASD rules. Advisers have not requested an exemption from these requirements.
61 Many observers believe that the disclosure and consent requirements of section 206(3) operate as a de facto prohibition on so-called principal transactions by investment advisers.
62 See Letter from ICAA Executive Director David G. Tittsworth to Jonathan G. Katz, Secretary, Securities and Exchange Commission (January 12, 2000). The comment letter is available on the SEC's web site and the ICAA's web site (under "Comments and Statements").
63 See Comment letter from Barbara L.N. Roper, Consumer Federation of America (January 14, 2000).
64 See Comment letter from Bradley W. Skolnik, North American Securities Administrators Association (January 14, 2000).
65 See Comment letter of Duane R. Thompson, Financial Planning Association (January 14, 2000); comment letter of Robert P. Goss, Certified Financial Planner Board of Standards (January 13, 2000);
66 Consistent with functional regulation, the Advisers Act should govern investment supervisory activities provided by any entity; brokerage activities by any entity should be governed by the Securities Exchange Act of 1934 and NASDR rules.
67 Section 206(3) of the Advisers Act provides that: "It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, acting as principal for his own account, knowingly to sell any security to or purchase any security 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 before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph (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 relation to such transactions."
68 Remarks Before the Securities Industry Association's Legal and Compliance Seminar (April 13, 1999).
69 Section 202(a)(11)(A), Investment Advisers Act of 1940.
70 Investment Advisers Act Release No. 333; Administrative Proceeding File No. 3-3859 (August 21, 1972) (emphasis added).
71 Letter from Ramsay D. Potts, ICAA Counsel, to Ronald F. Hunt, Secretary, Securities and Exchange Commission (October 6, 1972) (emphasis added).
72 Testimony of Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, Concerning Financial Modernization, Before the Committee on Banking and Financial Services (May 22, 1997) (emphasis added).
73 Public Law No. 106-102.
74 Section 217, Gramm-Leach-Bliley Act. Section 217 also provides that, in the case of a bank, if the advisory services are provided through a "separately identifiable department or division," such department or division, and not the bank itself, shall be deemed to be the investment adviser.
75 Section 202(a)(11)(B), Investment Advisers Act of 1940.
76 Lemke & Lins, Regulation of Investment Advisers, at 1-11, 1-12 (1999).
77 Id, at 1-12.
78 See, e.g., "CPAs & advice: Should they? Can they?", Investment News (November 29, 1999). "Before the recent liberalization of rules governing their practice, accountants colored strictly within the lines. Today, the lines are much less definite. Because many clients can do their taxes online or with relatively inexpensive software, more and more accountants are looking to break into investment advice."
79 Section 202(a)(11)(D), Investment Advisers Act of 1940.
80 472 U.S. 181 (1985).
81 Id., at 204.
82 "The only modifier that might arguably disqualify the newsletters are the words `bona fide.' Notably, however, those words describe the publication rather than the character of the publisher; hence Lowe's unsavory history does not prevent his newsletters from being `bona fide.' In light of the legislative history, this phrase translates best to `genuine': petitioners' publications meet this definition: they are published by those engaged solely in the publishing business and are not personal communications masquerading in the clothing of newspapers, news magazines, or financial publications. Moreover, there is no suggestion that they contained any false or misleading information, or that they were designed to tout any security in which petitioners had an interest." Id, at 208-209.
83 "Further, petitioners' publications are `of general and regular circulation.' Although the publications have not been `regular' in the sense of consistent circulation, the publications have been `regular' in the sense important to the securities market: there is no indication that they have been timed to specific market activity, or to events affecting or having the ability to affect the securities industry." Id., at 209.
84 Id., at 207-208.
85 SEC v. Yun Soo Oh Park,a/k/a Tokyo Joe, and Tokyo Joe's Societe Anonyme Corp., Case No. 00 C 0049 (U.S. Dist. Court for the No. District of Illinois).
86 Id., Memorandum of Law In Support of Motion to Dismiss.