Investment Advisers Act Modernization
The statutory framework of the Investment Advisers Act of 1940 has proven remarkably robust in protecting investors while allowing the advisory profession to grow to benefit investors, the capital markets, and the U.S. economy. However, the financial services landscape has evolved significantly over the last 80 years and certain of the regulations adopted pursuant to the Advisers Act has not kept pace with these developments. Accordingly, we are pleased that – as we long advocated – the SEC’s new Investment Adviser Marketing Rule brings the way advisers may communicate with their clients into the 21st Century.
The IAA supports providing investment advisers with greater flexibility in how they deliver required disclosures to their clients, calling for a change from the default of paper delivery to a default of electronic delivery with the option for the client to change to paper at any time. This approach would be more efficient for advisers, more secure for advisers and their clients, and would better reflect how today’s investors expect and prefer to receive communications from their financial professionals, especially following the COVID-19 pandemic.
We also support efforts to update the rules governing the safeguarding of client assets (custody rule) to better address stated objectives, eliminate confusing language, and streamline an extensive patchwork of staff guidance that is extremely challenging to navigate. In addition, we believe the pay-to-play rule on political contributions should be streamlined and updated.
The IAA has long advocated that all financial professionals who provide investment advice about securities to clients should be required to act pursuant to fiduciary principles. The SEC adopted a comprehensive rulemaking package in June 2019 that is intended to raise the standard of conduct for broker-dealers, reaffirm investment advisers’ fiduciary duty under the Advisers Act, and reduce investor confusion as to the services offered by – and standards applicable to – their financial professional.
The IAA has worked closely with its members to help them implement the new client relationship summary (Form CRS) disclosure document for retail investors. We will continue to advocate before the SEC to ensure that its interpretation, implementation, and enforcement of this rulemaking package preserve the overarching Advisers Act fiduciary duty, hold financial professionals to a robust investor protective standard, clearly delineate the essential differences between brokerage and advisory activities, and effectively achieve the SEC’s goals for Form CRS.
The IAA continues to closely monitor state efforts to impose its own fiduciary rules on financial professionals to ensure that these rules do not inappropriately apply to federally registered investment advisers and their representatives in contravention of the National Securities Markets Improvement Act of 1996 (NSMIA).
Tax Reform/Retirement Savings
The IAA strongly supports efforts to bolster Americans’ retirement savings, including efforts to increase participation in the retirement system by expanding access to retirement plans and to fiduciary advice. In this regard, we strongly favor restoring and expanding the deductibility of advisory fees as an itemized deduction to incentivize investors to seek advice about saving for retirement. We are also seeking reconsideration of the broad exclusion for service businesses from the 20 percent pass-through deduction created by the 2017 Tax Cuts and Jobs Act as it unfairly disadvantages investment advisory firms. The IAA is also strongly opposed to a financial transaction tax because of the unfair financial burden it would impose on investors, retirement savers, and the securities markets.
Diversity, Equity, and Inclusion
The IAA recognizes that the investment adviser profession has a long way to go in matters of diversity, equity, and inclusion (DE&I). Our community must address the issues that have resulted in a lack of diversity and must make meaningful progress. To that end, the IAA is committed to working collectively with our members to seek to promote diversity, equity, and inclusion as a value for our industry and to providing education, information, and resources to help foster significant change. The IAA also supports the SEC’s goal of promoting DE&I in the investment community.
An increasing number of investment advisers engage in Environmental, Social, and Governance (ESG) investing strategies, and take into consideration ESG factors as part of the investment process. This is driven, in no small part, by advisers’ prudent risk management as well as an increase in investors’ interest in ESG investing. The IAA strongly supports informed investor choice and objects to actions by regulators that would limit the ability of investment advisers to consider ESG factors or pursue ESG investment strategies on behalf of their clients. For example, retirement legislation or regulation should not make it difficult for retirement plans to consider ESG factors in investment decisions. The IAA also believes that, in order to preserve the ability of investment advisers to act in the best interest of their clients, regulators should not require investment advisers to consider a particular set of ESG factors when making investment decisions.
Level Playing Field: Active and Passive Management
The IAA supports policy approaches that promote a level playing field among investment strategies. Both active and passive strategies have valuable and important roles to play in investment management in the best interest of clients and the markets. Laws and regulations should not explicitly or implicitly favor one investment strategy over the other and should not limit investor choice or the tools available to investment advisers for risk management.
The IAA strongly supports a uniform, national approach to data privacy law in order to create consistency and reduce complexity. In addition, we support laws that facilitate cybersecurity information sharing, both among companies and between companies and law enforcement agencies. The IAA also supports the creation of a single, national data breach notification regime that would make it easier for affected companies to comply with the law while ensuring that clients and customers are protected.
Impact of SEC Regulations on Small Businesses
Small businesses are the backbone of the fiduciary investment advisory community with 58 percent of investment advisory firms having 10 or fewer non-clerical employees and 88 percent having 50 or fewer non-clerical employees. Policymakers should understand the unique challenges of smaller advisory firms and the cumulative impact of policy decisions on their businesses and their ability to serve the investing public.
The IAA strongly supports the “Investment Adviser Regulatory Flexibility Improvement Act,” bipartisan legislation passed by the House in 2018 as part of JOBS Act 3.0. This bill is designed to ease the regulatory burden on smaller advisory firms by requiring the SEC to analyze the impact of regulations and consider alternative approaches that minimize the burden on small businesses in accordance with the Regulatory Flexibility Act.
SEC Oversight of Advisers
Effective oversight of the advisory profession is critical to investor protection. The IAA believes that the SEC, an experienced and accountable governmental regulator, is in the best position to provide that oversight, and should retain its primacy in investment adviser regulation. To that end, the IAA supports efforts to ensure that the agency is able to dedicate sufficient resources for effective oversight of advisory firms and that it continues to use those resources efficiently.
CFTC and Derivatives Regulation
The IAA advocates for CFTC and SEC coordination to streamline costly, burdensome, and duplicative regulation of commodity pool operators and commodity trading advisors that are SEC-registered advisers through exemptions, uniform rules, and substituted compliance.