In conjunction with a hearing held on September 13, 2011 by the House Financial Services Committee entitled “Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight,” a discussion draft of a bill was issued by Committee Chairman Spencer Bachus (R. Alabama) entitled the "Investment Adviser Oversight Act of 2011" (the "IA Oversight Act"). This bill, which has not been referred to the Committee, would amend the Investment Advisers Act of 1940 (the "Advisers Act") to require investment advisers registered either with the Securities and Exchange Commission ("SEC") under Section 203 of the Advisers Act or with a state authority under Section 203A to become a member of a registered national investment adviser association.1
Any investment adviser with assets of 90 percent or more attributable to the following types of clients would not be required to become a member of an IA SRO:
- Investment companies registered under the Investment Company Act of 1940 (the "Investment Company Act");
- Non-U.S. persons;
- Clients that in the aggregate own not less than $25 million in investments;
- Funds organized for charitable or religious purposes;
- Pension or profit sharing plans;
- Private funds (including hedge funds and private equity funds relying on an exemption under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act); and
- Venture capital funds.
Also exempt would be affiliates of any of the above investment advisers with integrated compliance programs, so that membership would result in duplicative regulatory examinations.
An investment adviser that is also registered as a broker-dealer with the SEC, even if it would otherwise qualify for one of the above exemptions, would still need to become a member of a registered national investment adviser association.
Approval of Registered National Investment Adviser Association
The IA Oversight Act would establish standards for SEC approval of a registered national investment adviser association, including having a periodic examination program, a self-funding mechanism, the issuance of an annual report and a process for disciplining its members. The SEC would have oversight authority over the association, and would be required to establish procedures for the review of applications for registration and approval of its rules, including a public approval process for rule amendments.
Existing SROs, including FINRA, would not be precluded from seeking approval as a registered national investment adviser association under the IA Oversight Act.2 However, other industry organizations, while advocating the establishment of an IA SRO, oppose FINRA in that role.3 The Managed Funds Association continues to support the existing framework of SEC regulation of private fund managers, as enhanced by the Dodd-Frank Act and regulatory implementation of the Act.4 While it is uncertain whether the draft bill will be introduced in its current form, it is likely that there will continue to be support for greater scrutiny of investment adviser activities, either through an expanded SEC examination program, the creation of a dedicated SRO for investment advisers or the expansion of FINRA authority over investment advisers.