Today, the House Committee on Financial Services held a hearing entitled “Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance Office.”

Testifying before the committee were the following individuals.

Panel One—Strengthening Investor Protection

  • Denise Voigt Crawford , Texas Securities Commissioner, Securities Administrators Board, on behalf of North American Securities Administrators Association (NASAA)
  • Richard Ketchum, Chairman and CEO, Financial Industry Regulatory Authority
  • Mercer E. Bullard , Founder and President, Fund Democracy, Inc.
  • John Taft, Head of Wealth Management, RBC Wealth Management, on behalf of Securities Industry and Financial Markets Association (SIFMA)
  • David G. Tittsworth, Executive Director, Investment Adviser Association
  • Bruce W. Maisel, Vice President and Managing Counsel, General Counsel’s Office, Thrivent Financial for Lutherans, on behalf of the American Council of Life Insurers (ACLI)

Panel Two—Enhancing Oversight of Private Pools of Capital

  • Mr. Caswell testifying for Richard H. Baker, President, Managed Funds Association (MFA)
  • Douglas Lowenstein, President, Private Equity Council
  • James S. Chanos, Chairman, Coalition of Private Investment Companies (CPIC)
  • Terry McGuire , Co-Founder and General Partner, Polaris Venture Partners, and Chairman, National Venture Capital Association

Panel Three—Creating a National Insurance Office

  • Janice M. Abraham, President and Chief Executive Officer, United Educators Insurance, on behalf of the Property Casualty Insurers Association of America
  • David B. Atkinson , Executive Vice President and Vice Chairman, RGA Reinsurance Company, on behalf of the Reinsurance Association of America
  • Dennis S. Herchel, Assistant Vice President & Counsel, Massachusetts Mutual Life Insurance Company, on behalf of the American Council of Life Insurers
  • Spencer M. Houldin , President, Ericson Insurance Advisors, on behalf of the Independent Insurance Agents & Brokers of America
  • Therese Vaughan, Chief Executive Officer, National Association of Insurance Commissioners
  • J. Stephen Zielezienski, Senior Vice President & General Counsel, American Insurance Association (AIA)

Congressman Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, opened the hearing with an overview of his three proposed bills addressing investor protection, registration of certain unregistered investment companies and creation of an office of national insurance. Various representatives then made statements. Several representatives agreed that there has never been a greater need for national oversight of the insurance industry given the recent collapse of AIG. One member noted that Congress should consider establishing a world class regulatory alternative to the fragmented state regulators as Europe is doing.

Panel One

The witnesses on Panel One generally supported the goal of harmonizing the fiduciary standards for investment advisers and broker-dealers. For example, Ms. Abraham testified on behalf of NASAA that the imposition of a fiduciary duty on broker dealers is so important that “Congress should make it clear through explicit language that the SEC must adopt rules no later than one (1) year from the passage of the act mandating compliance by broker-dealers with this provision.” Mr. Ketchum also stated that FINRA agrees that the standard of care should be a fiduciary standard. However, according to him, it is clear that a fiduciary standard alone is not enough. Compliance must be vigilantly enforced.

Several witnesses expressed their concern that the proposed changes to the Investment Advisers Act of 1940 (the “Advisers Act”) could actually narrow the scope of the fiduciary duty already imposed by the Advisers Act on investment advisers because it would only cover retail customers. Mr. Taft, on the other hand, testifying for SIFMA, supported a harmonized fiduciary standard for broker-dealers and investment advisers only when they are providing personalized investment advice. SIFMA appreciates that the proposed legislation uses the term “personalized investment advice” by incorporating it into the definition of retail customer. However, he thought the proposed legislation should go further by making the giving of personalized investment advice about securities the trigger for the fiduciary standard.

Panel Two

The witnesses on Panel Two were generally supportive of requiring all investment advisers to register with the SEC notwithstanding what they see to be “a lack of nexus between private equity and hedge funds and systemic risk.” However, many of the witnesses expressed concern that the proposed legislation would require investment advisers to make unnecessary and broad disclosures to third parties.

Mr. Lowenstein noted that the Securities Act of 1933 and the Securities and Exchange Act of 1934 already require private equity funds to make extensive disclosures to investors. Furthermore, they are typically required by contract to disclose more information to their investors than required by the securities laws. There is no public or systemic risk issue solved by adding these disclosure requirements. He also noted that instead of carving out an exemption for venture capital firms from these requirements, Congress should instead change the threshold for registration from $30 million to a level Congress thinks is appropriate in order to treat all advisers the same way.

Mr. McGuire, on the other hand, supported the exclusion from registration for venture capital funds. He noted that entire industries have been built upon venture capital, but some venture capital firms have as few as 10 employees. He suggested that Congress require venture capital firms to file enhanced Form D’s each year, which he called Form D-2’s. In completing the Form D-2’s, venture capital firms could be required to answer questions regarding the nature of their investment activity such as their use of leverage, which would promote transparency without being unnecessarily costly.

Mr. Chanos objected to the expansion of regulations intended for retail investors to private pools of capital. He would prefer separate regulations for private pools of capital, but at the very least, suggested that Congress appropriately tailor the provisions that apply to private pools of capital based on their unique characteristics.

Panel Three

The witnesses on Panel Three were split almost evenly between those who support and those who oppose the creation of an Office of Insurance Information, as the federal insurance regulator would be called under the Kanjorski proposed legislation. (The Obama administration’s proposal referred to such regulator as the Office of National Insurance.) Of those who supported the creation of an Office of Insurance Information, Mr. Zielezienski cited the role of insurance in our economy as the reason AIA has long advocated a national insurance regulator. He also pointed out that states are inherently limited in their ability to resolve issues that go beyond their borders. Supporters also praised the proposal’s authorization of the federal government to establish a federal policy on prudential aspects of international insurance matters.

Those opposed to the creation of an Office of Insurance Information, or who conditionally supported it, generally cited the proven track record of state regulation. They argued that the Office of Insurance Information should not operate as a de facto insurance administrator and that the proposed legislation should clarify that the Office of Insurance Information would serve only as an information gatherer. In addition, they expressed concern that the provisions regarding data gathering were too broad and testified that any proposed legislation should include protections regarding how data will be obtained and utilized.