Adviser Advocacy Day Policy Priorities
IAA 2020 Policy Priorities
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 have not kept pace with these developments.
Among other things, the IAA has long advocated modernizing the advertising rule – adopted in 1961 – and replacing it with a principles-based approach that better reflects modern communications and investor needs for meaningful information. We are pleased that the SEC proposed changes to the advertising rule in November, consistent with a principles-based approach. We submitted extensive comments and will continue to engage with the SEC on the proposal’s potential effects on advisers in practice and ways it can be improved.
We also support efforts to: clarify the needlessly complex custody rule to facilitate advisers’ compliance and more effectively protect investors and are pleased that the SEC is gathering information about updating this rule; modernize electronic delivery rules; broaden the definition of “accredited investor” (beyond what the SEC proposed in December) to provide investors with greater choice regarding their investment options; and streamline and update the pay-to-play rules on political contributions.
With regard to electronic delivery, the IAA is also supporting legislation -- the RETIRE Act -- that would allow, but not require, an employer to use electronic delivery as the default method to communicate with participants in its retirement plan.
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 is working with its members as they seek to implement the new “client relationship summary (Form CRS)” disclosure document for retail investors. We will also continue to advocate before the SEC to ensure that its interpretation, implementation, and enforcement of this rulemaking package preserves the overarching Advisers Act fiduciary duty, holds financial professionals to a robust investor protective standard, clearly delineates the essential differences between brokerage and advisory activities, and are effective in achieving the SEC’s goals for Form CRS.
The IAA also continues to closely monitor state efforts to impose their own fiduciary rules on financial professionals to ensure that these rules do not affect federally-registered investment advisers and their representatives. The National Securities Markets Improvement Act of 1996 (NSMIA) spells out the respective oversight authority of states and the SEC over investment advisers, and prohibits states from imposing substantive regulation on SEC-registered advisers. We are pleased that, following our response to a proposed fiduciary rule in Massachusetts, the Massachusetts Securities Division decided to remove all references to federal covered investment advisers and their representatives from the scope of its new regulations.
Tax Reform/Retirement Savings
The IAA strongly supports efforts to bolster Americans’ retirement savings. 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 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.
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 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
The IAA strongly supports the “Investment Adviser Regulatory Flexibility Improvement Act,” bi-partisan legislation passed by the House in 2018 as part of JOBS Act 3.0, which has been introduced in the current Congress as H.R. 2436. 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 (RegFlex). Because the SEC currently defines small business to include only investment advisers with less than $25 million in AUM and the basic threshold for SEC registration is $100 million, the SEC has been able to avoid application of RegFlex to “small” advisory firms. In addition, the SEC’s definition does not take into account that more than 7,000 of the approximately 13,000 SEC-registered advisory firms employ 10 or fewer non-clerical employees. H.R. 2436 would require the SEC to develop a definition of small business that takes into account factors that include the number of an investment advisory firm’s employees.
Advisers that are responsible for voting proxies in volume typically engage third-party proxy advisory firms to help them with voting mechanics, research, and/or analytics. These services are particularly important to assist advisers in the administrative aspects of their substantial proxy voting responsibilities. While the research provided by proxy advisory firms is a valuable part of the analysis advisers undertake, advisers retain ultimate fiduciary responsibility to vote proxies in their clients’ best interest.
The IAA is concerned that the SEC’s 2019 Proxy Rule proposal, together with its 2019 guidance on investment adviser proxy voting, will have negative effects on advisers’ ability to vote proxies in their clients’ best interest and will increase burdens and costs for advisers that vote proxies, particularly those that use proxy advisory firms. We are also concerned that the proposal would put pressure on a proxy voting system already in need of a serious overhaul, undermine the independence of proxy advice, and increase barriers to entry for proxy advisory firms. We urge the SEC to focus instead on proxy infrastructure, where there is evidence of significant problems.
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.
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. For example, retirement legislation should not include provisions that favor passive management.
For additional information, please contact:
Karen Barr, President & CEO
Neil Simon, Vice President for Government Relations
Gail Bernstein, General Counsel