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“CLARIFICATION OF THE TREATMENT OF INVESTMENT MANAGERS” mentioning the U.S. Dept of Labor was published in the Extensions of Remarks section on pages E1481-E1482 on July 23, 1997.
The publication is reproduced in full below:
CLARIFICATION OF THE TREATMENT OF INVESTMENT MANAGERS
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HON. HARRIS W. FAWELL
of illinois
in the house of representatives
Wednesday, July 23, 1997
Mr. FAWELL. Mr. Speaker, I am pleased to today introduce legislation which amends title I of the Employee Retirement Income Security Act of 1974 [ERISA] to permit investment advisers registered with State securities regulators to continue to serve as investment managers to ERISA plans.
At the end of last Congress, landmark bipartisan legislation was enacted which adopted a new approach for regulating investment advisers: the Investment Advisers Supervision Coordination Act (title III of P.L. 104-290). Under the act, beginning July 8, 1997, States are assigned primary responsibility for regulating smaller investment advisers and the Securities and Exchange Commission [SEC] is assigned primary responsibility for regulating larger investment advisers. Under this framework, however, smaller investment advisers registered only with the States, and prohibited by the new law from registering with the SEC, would no longer meet the definition of ``investment manager'' under ERISA, since the current Federal law definition only recognizes advisers registered with the SEC.
As a temporary measure, a 2-year sunset provision was included in the securities reform law extending for 2 years the qualification of State registered investment advisers as investment managers under ERISA. This provision was intended to address the problem on an interim basis while the congressional committees with jurisdiction over ERISA reviewed the issue. We have reviewed this issue and have developed the legislation that I am introducing today to permanently correct this oversight.
Without the legislation I am introducing, State licensed investment advisers who, because of the securities reform law, no longer are permitted to register with the SEC would be unable to continue to be qualified to serve as investment managers to pension and welfare plans covered by ERISA. Without this legislation, the practices of thousands of small investment advisers and investment advisory firms would be seriously disrupted after October 10, 1998--as would the 401(k) and other pension plans of their clients.
It is necessary for an investment adviser seeking to advise and manage the assets of employee benefit plans subject to ERISA to meet ERISA's definition of ``investment manager.'' It is also important, for business reasons, for small investment advisers to eliminate the uncertainty about their status as investment managers under ERISA. This uncertainty makes it difficult for such advisers to acquire new ERISA-
plan client and could well cause the loss of existing clients.
The bill will amend title I of ERISA to permit an investment adviser to serve as an investment manager to ERISA plans if it is registered with either the SEC or the State in which it maintains its principal office and place of business, if it could no longer register with the SEC as a result of the requirements of the 1996 securities reform law. In addition, at the request of the Department of Labor, the bill requires that whatever filing is made by the investment adviser with the State be filed with the Secretary of Labor as well.
Arthur Levitt, Chairman of the Securities and Exchange Commission, has written a letter expressing the need for this legislation and his support for this effort to correct this problem. I ask that a copy of Chairman Levitt's letter be inserted in the Record.
This legislation also has the support of the Department of Labor. In addition, this bill is supported by the International Association for Financial Planning, the Institute of Certified Financial Planners, the National Association of Personal Financial Advisors, the American Institute of Certified Public Accountants, and the North American Securities Administrators Association, Inc. Identical legislation is being introduced on the other side of the Hill by Senator Jeffords, the chairman of the Senate Labor Committee.
Congress must act quickly to correct this oversight, to protect small advisers from unintended ruin and to bring stability to the capital management marketplace.
U.S. Securities and
Exchange Commission,
Washington, DC, April 7, 1997.Hon. William F. Goodling,Chairman, Committee on Education and the Work Force, U.S.
House of Representatives, Rayburn House Office Building,
Washington, DC.
Dear Chairman Goodling: I am writing to urge that the House Committee on Education and the Work Force consider enacting legislation to amend the Employee Retirement Income Security Act of 1974 (``ERISA;'') in a small but terribly important way. Unless the Congress acts quickly, thousands of small investment adviser firms, and their employees, risk having their businesses and their livelihoods inadvertently disrupted by changes to federal securities laws that were enacted during the last Congress.
At the very end of its last session, Congress passed the Investment Advisers Supervision Coordination Act. This was landmark bipartisan legislation that replaced an overlapping and duplicative state and federal regulatory scheme with a new approach that divided responsibility for investment adviser supervision; states were assigned primary responsibility for regulating smaller investment advisers, and the Securities and Exchange Commission was assigned primarily responsibility for regulating larger investment advisers. We supported this approach.
Until the Coordination Act takes effect in the next few months, most of the nation's 23,500 investment adviser firms--regardless of their size--will continue to be registered with the SEC, as they have for many decades. Once the Act becomes effective, however, we estimate that as many as 16,000 firms will be required to withdraw their federal registration. Indeed, this requirement is crucial if the Act's overall intent of reducing overlapping and duplicative regulation is to be realized. But the withdrawal of federal registration is also what causes the problem for these firms under ERISA.
As a practical business matter, it is a virtual necessity for a professional money manager (such as an investment adviser) seeking to serve employee benefit plans subject to ERISA to meet ERISA's definition of ``investment manager.'' The term is defined in ERISA to include only investment advisers registered with the SEC, and certain banks and insurance companies. Once the Coordination Act becomes effective, large advisers registered with the SEC will of course continue to meet the definition. But small advisory firms will not be able to meet the definition of investment manager because they will be registered with the states rather than with the SEC. Thus they may well be precluded from providing advisory services to employee benefit plans subject to ERISA, even if they have been doing so successfully for many years.
The sponsors of the Coordination Act were aware that the interplay between the Act and ERISA could have substantial detrimental consequences for small advisors, and thus added an amendment to ERISA during the House-Senate Conference on the Act. The ERISA amendment provided that investment advisers registered with a state can serve as ``investment managers'' for two years, or through October 12, 1998. My staff has been told that this ``sunset'' provision was included in the ERISA amendment so that the appropriate congressional committees with jurisdiction over ERISA could have a reasonable amount of time to review the amendment before deciding whether to make it permanent. Apart from that important procedural issue, I am not aware of any other considerations that would suggest the need for the ERISA amendment to expire in two years.
I believe that the Congress should move as quickly as possible to enact legislation that eliminates the sunset provision, and permanently enables properly registered state investment advisers to continue their service as investment managers under ERISA. There is no reason to wait until 1998 to do so. In fact, many small investment advisers believe that the ongoing uncertainty about their status as
``investment managers'' under ERISA is making it difficult for them to acquire new ERISA plan clients, and may even cause them to lose existing clients. Some advisers think the harm they could suffer, even before the expiration of the sunset provision next year, could be irreparable, and it is easy to see why.
It is only through the swift action of your Committee that these unintended and unnecessary consequences for thousands of successful small businesses can be avoided. If you or your staff would like additional information about this matter, please do not hesitate to contact me at 942-0100, or Barry P. Barbash, Director of the Division of Investment Management, or Robert E. Plaze, an Associate Director in the Division, at 942-0720.
Sincerely,
Arthur Levitt.
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