Commenters Against Federal Licensing, CE and Financial Responsibility Requirements for Advisers

The SEC included these proposals as part of its proposed best interest standards for investment advisers.

In its request for comment on a proposed interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940, the Securities and Exchange Commission (SEC)  also requested comment about: licensing and continuing education (CE) requirements for personnel of SEC-registered investment advisers; delivery of account statements to clients with investment advisory accounts; and financial responsibility requirements for SEC-registered investment advisers, including fidelity bonds.

Comments on Commission’s proposed best interest standards express concern that the standards fail to impose a uniform fiduciary standard or define key terms, most notably, what is a “best interest” standard.

Regarding new requirements for registered investment advisers, the Investment Adviser Association (IAA) commented that: “Investment advisers’ business models and activities differ significantly from those of broker/dealers. Given those differences, financial responsibility rules are inappropriate and unnecessary for advisers. A requirement for advisers to provide account statements would be duplicative. Investment adviser clients currently receive account statements from custodians.  Further, the custodial account statement or an invoice from the adviser specifies the actual advisory fees clients pay. “

IAA added: “Federal licensing and continuing education requirements for investment adviser personnel are unnecessary. Advisory personnel who engage with retail clients are already subject to state licensing and qualification requirements. The Commission has not explained why a second layer of licensing and qualification is warranted. Further, advisory personnel are subject to a range of compliance requirements and already receive training on the laws, regulations, and fiduciary obligations applicable to advisers.  Finally, advisers already are required to provide clients with a description of the qualification, education, business background, disciplinary history, and additional compensation (including sales awards) for personnel providing advice for each client. This information is required to be affirmatively provided to each client for whom the advisers’ personnel are giving or formulating advice, and is far more relevant to a client assessing the qualification of such personnel than passing an exam. There is no such counterpart for broker/dealers.”

Similarly, Tom Quaadman, executive vice president at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, pointed out that most states require investment adviser representatives who have a place of business in the state to be registered, licensed and/or meet certain other qualifications, and the Financial Industry Regulatory Authority (FINRA) requires that associated persons of broker-dealers register and meet qualification requirements.

Quaadman asks the SEC to explain how imposing federal licensing and continuing education requirements on investment adviser personnel will enhance investor protection. In addition, he says, “As part of its cost-benefit analysis, it should also assess whether any such enhancements would outweigh the costs it could have on smaller firms or on the ability of new advisers to enter the marketplace.”

Quaadman also noted that many investment advisory firms already provide account statements, and said the SEC should examine existing regulatory requirements and determine whether there are gaps in information that would merit additional rulemaking.

As for the Commission’s question about whether registered investment advisers should be subject to financial responsibility requirements, including requirements to maintain minimum capital, obtain a fidelity bond, conduct an annual audit, or file audited financial statements with the SEC as part of Form ADV, Quaadman again says the Commission must carefully consider the costs and benefits of these proposals including, for example, the fact that investment advisers provide advice and do not hold client assets. He notes that assets are held at a custodian; however, many broker-dealers do hold client assets.

Paul Schott Stevens, president and CEO of the Investment Company Institute (ICI), not only says that before the Commission explores further imposing registration, qualification, and continuing education requirements on investment adviser representatives, it should first explain why such requirements are necessary in light of current regulation under state law, but it should explain what such new requirements would consist of and how they would be administered and by whom. 

In addition Stevens notes that funds are subject to fidelity bonding requirements under the 1940 Act, and the contract under which the custodian provides services to the fund limits the purposes for which money may be disbursed by the custodian. In addition, any officer or employee that has the authority to direct the disbursement of the fund’s assets is required to be bonded by a fidelity insurance company against larceny and embezzlement.

Similarly, Mortimer J. Buckley, president and CEO of The Vanguard Group expressed his opinion that the Commission should not pursue rulemaking designed to impose a federal advisory licensing standard or to apply financial responsibility requirements “ill-suited to the advisory business.”

Comment letters received by the SEC can be viewed at