U.S. Senate Approves Financial Services Reform Bill

May 20, 2010

The U.S. Senate approved a broad financial regulatory reform bill, entitled the “Restoring American Financial Stability Act of 2010” or “RAFSA.”  The bill impacts most types of financial institutions, including investment advisers, mutual funds and ETFs. Here are some ways investment advisers will be impacted by the bill, if enacted:

  • Elimination of the private adviser exemption from registration, thereby requiring advisers to hedge funds to register with the SEC;
  • Intra-state advisers that advise private funds will not be permitted to access the exemption from registration under Section 203(b)(1);
  • Codify prior SEC staff positions regarding non-U.S. advisers with limited operations in the United States (with additional restrictions);
  • A new exemption for advisers who solely advise small business investment companies and certain affiliates;
  • New exemptions from registration for advisers to venture capital funds and private equity funds;
  • A new exemption for certain family offices; and
  • Increase in the minimum asset level for mandatory federal registration from $25 million to $100 million.

Once subject to registration with the SEC, investment advisers to private funds would be subject to provisions of the Advisers Act generally applicable to registered investment advisers. In addition, private fund advisers would be subject to new information and reporting requirements. Under the new a new Section 223 of the Advisers Act would impose certain custody requirements on a registered investment adviser, including verification of the assets by an independent public accountant. The SEC currently regulates custody by advisers under the antifraud provisions of Section 206(4) of the Advisers Act.

Furthermore, the bill:

  • amends the Advisers Act to give the SEC the authority to reaffirm, prohibit or impose conditions or limitations on the use of mandatory pre-dispute arbitration clauses in agreements between an investment adviser and their clients; and
  • amends the Advisers Act to grant the SEC authority to bar individuals who violate the Advisers Act from being associated with a number of registered securities entities.

The Senate bill also establishes within the SEC a new Investor Advisory Committee (IAC).  The IAC would advise and consult with the SEC on:

  • regulatory priorities,
  • issues related to the regulation of securities products,
  • trading strategies and fee structures,
  • the effectiveness of disclosure,
  • investor protection
  • initiatives and initiatives to promote investor confidence, and
  • the integrity of the securities markets.

The IAC would submit to the SEC its findings and recommendations, including proposed legislative changes.

The bill mandates cooperation between the SEC and the CFTC with regard to their monitoring of investment advisers and commodity trading advisers.  It adds a new Section 211(e) to the Advisers Act, which would provide that the SEC and CFTC must, after consultation with the ICA, within 12 months after the enactment of RAFSA, jointly promulgate rules to establish the form and content of reports required to be filed with the SEC or the CFTC by investment advisers that are registered under the Advisers Act as well as the Commodity Exchange Act.

With respect to mutual funds and ETFs, the Senate bill requires the General Accounting Office to conduct and submit to the Congressional Banking Committees a study on mutual fund advertising to identify:

  • current marketing practices for the sale of open-end investment company shares, including the use of past performance data, funds that have merged, and incubator funds;
  • the impact of such advertising on consumers; and
  • recommendations to improve investor protection in mutual fund advertising and additional information that may be necessary to ensure that investors can make informed financial decisions when purchasing mutual fund shares.

The bill also mandates a study by the SEC to evaluate the effectiveness of the existing legal and regulatory standards of care imposed on broker-dealers and investment advisers.

Click here to access a summary of the Senate bill.


Exchange-Traded Funds (ETFs), Investment Advisers, Legislative, Mutual Funds