On October 27, the House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-Pennsylvania), chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 with extensive bipartisan support by a vote of 67-1.
H.R. 3818 mandates that private advisors to private pools of capital register with the SEC. The Act also imposes new recordkeeping and disclosure requirements on private advisors. “The advisers to hedge funds, private equity firms, single-family offices, and other private pools of capital will have to obey some basic ground rules in order to continue to play in our capital markets,” Kanjorski said.
The Committee passed by a 49 to 14 voice vote the next day, October 28, the Accountability and Transparency in Rating Agencies Act, and is expected to also vote on Kanjorski’s H.R. 3817, the Investor Protection Act and H.R. 3890.
Markup of H.R. 2609, legislation to create a Federal Insurance Office Act of 2009, was to take place on October 28 as well, but was postponed so that the House Financial Services Committee could consult with the House Ways and Means trade subcommittee about international preemption provisions.
During markup of the Investor Protection Act on October 28, several amendments were approved by voice vote, including an amendment proposed by Rep. Dan Maffei (D-New York) to clarify “how insurance will be treated as to a fiduciary duty.” The amendment clarifies that broker/dealers and their representatives offering a limited basket of products will not violate the fiduciary standard for that reason. “My language clarifies that [B/Ds and their reps] would not have to be knowledgeable of all products in the universe,” Maffei said.
Another amendment was approved that would require the SEC to create a registration requirement for municipal securities advisors and that these advisors also be held to a fiduciary standard of care to municipal issuers they deal with.
Yet another amendment on the fiduciary duty as it applies to broker/dealers that was proposed sought to make the fiduciary standard transaction-oriented as opposed to one based on an ongoing relationship, meaning B/Ds would only be held to a fiduciary standard at the time of the transaction.
“My main concern is whether or not on a self-directed account, whether there will be a perpetual fiduciary relationship,” said Rep. Jeb Hensarling (R-Texas) in introducing the amendment. However, Kanjorski said he opposed the amendment because it goes against the essence of “encouraging relationships as opposed to just a single transaction between parties.” House Financial Services Committee Chairman Barney Frank (D-Massachusetts) said the language concerning the matter needs work, noting that the manager’s amendment to the Investor Protection Act will be subject to further change concerning this matter once it hits the House floor.
Other amendments that were approved called for various studies to be performed by the SEC. For instance, one amendment introduced by Rep. Carolyn McCarthy (D-New York) asked that the SEC review the need for enhanced examination and enforcement resources for investment advisors. The study should also examine the number and frequency of examinations of investment advisors by the Commission over the five years preceding the date of the enactment of the Investor Protection Act, as well as the need for the SEC to designate one or more self-regulatory organizations to augment the Commission’s efforts in overseeing investment advisors.
The SEC was also asked to study high frequency trading to determine whether it’s a systemic risk and unfair to the average investor. Plus, the SEC would be required to study the troubling “revolving door” at the agency, that is, the fact that SEC employees leave the agency and get high paying jobs on Wall Street.
The House Financial Services Committee did not finish marking up the Investor Protection Act on October 28, and will resume the markup and likely pass the bill on Tuesday, November 3. The bill goes to the House floor after it’s reported out of the Committee.