|We request comment whether the estimate of our recordkeeping burden is reasonable.|
The Commission is submitting the collection of information to the Office of Management and Budget ("OMB") in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of information is "Exemption for Certain Investment Advisers Operating Through the Internet" under the Advisers Act. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The collection of information is mandatory, and responses are not kept confidential. The likely respondents to this information collection would be investment advisers that meet the conditions of the proposed rule and register with us.
In addition, the proposal would amend Form ADV to add a new category of advisers eligible for Commission registration. The proposed rule therefore would increase the number of advisers that file Form ADV and annual amendments to Form ADV with the Commission. The title for this existing collection of information is "Form ADV" under the Advisers Act. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The form contains currently approved collection of information numbers under OMB control number 3235-0049 (expires June 30, 2003), and the Commission is submitting the amendments to this collection of information to the Office of Management and Budget ("OMB") in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The collection of information is found at 17 CFR 275.203-1, 275.204-1, and 279.1. This collection of information also is mandatory. Responses are not kept confidential. The likely new respondents to this information collection would be the investment advisers that meet the conditions of the proposed rule and register with us.
As new respondents,36 these advisers will increase the total burden under Form ADV, but an Internet Investment Adviser's burden for completing Form ADV would not differ from that for current registrants.37 The currently approved burden of the collection of information under Form ADV is 46,466 hours, and the current average burden for each form is 9.402 hours.38 We estimate that approximately 20 Internet Investment Advisers would register with the Commission under the proposed rule,39 and that each of these advisers would file one complete Form ADV and one amendment annually.40 The increase in the total annual burden for this collection of information would therefore be 455 hours,41 for a total revised burden of 46,921 hours.42
|We request comment whether these estimates are reasonable.|
Any information received by the Commission related to the proposed rule amendments would not be kept confidential. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to:
Persons wishing to submit comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Room 3208, Washington, DC 20503, and also should send a copy to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609 with reference to File No. S7-10-02. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, so a comment to OMB is best assured of having its full effect if OMB receives the comment within 30 days after publication of this release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-10-02, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street, NW, Washington, DC 20549.
The Commission has prepared the following Initial Regulatory Flexibility Analysis ("IRFA") regarding proposed rule 203A-2(f) in accordan7ce with section 3(a) of the Regulatory Flexibility Act.43
Section 203A(a) of the Investment Advisers Act of 1940 generally prohibits an investment adviser from registering with the Commission unless the adviser either has at least $25 million of assets under management or is an adviser to a registered investment company. Internet Investment Advisers do not meet the statutory thresholds for registration with us and do not qualify to use our existing exemptive rules. Section 203A(c) of the Advisers Act gives us authority to permit investment advisers to register with us when the prohibition of section 203A(a) would be unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes of section 203A.44 Without this proposed rulemaking relief, Internet Investment Advisers, as a practical matter, may be left with the burden of registering in 49 states, waiting until their registration obligations accrue in at least 30 states, and then registering with the Commission under the multi-state exemption of rule 203A-2(e) and withdrawing the state registrations. The proposed rule would eliminate the unnecessary burden of these temporary state registrations by permitting these advisers to register with us.
The objective of the proposed amendments is to alleviate the burden of multiple state regulation on investment advisers that conduct substantially all of their advisory business through interactive websites. Proposed rule 203A-2(f) would achieve this objective by providing these advisers with an exemption from the prohibition on Commission registration. We are proposing this rule pursuant to our authority under section 203A(c) of the Act.45 Section 203A(c) of the Act gives us the authority, by rule or regulation upon our own motion, or by order upon application, to permit registration with us of any person or class of persons to which the application of the prohibition on Commission registration would be unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes of section 203A.
Under Commission rules, for the purposes of the Advisers Act and the Regulatory Flexibility Act, an investment adviser generally is considered a small entity if it: (i) has assets under management having a total value of less than $25 million; (ii) did not have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had $5 million or more on the last day of its most recent fiscal year.46 The Commission estimates that approximately 20 investment advisers will likely be eligible to register with us under the proposed rule, and it is probable that all of these approximately 20 investment advisers will be small entities.47
The proposed rule would impose certain new recordkeeping requirements on Internet Investment Advisers. The proposed rule would not impose any other new or additional reporting or compliance requirements on these advisers, and would significantly reduce certain compliance burdens for these advisers by eliminating the need for these advisers to comply with multiple state regulations. As discussed earlier, most or all of these advisers would likely be small advisers. Under the proposed rule, Internet Investment Advisers would be required to maintain in an easily accessible place a record demonstrating that substantially all of their advisory business has been conducted through an interactive website. The Commission believes that the recordkeeping requirement contained in the proposed rule would not impose a significant burden on Internet Investment Advisers, including small advisers.48
The Commission believes that the proposed amendment to Item 2 of Part 1A of Form ADV would have no measurable effect on Internet Investment Advisers, including small advisers. A new box would be added to Item 2 for Internet Investment Advisers to indicate their eligibility to register with the Commission. An adviser registering with the Commission under the proposed rule would simply check that new box when completing Form ADV.
The Commission believes that there are no rules that duplicate, overlap, or conflict with the proposed rule.
The Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities, including (i) establishing different compliance or reporting requirements or timetables that take into account the resources available to small advisers; (ii) clarifying, consolidating, or simplifying compliance and reporting requirements under the proposed rule for small advisers; (iii) using performance rather than design standards; and (iv) exempting small advisers from coverage of all or part of the proposed rule.
Regarding the first alternative, the Commission has considered establishing different compliance or reporting requirements for small advisers. Establishing different compliance or reporting requirements would be inconsistent with our mandate to provide a system of public disclosure of investment adviser information. An Internet Investment Adviser that is a small entity, however, by the nature of its business, would likely spend fewer resources in completing Form ADV and amendments, and pay lower filing fees, than a larger adviser.
Regarding the second alternative, the Commission has attempted to clarify and simplify compliance and reporting requirements under the proposed rule for all advisers, including small advisers. It does not appear that the proposed rule can be formatted differently for small advisers and still achieve its stated objective of providing relief from multiple state regulation. The proposal has been designed particularly to benefit Internet Investment Advisers, which are, we believe, generally small entities.
With respect to the third alternative, the proposed rule would permit advisers to use performance rather than design standards to meet certain requirements under the Act. The proposal, for example, does not specify the means by which an adviser must maintain its records to satisfy the recordkeeping requirements of the proposed rule.
Regarding the fourth alternative, the Commission has considered exempting small advisers from the proposed rule. Such an exemption would be inconsistent with the intended purpose of the proposal, which is to provide regulatory relief from multiple state regulatory requirements. Small advisers are the primary intended beneficiaries of this rulemaking relief.
The Commission has considered the above alternatives in the context of the proposed rule, and, after taking into account the resources available to Internet Investment Advisers that are small entities and the potential burden the proposal could place on these advisers, has concluded that the alternatives would not accomplish the stated objectives of the proposal.
We encourage written comments on matters discussed in this IRFA.
We are proposing rule 203A-2(f) pursuant to our authority set forth in section 203A(c) of the Investment Advisers Act of 1940.49 Section 203A(c) of the Act gives us the authority, by rule or regulation upon our own motion, or by order upon application, to permit registration with us of any person or class of persons to which the application of the prohibition on Commission registration would be unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes of section 203A.
List of Subjects in 17 CFR Parts 275 and 279
Investment advisers, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulation is proposed to be amended as follows:
PART 275 - RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1. The authority citation for Part 275 continues to read in part as follows:
Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3A, 80b-4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *
2. Section 275.203A-2 is amended by adding paragraph (f) to read as follows:
§ 275.203A-2 Exemptions from prohibition on Commission registration.
(f) Internet investment advisers. (1) An investment adviser that:
(i) Conducts substantially all of its advisory business through an interactive website on the Internet; and
(ii) Maintains in an easily accessible place, for a period of not less than five years from the filing of a Form ADV that includes a representation that the adviser is eligible to register with the Commission under paragraph (f)(1)(i) of this section, a record demonstrating that substantially all of its advisory business has been conducted through an interactive website.
(2) For purposes of this section:
(i) Interactive website means a website in which computer software-based models or applications provide investment advice to clients based on information each client supplies through the website.
(ii) Substantially all means that at least 90 percent of the investment adviser's clients obtain their investment advice from the adviser exclusively through the interactive website.
PART 279 - FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 1940
3. The authority citation for Part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, et seq.
4. Form ADV (Referenced in § 279.1), Part 1A, Item 2 is amended by revising the introductory text of paragraph A, paragraph A.(10) and A.(11), and by adding paragraph A.(12) to read as follows:
Note: The text of Form ADV does not and the amendment will not appear in the Code of Federal Regulations.
* * * * *
* * * * *
Item 2 SEC Registration
* * * * *
A. To register (or remain registered) with the SEC, you must check at least one of the Items 2.A(1) through 2.A(11), below. If you are submitting an annual updating amendment to your registration and you are no longer eligible to register with the SEC, check Item 2.A(12). You:
* * * * *
(10) are an Internet investment adviser relying on rule 203A-2(f);
(11) have received an SEC order exempting you from the prohibition against registration with the SEC;
If you checked this box, complete Section 2A(11) of Schedule D.
(12) are no longer eligible to register with the SEC.
* * * * *
5. Form ADV (Referenced in § 279.1), Schedule D is amended by revising the heading "Section 2.A(10)" to read "Section 2.A(11)".
By the Commission.
Margaret H. McFarland
Dated: April 12, 2002
|1||We do not edit personal or identifying information, such as names or e-mail addresses, from electronic submissions. Submit only information you wish to make publicly available.|
|2||National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996)(codified in scattered sections of 15 U.S.C.).|
|3||See S. Rep. No. 293, 104th Cong., 2d Sess. 3-4 (1996) (hereafter Senate Report) at 4 ("The states should play an important and logical role in regulating small investment advisers whose activities are likely to be concentrated in their home state.").|
|4||15 U.S.C. 80b-3a.|
|5||Section 203A(a)(1) of the Advisers Act [15 U.S.C. 80b-3a(a)(1)]. Rule 203A-1(a)(1) increases the assets under management threshold from $25 million to $30 million for registration with the Commission. [17 CFR 275.203A-1(a)(1)]. Upon reaching the $30 million threshold, advisers must register with us. Advisers having assets under management between $25 million and $30 million may opt to register with us. [17 CFR 275.203A-1(a)(2)].|
|6||Section 203A(b) of the Advisers Act [15 U.S.C. 80b-3a(b)].|
|7||Section 222 of the Advisers Act [15 U.S.C. 80b-18a]. The prohibition in section 203A against registration with the Commission applies to advisers whose principal office and place of business is in a United States jurisdiction that has enacted an investment adviser statute. See Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997) [62 FR 28112 (May 22, 1997)], at text accompanying note 83. Currently, 49 states have investment adviser statutes, as do the District of Columbia, Puerto Rico and Guam. Investment advisers in Wyoming and the United States Virgin Islands, which do not have adviser statutes, register with us.|
|8||See Senate Report at 4-5.|
|9||Section 203A(c) of the Advisers Act [15 U.S.C. 80b-3a(c)]. See Senate Report at 5. Section 203A was designed to allow the Commission to better use its limited resources by concentrating its regulatory responsibilities on larger advisers with national businesses, and to reduce the burden to investment advisers of the overlapping and duplicative regulation (that existed prior to enactment of NSMIA) by preempting state investment adviser statutes, thus subjecting large advisers with national businesses to a single regulatory program administered by the Commission. See Senate Report at 2-4.|
|10||The exercise of our exemptive authority permits registration with the Commission and preempts state law with respect to the exempted advisers that register with us.|
|11||We recognize that other advisers use the Internet in other ways. For example, other advisers may use websites for marketing purposes. See infra Section II of this Release. The proposed rule amendment, however, does not address these other Internet uses.|
|12||See Andrew Willmott, Legg Mason Nurtures Mass Affluent, FUNDfire, Dec. 12, 2001; Caren Chesler, Technology A Must In Managed Account Mart, FUNDfire, July 27, 2001.|
|13||17 CFR 275.203A-2(e). An investment adviser relying on this exemption must represent that it has reviewed its obligations under state and federal law and has concluded that it would be required to register as an investment adviser with the securities authorities of at least 30 states. Following registration with us, the investment adviser continues to be eligible for the exemption as long as it can annually represent that it would be required to register in at least 25 states.|
|14||The multi-state exemption codified exemptive orders that permitted large accounting firms that offered financial planning services to register as advisers with the Commission even though they did not manage assets.|
|15||In addition to the multi-state exemption, rule 203A-2 [17 CFR 275.203A-2] provides four other exemptions under which advisers register with the Commission, none of which may be available to Internet Investment Advisers. One of these exemptions permits a newly-formed adviser to register with us if the adviser is not already registered or required to be registered with the Commission or with a state securities authority, and the adviser has a reasonable expectation that, within 120 days, it will be eligible to register with us under a different basis. Rule 203A-2(d) [17 CFR 275.203A-2(d)]. This rule was designed for use principally by new advisory firms that have been "spun-off" from existing portfolio management firms and therefore can reasonably expect to have at least $25 million in assets under management within 120 days, and by advisers to new mutual funds that are expected to be operational within 120 days. Internet Investment Advisers, however, typically must register early in their development and testing phase in order to secure venture capital, and typically need more than 120 days to complete development and testing. Many may not even be fully operational within 120 days after registering.|
|16||See supra note 9 and accompanying text.|
|17||Proposed rule 203A-2(f)(1)(i).|
|18||A new box would be added to Item 2 of Part 1A of Form ADV for these advisers to indicate their eligibility to register with the Commission.|
|19||Proposed rule 203A-2(f)(1)(ii).|
|20||Internet use of some kind is very common among advisers. Over half of SEC-registered advisory firms, for example, report having at least one web address. A rule permitting all advisers using the Internet to register with the Commission could effectively undo NSMIA's division of regulatory responsibilities between the Commission and the states.|
|21||Proposed rule 203A-2(f)(2)(i).|
|22||Proposed rule 203A-2(f)(2)(ii).|
|23||These statutory thresholds were imposed in NSMIA, which divided responsibility for regulating investment advisers between the Commission and the state securities authorities.|
|24||Exceeding state-established de minimis numbers for advisory clients may trigger state registration requirements. The national de minimis standard in section 222(d) of the Advisers Act [15 U.S.C. 80b-18a(d)], however, preempts state minimums that are lower than six clients resident in that state during a 12-month period.|
|25||At this time, 49 states have investment adviser statutes, as do the District of Columbia, Puerto Rico and Guam. Wyoming and the United States Virgin Islands currently do not have investment adviser statutes. Advisers that maintain their principal places of business in those two jurisdictions must register with the Commission.|
|26||17 CFR 275.203A-2(e). Advisers relying on the multi-state exemption must be required to register with the securities authorities of at least 30 states. After registering with us, multi-state advisers continue to be eligible for the exemption as long as they can represent annually that they would be required to register in at least 25 states.|
|27||This figure includes the costs of responding to multiple states' comments on filings, as well as the cost of complying with multiple and often disparate state regulations. It does not, however, include the time to complete Form ADV initially and the fees to file Form ADV through the IARD, as discussed below. This figure also does not include state registration fees.|
|28||20 × 50,000 = 1,000,000.|
|29||The Commission estimated this figure by multiplying the burden hours to comply with the proposed rule's recordkeeping requirements (4 hours) by an average hourly compensation rate of $34.70. This compensation rate includes overhead and is the rate for an operations supervisor outside of New York City, based on a 2000 study by the Securities Industry Association. The estimate of burden hours is based on the Commission's submission for the proposed rule under the Paperwork Reduction Act and reflects recent discussions with counsel familiar with advisers' recordkeeping issues. See infra Section V. of this Release.|
|30||20 × 138.8 = 2,776.|
|31||17 CFR 279.1 (Form ADV).|
|32||Advisers registered with the Commission, however, complete only Part 1A of Form ADV, while advisers registered with the states must complete both Parts 1A and 1B.|
|33||Advisers pay filing fees to NASD Regulation, Inc., which operates the IARD system. The filing fees include an initial set-up fee and an annual fee, each of which varies based on the adviser's assets under management. Because Internet Investment Advisers generally do not manage client assets, we expect that they will be eligible for the lowest fee levels of $150 for the initial set-up fee and $100 for the annual fee. See Investment Advisers Act Release No. 1888 (July 28, 2000) [65 FR 47807 (Aug. 3, 2000)] ("Advisers Act Release No. 1888").|
|34||44 U.S.C. 3501-3520.|
|35||4 hours × 20 advisers = 80 hours. This estimate is based on recent discussions with counsel familiar with advisers' recordkeeping issues. The recordkeeping requirement does not require extensive data on usage of the website, nor does it specify how an adviser should maintain its records to meet this condition of the proposed rule. The adviser would need only to demonstrate that 90 percent of its clients obtain their investment advice from the firm exclusively through the website. We note that Internet Investment Advisers that conduct their business exclusively through interactive websites would likely need to spend very little time documenting their compliance with the condition. An adviser that also meets in person with some clients or communicates with them through other means may need to spend more time.|
|36||We note that, because the states as well as the Commission use Form ADV, these advisers will be new respondents for purposes of the Commission's collection of information requirements, but not new users of Form ADV.|
|37||The proposed amendments would add a new box to Item 2 of Part 1A of Form ADV, so that Internet Investment Advisers could indicate their eligibility for Commission registration. All advisers registering with the Commission must indicate their eligibility by checking at least one box, so the addition of the new box for Internet Investment Advisers will not change the burden of completing the form.|
|38||See Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Investment Advisers Act Release No. 1862 (April 5, 2000) [65 FR 20524 (April 17, 2000)] ("Advisers Act Release No. 1862"). The current average burden per response includes 9,100 filings of the complete form at 22 hours each, plus 13,250 amendments requiring 0.75 hours each. [((9100 × 22) + (13250 × .75))/22350 = 9.402].|
|39||Our staff has examined approximately six advisers that registered with us and whose business is substantially Internet-based. Because most Internet Investment Advisers are not yet eligible to register with us, however, we believe that there may be as many as 20 firms that could register under the proposed new exemption.|
|40||The currently approved burden for this collection of information estimates that most advisers registering with the Commission for the first time will file one amendment per year.|
|41||22 hours to complete a new Form ADV × 20 Internet Investment Advisers = 440 hours. 0.75 hours per amendment × 20 amendments = 15 hours. 440 + 15 = 455.|
|42||46,466 + 455 = 46,921.|
|43||5 U.S.C. 603(a).|
|44||See supra note 9 and accompanying text.|
|45||15 U.S.C. 80b-3a(c).|
|46||17 CFR 275.0-7(a).|
|47||Internet Investment Advisers generally do not manage assets and therefore will not likely have any assets under management. These firms are also generally start-up businesses and may have limited assets; only one of the Internet-based firms our staff has examined reported having total assets of $5 million or more. Consequently, we believe that most, if not all, of the advisers registering with us under the proposed rule will be small entities.|
|48||Recordkeeping is already mandated for all Commission-registered advisers, including small advisers, under rule 204-2. [17 CFR 275.204-2.] The Commission has estimated, for purposes of the Paperwork Reduction Act, that compliance with the recordkeeping requirements of the proposed rule would take no more than 4 hours annually on average.|
|49||15 U.S.C. 80b-3a(c).|
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