Via E-mail and Federal Express

June 13, 2000

Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW - - Mail Stop 0609
Washington, D.C. 20549-0609

Re: Proposed Revisions to Form ADV and Related Rules

File No. S7-10-00

Dear Mr. Katz:

This letter presents the comments of Federated Investors, Inc. ("Federated")1 regarding the proposal of the Securities and Exchange Commission ("Commission") to amend Form ADV and related rules (the "Proposal")2 under the Investment Advisers Act of 1940 ("Advisers Act"). The Proposal covers amendments to rules under the Advisers Act which would implement the Investment Adviser Registration Depository ("IARD"), an electronic filing system currently being developed by NASD Regulation, Inc. The Proposal also would substantially revise Form ADV to reflect regulatory changes since it was last amended, adapt Form ADV for use in the IARD, and amend application, disclosure and reporting requirements. In particular, the Commission has proposed changes to the information statements that advisers must provide to clients and prospective clients.

Federated supports the Proposal in many respects. We have reviewed comments being prepared by the Investment Company Institute ("ICI"), and generally agree with the changes it recommends. Additionally, we are submitting this letter to address an issue that is not raised in the ICI's letter: to urge the Commission to take this opportunity to consider the implications of the Proposal for advisers that generally provide services to sophisticated investors. Federated believes that such investors and advisers would be better served if the Proposal contained an exemption from the Proposal's brochure delivery requirements ("Brochure Rules") for advisers' clients that are sophisticated investors. Our comments are set forth in detail below.

The Proposal's Brochure Rules

Under the Proposal, Part I and Part II of Form ADV would be sub-divided and substantially revised. Revised Rule 204-3 under the Advisers Act would require each registered investment adviser to offer and deliver a firm brochure and one or more supplements to each client or prospective client. The brochure and supplement(s) would include the information required by Part 2 of revised Form ADV, which is summarized as follows:

The Brochure Rules Should Not Apply to Sophisticated Investors

Federated believes that circumstances unique to sophisticated investors justify an exemption to the Brochure Rules. The concept of an exemption with respect to sophisticated investors is not new to the Commission. Indeed, the Staff of the Division of Investment Management devoted Chapter 2 of its comprehensive May, 1992, report Protecting Investors: A Half Century of Investment Company Regulation, (the "Report") to putting forth and justifying the creation of a new exception from regulation for funds held exclusively by "qualified purchasers." As noted in the Report, "[t]he new exception would be premised on the theory that `qualified purchasers' do not need the [Investment Company] Act's protections because they are able to monitor such matters as management fees, transactions with affiliates, corporate governance, and leverage."3 (Emphasis added.) As the Division observed, "[w]hile the class of investors for a sophisticated investor exception would have to be defined adequately to ensure that investors are capable of safeguarding their interests, the idea that some investors do not need the protections of the federal securities laws is certainly not novel."4 (Emphasis added.) Additionally, the Staff stated that it "believes that no sufficiently useful governmental purpose is served by continuing to regulate funds owned exclusively by sophisticated investors."5 (Emphasis added.)

Federated strongly agrees with the Division's observations, and would urge the Commission to consider these statements with regard to the Proposal's Brochure Rules, and take a consistent approach with respect to sophisticated investors under the Advisers Act. Federated offers two arguments in support of an exemption for qualified purchasers. First, qualified purchasers capable of evaluating pooled investments without the protection of the Investment Company Act of 1940, as amended ("1940 Act") are also capable of evaluating investment advisers without mandatory disclosure. Second, qualified purchasers already obtain tailored disclosure from the investment adviser, making any mandatory brochure superfluous and redundant.

The "Qualified Purchaser" Exemption Should Apply to the Brochure Rules

In 1996, Congress embraced the Division's proposal and added Section 3(c)(7) to the 1940 Act. Section 3(c)(7)(A) exempts from regulation funds comprised exclusively of persons who are qualified purchasers, and that do not make public offerings of securities. Congress also added Section 2(a)(51)(A) to the 1940 Act to define qualified purchasers as: (1) individuals who own $5 million in investments and their spouses if they invest jointly; (2) specified family-owned companies with $5 million in investments; (3) trusts established and funded by qualified purchasers for which investment decisions are made by a qualified purchaser; and (4) entities that in the aggregate own and invest on a discretionary basis for their own account, or for the accounts of other qualified purchasers, $25 million in investments.

In the report of the Committee on Banking, Housing, and Urban Affairs ("Committee") under the proposed Securities Investment Promotion Act of 1996, in which the Committee recommended the adoption of the exemption set forth in Section 3(c )(7), the Committee stated that the "qualified purchaser pool reflects the Committee's recognition that financially sophisticated investors are in a position to appreciate the risks associated with investment pools that do not have the [1940] Act's protections. Generally these investors can evaluate on their own behalf matters such as the level of a fund's management fees, governance provisions, transactions with affiliates, investment risk, leverage and redemption rights." (Emphasis added.) The Committee further stated that it "intends the [Commission] to deem as qualified purchasers only those persons the [Commission] determines may fend for themselves without the protection of the 1940 Act."6 (Emphasis added.)

Federated wholly concurs with the Committee's statements, and argues that sophisticated advisory clients are similarly able to "appreciate the risks" of engaging the services of an investment adviser, and are certainly able to "fend for themselves" in this regard. Therefore, Federated believes that the same criteria that apply to private investment pools (or "hedge funds") under Section 3(c)(7) should apply to the delivery of information to sophisticated investors under the Brochure Rules. Otherwise, the Proposal will create a double standard in which advisers who manage investments for qualified purchasers directly will be subject to greater disclosure requirements than advisers who manage such investments on a pooled basis. Federated cannot find any reasonable basis for such a distinction.

Additionally, once the IARD is effective, investors will have instant, free, online access to substantive and detailed information about an investment adviser pursuant to that adviser's filing of its Form ADV. At a minimum, this filing would include Part 1 of amended Form ADV, giving basic information about the adviser, as well as detailed information about the adviser's disciplinary history, as set out in the newly-proposed Disciplinary Reporting Pages. Based upon the experience detailed below, we expect qualified purchasers will access this information directly, without the need for a brochure.

RFP Information Makes the Brochure Rule Requirements Redundant and Superfluous

Approximately 75% of Federated's private account clients submit to Federated a request for proposal ("RFP") for their investment advisory business, prior to entering into an investment advisory agreement with Federated. The RFP questionnaire is, in essence, the client's own, personalized disclosure request form. Federated urges the Commission to consider the fact that, not surprisingly, RFP responses encompass much of the same information as would be required by the Brochure Rules. Indeed, the information an adviser must furnish pursuant to an RFP is sometimes more detailed than that required by the Brochure Rules, and is always tailored to the stated requests of the particular client. Thus, Federated believes that it would be superfluous to deliver a brochure to a sophisticated investor client in addition to RFP information.

To illustrate this point, we have reviewed several RFP documents actually submitted to Federated, which we believe are representative. We have attached as Appendix A a comparison of the most significant informational items required by the Brochure Rules, and information that generally would be provided to sophisticated investors pursuant to an RFP. Based on this review and our extensive experience in dealing with the types of investors who would meet the definition of "qualified purchasers," Federated believes that the information requested in an RFP generally calls for more detail in the form of tailored disclosure information and reflects a far greater investment knowledge on the part of the client than information required under the Brochure Rules.

Despite the marked prevalence of sophisticated investors' use of the formal RFP process, we recognize that the process is not universal. Nevertheless, it would be inaccurate to conclude that the minority of qualified purchasers who do not invest the time, effort, and money to develop their own formal RFP document take no interest in performing a "due diligence" review of prospective advisers. In our experience, a client's lack of a formal RFP document does not generally indicate a lesser degree of sophistication; rather, these clients have chosen to rely more on personal interviews and contacts, as well as less formal requests for information, in deciding which adviser to retain.

Furthermore, the Commission has stated that the purpose of the Brochure Rules is "to improve the quality of information advisers must provide to their clients."7 Federated is greatly concerned that the Brochure Rules may result in disclosure that must be modified in every instance to the particular investor's needs in the case of completely negotiated advisory arrangements (i.e., arrangements for sophisticated investors). The cumulative effect of such modifications on a "one size fits all" brochure would prove not only impractical, but uneconomical.

For example, under Item 7 of the firm brochure, advisers are required to provide clients with information about "methods of analysis, investment strategies and risk of loss." For sophisticated investors that know exactly what they want from an advisory relationship, much of this information is redundant. Federated believes that, in order to attain a sophisticated investor's business, an adviser would have to tailor this disclosure to contain the particular methods and strategies applicable to that particular investor. Another example can be seen in Item 11 of the firm brochure, which will set out the information generally required regarding an adviser's "brokerage practices." While an adviser may discourage directed brokerage, it may wish to make an exception for certain sophisticated investors, which would necessitate the modification of the "standard" brochure.

Alternatively, Federated believes that merely providing the level of information necessary to satisfy the disclosure requirements of the Brochure Rules may result in disclosure that, from the perspective of a sophisticated investor, is so diluted and generic as to become meaningless. This is because the disclosure will be simplified and general enough to apply to any potential investor of any level of expertise. Accordingly, Federated believes that the Brochure Rules ultimately will produce disclosure that is not only inconsistent with the edicts of the Commission, but which will not be of benefit to a sophisticated advisory client.

Moreover, the exercise by certain clients of their ability to obtain extensive information about an adviser outside the requirements of Form ADV has already been recognized by the Commission as a basis to dispense with the requirement to deliver a brochure to them. Indeed, this notion has been an integral part of the Commission's analysis throughout its development of the Brochure Rules, as exempted by the treatment of investment companies.

The Commission first sought comment on a possible requirement for advisers to deliver specified disclosure statements in Investment Advisers Act Release No. 442 (March 5, 1975). Even at this earliest stage in the evolution of the Brochure Rules, the Commission proposed to specifically exempt advisers from having to deliver a standard disclosure statement to any client that is a registered investment company. In this regard, the Commission stated that "[t]his exception is based on the fact that investment advisers are already required pursuant to Section 15(c) of the [1940 Act] to provide extensive disclosures to the boards of directors of investment companies and that those disclosures should encompass at least the information that would appear in the proposed written disclosure statement." In the case of clients who would meet the definition of "qualified purchaser," even though there is no direct statutory equivalent of Section 15 (c), we believe there is a defacto disclosure requirement created by the client that is sufficient to support the same conclusion.

We are aware that a proposal similar to ours was made during the comment process leading up to adoption of current Rule 204-3. As noted in Investment Advisers Act Release No. 664 (January 30, 1979), several commentators suggested that the Brochure Rules include an exemption for what the Commission referred to as "large account clients." In deciding to reject this proposal, the Commission observed in Release No. 664 that "[i]t is not at all certain, however, that large account clients necessarily have sufficient financial acumen to obviate the need for the protections afforded other advisory clients." The Commission went on to note that, while what was then Rule 146 under the 1933 Act provided an exemption from registration for offerings to persons who are "able to bear the economic risk of the investment," the terms of the exemption were "strictly limited" with respect to such matters as the manner of the offering, nature and number of the offerees, and provision of access to information.

As seems evident from our foregoing discussion, the regulatory landscape with respect to "large account investors" (i.e., qualified purchasers) has changed dramatically in the decades since the Commission first adopted the Brochure Rules. Both the Commission's Staff and Congress have recently, and forcefully, taken the view that qualified purchasers need neither the disclosure protections of the 1933 Act nor the substantive protections of the 1940 Act. It strikes us as entirely consistent and appropriate (not to mention long overdue) for the Commission to apply the same logic to disclosure under the Advisers Act.

Thus, Federated believes that the Proposal's mandate for brochure delivery to all clients in all circumstances would not serve any useful purpose and would result in unnecessary expense and inconvenience both to Federated and to its clients. Consequently, Federated believes that an exemption to the Brochure Rules for sophisticated investors who fit the definition of a qualified purchaser under Section 3(c)(7) under the 1940 Act would prove far more time and cost effective to all parties involved.

* * * * *

Federated very much appreciates having the opportunity to comment on this important Proposal. If you would like to discuss these comments or any other aspects of the Proposal with us, please contact Amanda Reed by phone at (412) 288-2284 or by e-mail at; or Jay Neuman by phone at (412) 288-7496 or by e-mail at Thank you very much.

Very truly yours,

/s/Amanda J. Reed

Amanda J. Reed
Associate Corporate Counsel

/s/ Jay S. Neuman

Jay S. Neuman
Corporate Counsel

cc: Paul F. Roye, Director
Division of Investment Management

Appendix A

Brochure Rule Items

RFP Information Generally Requested/Provided

Part 2A - Firm Brochure


Item 4 -- Advisory Business.

History, organization, specialization, assets and accounts under management and business affiliations of the adviser.

Item 5 -- Fees and Compensation.

Fee schedule, including breakpoint designations, fee guaranty periods and information on negotiation. Currently, Federated does not offer performance based fees, but would proffer this information if applicable in future.

Item 6 -- Types of Clients.

Information regarding representative clients, including specific client references.

Item 7 -- Methods of Analysis, Investment Strategies and Risk of Loss.

Investment policies, processes, strategies (including asset allocation strategies), economic and investment research, portfolio management, portfolio diversification and risk control.

Item 8 -- Disciplinary Information.

Litigation and disciplinary information. Insurance and bonding information.

Item 9 -- Other Financial Industry Activities and Affiliations.

Business affiliations.

Item 10 -- Participation or Interest in Client Transactions; Personal Trading.

Code of ethics, including compliance manual and procedures.

Item 11 -- Brokerage Practices.

Brokerage allocation policies, soft dollar practices, best execution practices.

Item 12 -- Review of Accounts.

Client service and reporting information, including examples of reporting statements and narrative reports or commentaries, including description of any necessary special communications.

Item 13 -- Payment for Client Referrals.

Client referral information and fees, if any.

Item 14 -- Custody.

Not applicable to Federated. Independent custodian information provided.

Item 15 -- Investment Discretion.

RFPs generally request discretionary advisory services and any desired exceptions.

Item 16 -- Proxy Voting Policies.

Generally not required.

Item 17 -- Investment Performance.

Performance information, including Association for Investment Management and Research information and benchmark and style universe performance histories, if applicable.

Part 2B - Brochure Supplement


Item 2. Educational Background and Business Experience.

Advisory personnel educational information, investment experience and specific client references.

Item 3. Disciplinary Information.

Client references for individuals or teams of individuals, disciplinary information.

Item 4. Other Business Activities.

Not applicable.

Item 5. Additional Compensation.

Not applicable.

Item 6. Investment Advice and Supervision.

Portfolio manager and asset management team information.


1 Federated is one of the largest asset management and mutual fund firms in the United States. Through its subsidiaries, Federated manages total assets of more than $125 billion (including over $3.4 billion in private account assets, the majority of which are placed with Federated by institutional investors), and serves as administrator for over 450 classes of fund shares.

2 The Proposal is set forth in Investment Advisers Act Release No. 1862 (April 5, 2000) ("Release").

3 See the Report at pages 104-5.

4 Id. at page 111.

5 Id. at pages 114-5.

6 Report of the Committee on Banking, Housing, and Urban Affairs Under the Proposed Securities Investment Promotion Act of 1996 at pages 9-10. In SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1953), the Supreme Court found that the applicability of an exemption from the registration requirements of the Securities Act of 1933 "should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction `not involving any public offering.' " (Emphasis added.)

7 See the Release at page 4.