VIA ELECTRONIC AND REGULAR MAIL June 6, 2002 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington DC 20549-0609 Re: File No. S7-10-02 Proposed Exemption for Certain Investment Advisers Operating Through the Internet Dear Secretary Katz: As Banking Commissioner of the State of Connecticut, my regulatory responsibilities include administering the state's securities laws contained in Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act. I must admit I am somewhat troubled by the Commission's proposed amendments to SEC Rule 203A-2, 17 C.F.R. . 275.203A-2 removing the prohibition on SEC registration for investment advisers transacting business over the Internet. Like many others, I learned of the proposal, not through an informal dialogue with the SEC or even through a posting to the SEC's web site but rather through press reports that preceded release of the actual rule text by days. Although I can understand the Commission's intent in proposing the exemption, I must urge caution lest the proposal sweep too far. First, I would question the need for the proposal in its present form. Currently, the SEC has in place a multi-state adviser exemption that would permit an adviser to register with the SEC if it would otherwise have to register with the securities authorities of at least 30 states. Although the release claims that this exemption was designed to permit SEC registration where advisory firms had offices and clients in multiple states, the exemption does not specifically require that advisers relying on it maintain any office locations. Second, I would point out that the national de minimis standard in Section 222(d) of the Investment Advisers Act of 1940 would excuse state registration where an adviser does not maintain a place of business in a state and where the adviser has had less than 6 clients during the preceding 12 month period. Under Section 222(d), an on-line adviser can market to any number of prospective clients without triggering state registration requirements. Finally, I would dispute the release's assertion that Internet investment advisers were not in business when NSMIA was enacted in late 1996. On April 27, 1997, the North American Securities Administrators Association, Inc. ("NASAA") capped a year-long project group evaluation by adopting an Interpretive Order Concerning Broker-dealers, Investment Advisers, Broker-dealer Agents and Investment Adviser Representatives Using the Internet for General Dissemination of Information on Products and Services (the "NASAA Internet Order"). The NASAA Internet Order has been adopted in the majority of jurisdictions. While acknowledging that individualized investment advice would trigger state registration concerns, the NASAA Internet Order also reflected a policy determination that the marketing of advisory services on the Internet would not alone constitute the transacting of business for state jurisdictional purposes. There is no reason to believe that the states, in consultation with the SEC, could not develop a responsive interpretive solution - short of preemption - that would address algorithmic on-line advisory services. Proposed Rule 203A-2(f) may also be unworkable given its focus on advisers conducting "substantially all" of their advisory business through an interactive website. The rule defines "substantially all" to mean that 90 percent of the adviser's clients obtain their investment advice exclusively through the interactive website. In addressing the burden associated recordkeeping would impose on advisers eligible to use the rule, the release states that: "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." (Emphasis added) This last sentence implies that some on-line advisers meeting with clients at a physical location may also be eligible to use the exemption. Such an approach would not only open the door to possible misuse of the exemption, but represents a departure from the Commission's intent as articulates earlier in the release. The release also indicates that the proposed rule would minimize "the cost of examinations by multiple states' regulators." How could state regulators examine an adviser that has no physical office at which records are maintained? Although the release admits that "[a] rule permitting all advisers using the Internet to register with the ... [SEC] could effectively undo NSMIA's division of regulatory responsibilities between the Commission and the states", the proposal also acknowledges that its impact would be greatest on start-up businesses with limited assets - entities that the National Securities Markets Improvement Act of 1996 left to state oversight and concerning which the Commission claimed it lacked the resources to adequately regulate. Preemption should not be taken lightly, particularly in times of limited resources and challenging regulatory demands. The release questions whether "there are other types of investment advisers - without assets under management but operating in many states - that face similar burdens ...[and that we should] also consider exempting ... from section 203A." I am concerned that expanding preemption through additional rule-making would lead to less protection for advisory clients and further erode public confidence government's ability to effectively protect the investing public. Very truly yours, /s/ John P. Burke Banking Commissioner