From: Cunningham William Sent: Tuesday, May 28, 2002 7:33 PM To: rule-comments@sec.gov Subject: File No. S7-10-02 May 28, 2002 Jonathan G. Katz, Secretary UNITED STATES SECURITIES AND EXCHANGE COMMISSION 450 Fifth Street, NW Washington, DC 20549-0609 RE: File No. S7-10-02 Dear Mr. Katz: I am writing concerning proposed "rule amendments under the Investment Advisers Act of 1940 that would exempt certain investment advisers that provide advisory services through the Internet from the prohibition on Commission registration set out in section 203A of the Act. The effect of the amendments would be to permit these advisers to register with the Commission instead of with state securities authorities. The amendments are designed to alleviate the burden of multiple state regulation on advisers whose business is unconnected with any particular state and for whom multiple state regulation would be a hardship." Background William Michael Cunningham registered with the U.S. Securities and Exchange Commission as an Investment Advisor on 2/2/1990. He registered with the D.C. Public Service Commission as an Investment Advisor on 1/28/1994. Mr. Cunningham manages an investment advisory and research firm, Creative Investment Research, Inc. The firm researches and creates socially responsible investments and provides socially responsible investment advisory services. The company was founded in 1989. On November 16, 1995 the firm launched one of the first investment advisor websites (www.creativeinvest.com, launched at www.ari.net/cirm/). The firm and Mr. Cunningham have long been concerned with the SEC's ability to manage the investment advisor regulatory process: a.. On July 9, 1993, Mr. Cunningham wrote SEC Commissioner Mary Schapiro to suggest the SEC warn the investing public about a certain specific investing "scam." A timely warning was not, to our knowledge, ever issued. b.. In an April, 1995 article titled "Profit From Debt: The Black Enterprise Fixed Income Roundtable" Mr. Cunningham recommended investors not purchase municipal securities issued by the District of Columbia, given social and financial difficulties the city was experiencing at that time. For reasons having nothing to do with Mr. Cunningham's comments, the city was stripped of financial autonomy and municipal securities issued by the District of Columbia fell sharply in value. Shortly thereafter, Mr. Cunningham was subject to certain "unfair regulatory practices" by the Public Service Commission of the District of Columbia (DC Public Service Commission Case 943-G.) There have been several other similar incidents. In each case, upon commenting, the SEC improperly first reviewed Mr. Cunningham's activities, instead of looking at the facts surrounding the matters cited. We note this behavior may explain why the SEC does not receive more timely information from industry insiders concerning inappropriate activities. Comments on the Proposed Rule: Exemption for Certain Investment Advisers Operating Through the Internet The commission asked for comments concerning the following: "Does the proposed rule differentiate adequately between advisers that merely use the Internet to market their business and those that conduct substantially all of their advisory business through the Internet?" The term "merely" is, in this context, somewhat pejorative. Small investment advisors have no effective option to using the internet as a marketing tool, given the structure of the market for investment advisory services. (Recent events point to the influence large brokerage firms, money management companies, mutual funds and investment analysts have. This influence is not always consistent with the public interest.) The proposed rule seems designed to benefit a handful of new, relatively large, well funded investment advisors. We plan to use new internet technologies to provide investment advisory services over the internet without using computer software-based models or applications. We will provide personalized investment advice to clients. Given this, we plan to claim exemption under the proposed rule. "Will the test for "substantially all" appropriately limit the use of the rule, or are there alternative tests that we should consider?" We suggest the SEC use a "majority", or 51%, test. A requirement that 90% of clients receive advice via the internet serves the interest of large internet investment advisors, not the general investing public, and is unduly restrictive. Small advisors may not be able to afford the computer-based applications or platforms to processes and analyzes client responses to generate personalized investment advice. They can, however, provide investment advisory services via the internet. We further suggest most of the investing public will find computer-based models, applications or platforms complicated and confusing. Small advisors may, however, develop other, less confusing tools to provide independent, value-adding investment advice through the internet. The Commission's definition of an "interactive website" as "a website in which computer software-based models or applications provide investment advice to clients based on information that each client supplies through the website", again, serves only the interest of large, well funded internet investment advisors and should be broadened. "The rule would require that 90% of the adviser's clients obtain their investment advice exclusively through the interactive website. Is 90% of clients the appropriate percentage? If not, what higher or lower percentage should we consider?" As noted above, the SEC should use a "majority" or 51% guideline. "Should we require that these clients obtain all of their advice from the adviser through the interactive website? Alternatively, should we consider permitting an adviser to use the rule even if these clients obtain less than all of their advice through the website? If so, what proportion should we require? How would the adviser measure that proportion? What burden would this measurement place on the adviser?" To increase flexibility and to serve the public interest, the SEC should permit an adviser to be eligible for exemption even if some clients obtain less than all of their advice through the website. The advisor may not fully control the percentage of investment advice received by clients through the website, or may wish to allow consumers to choose the percentage of online investment advice they receive. We suggest the Commission consider requiring that 51% or more of the investment advice and clients come through the internet. We suggest the advisor measure this proportion by simply asking clients what percentage of advice they plan to receive on-line. The advisor can easily monitor and track the amount of investment advice actually delivered on line. "We estimate that as many as 20 advisers may currently be eligible for the exemption provided by the proposed rule amendments. Is this estimate reasonable?" We request the SEC list the 20 advisors currently eligible. The proposed rule, assuming changes suggested herein are incorporated, will cause a number of firms to enter this sector, spurring competition. We believe this to be in the public interest, and therefore anticipate that the number of advisors using this exemption may grow to 100 or more. "We believe that demand for Internet Investment Advisers' services may grow in the next several years, perhaps as part of the growing demand for advice to pension plan participants. Is this expectation reasonable? How many new Internet Investment Advisers are likely to form to meet any increases in demand?" While we intuitively agree, we suggest there is no way to accurately answer this question. "Are there other types of investment advisers - without assets under management but operating in many states - that face similar burdens? How many of these advisers are there? In how many states do they typically register? Should we also consider exempting them from section 203A? " See above. There is no way to accurately answer this question. Cost/benefit analysis "Comment is requested on our estimate of the number of investment advisers likely to r egister with the Commission under the proposed rule. Commenters are requested to provide views and empirical data relating to the number of these advisers." A search using the term "investment advice" conducted on one of the more popular web search engine sites (Yahoo) reveals the following (Number indicates a count of websites in each category): Brokerages (850) Clubs and Forums (25) Education Savings Plans (11) Financial Planners (433) Forestry Investments (16) Futures and Options (6) Market Information and Research (862) Mutual Funds (405) Real Estate Instruments (163) Retirement Planning (154) Socially Responsible Investments (24) TOTAL: 2,949 Each firm listed, with the appropriate technology, might be considered an internet investment advisor. (We note that this listing contains several institutions that would not be considered investment advisors: trade associations, software and computer service providers, etc.) "The Commission requests comment on the potential costs and benefits identified in this release, as well as any other costs or benefits that may result from the proposal." The Commission may not have considered other expenses small investment advisors face. In several states, unless native to that state, an advisor must file certain "foreign corporation" registrations. There are both monetary and time costs associated with "foreign corporation" registrations. The Proposed Rule "encourage(s) commenters to identify, discuss, analyze, and supply relevant data regarding these or additional costs and benefits." Se above. Recordkeeping The SEC estimates that "recordkeeping burden should not exceed an average of 4 hours annually per adviser, for a total burden of 80 hours annually." Further, the SEC requested comment whether this estimate of recordkeeping burden is reasonable. There is really no way to tell until the final regulations are issued. Form ADV According to the Proposed Rule, "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. We estimate that approximately 20 Internet Investment Advisers would register with the Commission under the proposed rule, and that each of these advisers would file one complete Form ADV and one amendment annually. The increase in the total annual burden for this collection of information would therefore be 455 hours, for a total revised burden of 46,921 hours. We request comment whether these estimates are reasonable." There is really no way to tell until the final regulations are issued. According to the Proposed Rule, "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: evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information; determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology." The proposed information collection seems necessary and reasonable. Again, it is impossible to determine the accuracy of the burden estimate until final regulations are issued and implemented. Certainly, the quality, utility and clarity of the information to be collected can be enhanced. We suggest the SEC use new technologies to monitor, in real time, Internet Investment Advisor performance. This real time monitoring should be tied to specific information collection algorithms. According to the Proposed Rule, "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. Comment is requested on the number of Internet Investment Advisers that are likely to be small entities. Commenters are requested to provide views and empirical data relating to the number of these advisers that would be considered small entities." Based on our review of investment advisors conducted using a popular web search engine sites (Yahoo), we anticipate that most (51% or more) internet investment advisors will be small entities. Further, it is our belief that this is in the public interest. Thank you. Sincerely, William Michael Cunningham for William Michael Cunningham and Creative Investment Research, Inc.