Page 4 February 10, 1997 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, N.W., Stop 6-9 Washington, DC 20549 Re: File No. S7-31-96 Dear Jonathan G. Katz: The Personal Financial Planning Executive Committee of the American Institute of Certified Public Accountants (AICPA) appreciates the opportunity to comment upon the Securities and Exchange Commission's ("the Commission") Draft rules implementing amendments to the Investment Advisers Act of 1940 (IAA). As a preliminary matter, we commend you and your staff for developing helpful rules to implement the amendments to the IAA. The AICPA strongly endorses efforts to provide information to help investment advisers in ascertaining their regulatory status under the provisions of the Coordination Act. Generally, the Coordination Act requires advisers with $25 million or more of assets under management to register with the Commission and advisers with less than $25 million to register with a state and not with the Commission. Assets under Management It should be noted that many local and regional CPA firms have also registered affiliated firms with the Commission to provide financial planning and investment advising services. We support the comment that the Commission believes that Congress intended to exclude from Commission registration most advisers that do not engage in traditional portfolio management, including most financial planners and consultants. We agree that a financial planner who merely undertakes to monitor the markets and advise clients on changes to their portfolios would not be providing continuous and regular management or supervisory services. The AICPA is concerned about the distinctions developed in the discussion on "continuous and regular supervisory and management services." In particular, when a financial planner, with no discretionary investment authority, provides annual or quarterly investment monitoring services, would the nature of those services fail to meet the definition of continuous and regular management and supervisory services? The Coordination Act defines assets under management to include "securities portfolios with respect to which an investment adviser provides continuous and regular supervisory or management services". We believe this definition is unclear because it does not address a wide variety of activities that can be undertaken with respect to an investor's portfolio. These advisory services activities might include: # suggesting criteria for investing in mutual funds; # monitoring the results and performance of clients' money managers; # recommending allocations of investments among asset classes; and # evaluating the suitability of investments. The AICPA urges that the Commission's definition of continuous and regular supervisory and management services under the definition of assets under management should make it clear that such advisory services are not included thereunder. We understand that the Commission expects that most financial planners would not fit the group that will be registered with the Commission as investment advisers because they are not investing client money with full discretion or engaging in traditional ongoing portfolio management. The Commission's position needs to be clarified so that CPA financial planners are certain about whether they will need to calculate Schedule 1 annually to determine whether they should register. Place of Business The Commission's proposed definition of place of business is too broad. Under the proposed rules, the place of business test is met in any place, such as a hotel room or even the home of the client. As a practical matter, without a definition of what is meant by "regularly communicates", any regular contact with a client from any place could be a place of business. We believe additional guidance and criteria would be appropriate to narrow the term. Such guidance should also cover the types of services provided over the Internet and through other electonic communications. Transition from State to Commission Registration We support the single point in time (one year) approach to measuring assets under management in that it makes it easier for investment advisers to comply with the rule. However, we support the use of each registrant's fiscal year for purposes of measuring assets. We also support the $5 million "window" because it provides sufficient flexibility to avoid the costly process of periodically registering and deregistering. Transition from Commission to State Registration An adviser facing potential cancellation of its Commission registration should have a sufficient grace period to register with the appropriate states. Because advisers will face multi- state registration, we believe the 90-day grace period is not sufficient time and urge that the period be lengthened to 120 days. National De Minimis Standard The Coordination Act amends the Investment Advisers Act of 1940 to make state investment adviser statutes inapplicable to advisers that do not have a place of business in the state and have fewer than six clients who are residents of that state. We agree that the national de minimis standard was intended to ease the regulatory burden on advisers who may be uncertain as to whether they are subject to state registration requirements as a result of clients moving to another state. We believe that since the Commission's definition of place of business will be satisfied with any regular client contact, the usefulness and benefit of having a national standard will be reduced. By narrowing the definition of place of business, the scope of the de minimis exemption will be preserved. In addition, we believe the proposed definition of client is reasonable. Pension Consultants The Coordination Act amends the Employee Retirement Security Act to allow both state- and federally-registered investment advisers to advise pension accounts for two years. We hope that provision will become permanent. We support your exemption for certain pension consultants who provide investment advise to certain employee benefit plans having aggregate value of less than $50 million during the adviser's last fiscal year. Planners with "Multi-State" Practices Many financial planners/investment advisers even those with smaller and medium- sized firms (who will no longer be registered with the Commission) have clients in three or more states. The law gives the Commission the authority to require Commission registration of all persons to whom state registration would be a "burden on interstate commerce." Smaller advisers who do not meet the definition of assets under management should be able to register with the Commission rather than having to register in numerous states. It is burdensome for an adviser to register in new states including the possibility of having the take new securities examinations, when there is only a limited-time grace period to study and pass the examination. We are concerned that an adviser may have to refuse service to new clients. Thank you for the opportunity to comment on the proposed rules. If you or your staff would like to discuss our comments further, we would welcome the opportunity to do so. Please contact me at 212-596-6058 or Lisa Dinackus at 202-434-9276. Sincerely, Phyllis Bernstein Director Personal Financial Planning cc: PFP Executive Committee