SECURITIES AND EXCHANGE COMMISSION

     17 CFR Parts 230, 240, 270, and 275

     [Release Nos. 33-7548, 34-40122, IC-23272, and IA-1727; File No. S7-4-97]

     RIN 3235-AG62; 3235-AH01 

     Definitions of "Small Business" or "Small Organization" Under the
     Investment Company Act of 1940, the Investment Advisers Act of 1940, the
     Securities Exchange Act of 1934, and the Securities Act of 1933.

     AGENCY:  Securities and Exchange Commission

     ACTION:  Final Rules

     SUMMARY:  The Securities and Exchange Commission is amending the

     definitions of "small business" and "small organization" that are used in

     connection with Commission rulemaking under the Investment Company Act of

     1940, the Investment Advisers Act of 1940, the Securities Exchange Act of

     1934, and the Securities Act of 1933 regarding regulatory requirements

     applicable to investment companies, investment advisers, exchanges,

     securities information processors, transfer agents and issuers, and broker-

     dealers.  These definitions are used specifically for purposes of the

     Regulatory Flexibility Act, which requires the Commission to consider the

     impact of its regulations on small entities.  The amendments to these

     definitions reflect recent changes in the law as well as changes in the

     securities markets over the past decade, including technological

     innovations and increased business relationships among participants in the

     securities industry.

     EFFECTIVE DATE:  The rule amendments will become effective [insert date 30

     days after publication in the Federal Register].

     FOR FURTHER INFORMATION CONTACT:

     General:





          Christopher Gilkerson, Assistant General Counsel at (202-942-0929), or

     Anne H. Sullivan, Senior Counsel at (202-942-0954), Office of the General

     Counsel, Securities and Exchange Commission, 450 Fifth Street, N.W., Mail

     Stop 6-6, Washington, D.C. 20549.

     Divisions with Particular Responsibility:

          Thomas M.J. Kerwin, Senior Counsel, Division of Investment Management,

     (definitions applicable to investment companies and investment advisers)

     (202-942-0690).

          Glenn J. Jessee, Special Counsel, Office of the Chief Counsel,

     Division of Market Regulation (definitions applicable to brokers, dealers,

     exchanges, transfer agents and issuers, securities information processors,

     and broker-dealers) (202-942-0073).

     SUPPLEMENTARY INFORMATION:

          The Commission is amending the definitions of "small business" and

     "small organization" (together, "small business") set forth in Rule 0-10

     (17 CFR 270.0-10) under the Investment Company Act of 1940 (15 U.S.C. 80a-1

     et seq.) ("Investment Company Act"), Rule 0-7 (17 CFR 275.0-7) under the

     Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) (the "Advisers

     Act"), Rule 0-10 (17 CFR 240.0-10) under the Securities Exchange Act of

     1934 (15 U.S.C. 78a et seq.) (the "Exchange Act"), and Rule 157 (17 CFR

     230.157) under the Securities Act of 1933 (15 U.S.C. 77a et seq.) (the

     "Securities Act") as those terms are used for purposes of Chapter Six of

     the Administrative Procedure Act, 5 U.S.C. 601 et seq. (the Regulatory

     Flexibility Act, Pub. L. No. 96-354, 94 Stat. 1164 (1980), as amended, Pub.

     L. No. 104-121, Title II, Subtitle D, 110 Stat. 864 (1996) (the "Reg. Flex.

     Act")).  


                              ======END OF PAGE 2======





          The Reg. Flex. Act, enacted in 1980, requires federal agencies, among

     other things, to consider the impact of rulemaking on entities that qualify

     as "small" under applicable standards in the Reg. Flex. Act,<(1)> the

     Small Business Act,<(2)> or regulations promulgated by the Small

     Business Administration ("SBA").<(3)>  In 1982, the Commission adopted

     definitions that it considered appropriate for issuers and other entities

     subject to its regulation.  

          On January 22, 1997, the Commission published for comment proposed

     amendments to its definitions of "small business" for purposes of the Reg.

     Flex. Act, when used in connection with rulemaking affecting investment

     companies, investment advisers, exchanges, securities information

     processors, transfer agents and issuers, and broker-dealers.<(4)>  In

     addition to publishing the rule proposal in the Federal Register, the

     Commission posted the proposed rule changes on the small business page of

     the Commission's Website.<(5)>  To give the public additional time to

     comment, the Commission extended the comment period for the proposed

     amendments.<(6)>  The Commission received no comments on the proposal. 
                              

          <(1)>     5 U.S.C. 603, 604.

          <(2)>     15 U.S.C. 631 et seq.

          <(3)>     13 CFR Part 121.

          <(4)>     Securities Act Release No. 7383, Exchange Act Release
                    No. 38190, Investment Company Act Release No. 22478,
                    Investment Advisers Act Release No. 1609, 62 FR 4106
                    (Jan. 28, 1997) (the "Proposing Release").

          <(5)>     The Commission's Website is located at
                    http://www.sec.gov.

          <(6)>     Securities Act Release No. 7404, Exchange Act Release
                    No. 38401, Investment Company Act Release No. 22566,
                                                             (continued...)

                              ======END OF PAGE 3======





     The Commission is adopting the amendments to the "small business"

     definitions as proposed.<(7)>  The Commission is, however, making some

     modifications to the "small business" definition of investment adviser to

     reflect amendments to the Investment Advisers Act enacted under the

     National Securities Markets Improvement Act of 1996 (the "Improvement

     Act")<(8)> and to simplify the definition.  As required under the Reg.

     Flex. Act, the Commission has consulted with the SBA Office of Advocacy

     regarding the amendments it is adopting.<(9)>

     I.   BACKGROUND

          The Reg. Flex. Act defines the term "small entity" as a "small

     business," "small organization," or "small governmental

     jurisdiction."<(10)>  The definition of "small business" incorporates

     the Small Business Size Regulations ("SBA size standards")<(11)>

     established by the SBA under the Small Business Act.<(12)>  In

     addition, the Reg. Flex. Act definition of "small business" authorizes

                              

          <(6)>(...continued)
                    Investment Advisers Act Release No. 1619, 62 FR 13356
                    (Mar. 20, 1997).

          <(7)>     The Commission intends to maintain its current
                    definitions of "small business" as they relate to small
                    business issuers, clearing agencies, bank municipal
                    securities dealers, and public utility holding company
                    systems.

          <(8)>     Pub. L. No. 104-290, 110 Stat. 3416 (1996).

          <(9)>     See 5 U.S.C. 601(3), 601(4).

          <(10)>    Id.  601(6).

          <(11)>    13 CFR Part 121.

          <(12)>    15 U.S.C. 632(a)(2)(A) (SBA authority to establish
                    standards for determining "small business concern").

                              ======END OF PAGE 4======





     agencies to establish their own definitions if they determine that

     specialized definitions are more appropriate to the activities of the

     agency.<(13)>  

          As discussed in greater detail in the Proposing Release, the

     Commission has a longstanding commitment to understanding and addressing

     the concerns of small business.<(14)>  Consistent with this

     commitment, in 1982, the Commission chose to adopt its own definitions of

     "small business" for purposes of Commission rulemaking after reviewing size

     standards adopted by the SBA.<(15)>  

            As discussed in the Proposing Release, the Commission's definitions

     adopted in 1982 were, in many ways, more expansive than the statutory

     definitions of "small business" and "small organization" in the Reg. Flex.

                              

          <(13)>    5 U.S.C. 601(3), 601(4).

          <(14)>    See Proposing Release, supra note 4.

          <(15)>    The SBA adopted its size standards in 1980.  Small
                    Business Size Standards, Revisions of Methods of
                    Establishing Size Standards and Definitions of Small
                    Business, 45 FR 15442 (Mar. 10, 1980).  The Commission
                    determined that the SBA size standards were generally
                    inappropriate in the context of regulations affecting
                    securities issuers and reporting companies.  See
                    Proposed Definitions of "Small Business" and "Small
                    Organization" for Purposes of the Regulatory
                    Flexibility Act, Securities Act Release No. 6302,
                    Exchange Act Release No. 17645, PUHCA Release No.
                    21970, Trust Indenture Act Release No. 619, Investment
                    Company Act Release No. 11694, Investment Advisers Act
                    Release No. 754, 46 FR 19251 (Mar. 30, 1981) ("1981
                    Proposing Release"); see also Final Definitions of
                    "Small Business" and "Small Organization" for Purposes
                    of the Regulatory Flexibility Act, Securities Act
                    Release No. 6380, Exchange Act Release No. 18452, PUHCA
                    Release No. 22371, Trust Indenture Act Release No. 693,
                    Investment Company Act Release No. 12194, Investment
                    Advisers Act Release No. 791, 47 FR 5215, 5216 (Feb. 4,
                    1982) ("1982 Adopting Release").

                              ======END OF PAGE 5======





     Act.  Under the Reg. Flex. Act, a business is not considered "small" if it

     is not "independently owned and operated."<(16)>  The Commission's

     definitions went beyond the Reg. Flex. Act requirements because, for the

     most part, the Commission's definitions did not limit "small businesses" to

     those that were independently owned and operated.  The Commission's

     original definitions also were broader in certain respects than the SBA

     size standards, which consider various limiting factors when determining if

     an entity is "small."<(17)>  For example, the SBA size standards

     aggregate the interests of affiliated entities for the purpose of

     determining whether an entity is "independently owned and operated," and

     thus, "small."<(18)>  In determining whether entities are affiliated,

     the SBA size standards consider such factors as control, management,

     ownership, and contractual relationships.<(19)>  In addition, the SBA

     may treat multiple entities that have identical or substantially identical


                              

          <(16)>    See 5 U.S.C. 601(4) ("small organization" under the
                    Reg. Flex. Act means an entity that is "independently
                    owned and operated and is not dominant in its field");
                    15 U.S.C. 632(a)(1) (definition of "small-business
                    concern" under the Small Business Act (as incorporated
                    in the Reg. Flex. Act definition of "small business," 5
                    U.S.C. 601(3)) means an entity that is "independently
                    owned and operated and . . . is not dominant in its
                    field").

          <(17)>    See SBA size standards, 13 CFR 121.102 (size
                    eligibility provisions and standards).

          <(18)>    Id.  121.103.

          <(19)>    Id.  121.103(a)(1) (describing control relationships
                    that constitute affiliation); id.
                121.103(a)(2) (describing factors such as ownership,
               management, previous relationships with or ties to another
               concern, and contractual relationships that SBA considers in
               determining whether affiliation exists).

                              ======END OF PAGE 6======





     business or economic interests as a single entity.<(20)>  Although

     the Commission's current definitions in some cases address the concept of

     control,<(21)> none of the other affiliation concepts set forth in

     the SBA size standards were considered when the Commission originally

     adopted its definitions of "small business" in 1982.

          Under the Commission's current definitions, a majority of broker-

     dealers and investment advisers qualify as small.<(22)>  Some of

     those "small" broker-dealers handle customer orders in excess of $200

     million from which they earn more than $6 million per year in

     revenue.<(23)>  These entities are classified as "small" under

     current Commission rules even though they may be affiliated with larger

     entities that are responsible for many of the smaller firms' securities

     functions.  Similarly, today most mutual funds are affiliated with large
                              

          <(20)>    See id.  121.103(a)(3).

          <(21)>    Under certain of the current definitions of "small
                    business" under the Exchange Act (broker, dealer,
                    clearing agency, municipal securities dealer,
                    securities information processor, transfer agent), the
                    Commission has considered control interests in
                    determining whether an entity was "small."  Exchange
                    Act Rule 0-10 (17 CFR 240.0-10).  The SBA regulations
                    also address factors of control.  13 CFR 121.103(a)(1).

          <(22)>    Under the current definitions, approximately 75 percent
                    of investment advisers and 60 percent of registered
                    broker-dealers qualify as "small."  The number of
                    "small" investment advisers registered with the
                    Commission was significantly reduced as of July 8,
                    1997, however, as a result of legislation that
                    reallocated primary responsibility for regulating most
                    smaller investment advisers to the states.  See infra
                    notes 45-47 and accompanying text.

          <(23)>    The revenue amount is based on information provided by
                    broker-dealers in quarterly FOCUS reports.  The amount
                    of customer order flow is derived using revenue data in
                    the FOCUS reports.

                              ======END OF PAGE 7======





     mutual fund families, and many investment advisers are affiliated with

     larger financial services firms.  These relationships allow the "small"

     affiliates to rely on a larger entity that centralizes administrative and

     compliance systems for all affiliates, significantly reducing regulatory

     burdens for each individual affiliate.  

          A similar relationship exists between introducing broker-dealers and

     the large firms through which they clear securities trades.  Although

     introducing and clearing firms share responsibility for ensuring that a

     customer's account is handled properly, introducing firms typically depend

     on clearing firms to execute customer trades, to handle customer funds and

     securities, and to handle many back-office functions, including issuing the

     confirmation of the customer's trade.  The increase in these affiliations

     since 1982 occurred along with tremendous growth and significant

     technological changes in the securities industry that facilitate such

     arrangements.<(24)>  These changes in the securities industry
                              

          <(24)>    Between 1980 and 1996, the value of public offerings
                    (including debt and equity, but not investment company
                    securities) increased from $58 billion to over $1
                    trillion.  Between 1990 and 1996, the dollar volume of
                    equity securities traded on registered national
                    securities exchanges and Nasdaq grew 277 percent, with
                    over $7.8 trillion traded in 1996.  Assets under
                    management by investment advisers (excluding bank
                    advisers to registered investment companies) rose from
                    $205 billion to over $10 trillion (a 4,778 percent
                    increase) between 1980 and 1996.  Over the same period,
                    assets of investment companies increased 1,514 percent
                    from $235 billion to $3.794 trillion.  The number of
                    securities firms and professionals registered with the
                    Commission or with self-regulatory organizations has
                    also surged.  The number of broker-dealers grew, over
                    the same period, from around 5,200 to approximately
                    7,760 (a 49 percent increase).  In addition,
                    technological progress has changed the securities
                    industry.  For example, advances in information
                                                             (continued...)

                              ======END OF PAGE 8======





     prompted the Commission to begin reviewing certain of its "small business"

     definitions in 1995.<(25)>

          The Commission expanded its review of "small business" definitions in

     1996, after Congress enacted the Small Business Regulatory Enforcement

     Fairness Act of 1996 ("SBREFA").<(26)>  Among other things, SBREFA

     (i) imposed new obligations on the Commission and other agencies to assist

     small entities in understanding and complying with regulatory

     requirements,<(27)> (ii) amended the Reg. Flex. Act to allow small

     entities to seek judicial review of agency compliance with the Reg. Flex.

     Act,<(28)> and (iii) amended the Equal Access to Justice Act

     ("EAJA")<(29)> by expanding the class of litigants eligible to

                              

          <(24)>(...continued)
                    technology have resulted in the proliferation of
                    information vendors and electronic trading systems not
                    contemplated in 1982.  Since 1982, the markets have
                    seen the development of fully automated electronic
                    broker-dealers and exchanges, improved electronic order
                    execution systems at broker-dealers, exchanges, and
                    national securities associations, and improved
                    electronic linkages among markets and between broker-
                    dealers and their customers.  These changes have
                    created substantially deeper and more liquid markets
                    and have made trading more immediate and less expensive
                    for both institutional and retail customers.

          <(25)>    See Introduction to the Regulatory Plan and the Unified
                    Agenda of Federal Regulations, 60 FR 59503, 61073 (Nov.
                    28, 1995) (noting Division of Investment Management's
                    consideration whether to recommend that the Commission
                    propose amended definition of "small entity" in Rule 0-
                    10 (17 CFR 270.0-10) under the Investment Company Act).

          <(26)>    Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).

          <(27)>    Id.  212, 213(b), 110 Stat. 858, 859.

          <(28)>    Id.  242, 110 Stat. 865.

          <(29)>    5 U.S.C. 504; 28 U.S.C. 2412.

                              ======END OF PAGE 9======





     receive EAJA awards to include small entities as defined under the Reg.

     Flex. Act.<(30)>  In view of the Commission's expanded obligations

     under SBREFA,<(31)> and changes in the securities industry discussed

     above, the Commission is adopting amendments to certain of its "small

     business" definitions to take into account more of the factors suggested by

     SBA size standards in determining whether an entity qualifies as

     "small."<(32)>  The following sections of this release describe the

     amendments to specific "small business" definitions.  The release also

     discusses how the amended definition of "small business" as it relates to

     investment advisers differs from the proposal and the reasons for the

     changes.

     II.  DISCUSSION OF AMENDMENTS

          A.  Investment Companies

                              

          <(30)>    Pub. L. No. 104-121,  232(b)(2), 110 Stat 863.

          <(31)>    The Commission is concerned that, as a result of the
                    Commission's existing broad definitions of "small
                    business," certain of the amendments made by SBREFA
                    could result in a significant increase in the
                    Commission's exposure to litigation beyond that
                    reasonably contemplated by the Reg. Flex. Act.  The
                    Commission's enforcement litigation and other
                    litigation matters have increased in recent years.  In
                    light of increased exposure to litigation under SBREFA,
                    which could further strain the Commission's limited
                    budget, the Commission believes it is appropriate to
                    revise certain small business definitions under its own
                    rules to reflect better the policies underlying the
                    Reg. Flex. Act and the SBA size standards.

          <(32)>    In instances where the Commission has already
                    instituted a rulemaking proceeding and prepared an
                    Initial Regulatory Flexibility Analysis (IRFA) under
                    the old small business definitions, those definitions
                    will apply for purposes of any final rulemaking and the
                    Commission's preparation of the required Final
                    Regulatory Flexibility Analysis (FRFA).

                              ======END OF PAGE 10======





          The Commission is adopting, as proposed, amendments to the rule under

     the Investment Company Act that defines "small business" as applied to

     investment companies.<(33)>  The current rule treats as a small

     business each investment company ("fund") that has $50 million or less in

     assets as of the end of its fiscal year.<(34)>  As amended, the rule

     generally treats a fund as a small business only if it and any group of

     related funds have aggregate net assets of $50 million or less.<(35)> 

     The Commission estimates that approximately 400 funds will be treated as

     small businesses under the amended rule.  

          The amended rule defines a group of related funds to include two or

     more management companies (including any series of such a company) that

     hold themselves out to investors as related companies for purposes of

     investment and investor services, and share either a common investment



                              

          <(33)>    See amended Rule 0-10 (17 CFR 270.0-10); Proposing
                    Release, supra note 4.  

          <(34)>    Rule 0-10 (17 CFR 270.0-10).

          <(35)>    Amended Rule 0-10.  Conforming amendments to Rule
                    157(b) (17 CFR 230.157(b)) under the Securities Act and
                    Rule 0-10(b) (17 CFR 240.0-10(b)) under the Exchange
                    Act adopt the same small business definition of an
                    investment company.  To facilitate the efficient
                    computation of net assets, the amended rule provides
                    that the Commission may base its count of the assets of
                    any group of related funds on the net assets of each
                    fund (or series) in the group at the end of each fund's
                    fiscal year, as generally reported in Form N-SAR. 
                    Amended Rule 0-10(c) (17 CFR 270.0-10(c)); see 17 CFR
                    274.101; Form N-SAR, Item 74T.  As under the current
                    rule, small business status will be determined on a
                    company-by-company basis rather than a series-by-series
                    basis (even in the unusual circumstances when some
                    series of a multi-series company may not constitute a
                    group of related funds with respect to other series).

                              ======END OF PAGE 11======





     adviser (or affiliated advisers) or a common administrator.<(36)>  In

     the case of a unit investment trust ("UIT"), a group of related funds means

     two or more UITs that have a common sponsor.<(37)>  

          There is a special rule applicable to insurance company separate

     accounts.<(38)>  Because state law generally treats separate account

     assets as the property of the sponsoring insurance company, the amended

     rule aggregates each separate account's assets with the assets of its

     sponsor, including other sponsored accounts.<(39)>  As a result, the

     Commission expects few, if any, separate accounts to be treated as small

     businesses.





                              

          <(36)>    Amended Rule 0-10(a)(1) (17 CFR 270.0-10(a)(1)).  Under
                    this definition, the assets to be aggregated for a
                    multi-series company would include those of all series
                    of the company, and of any separately organized company
                    (and its series) in a related group.

          <(37)>    Amended Rule 0-10(a)(2) (17 CFR 270.0-10(a)(2)).  A UIT
                    holds a fixed portfolio of securities deposited by its
                    sponsor, and does not have an investment adviser.  See
                    generally Section 4(2) of the Investment Company Act
                    (15 U.S.C. 80a-4(2)).  The amended rule does not define
                    a group of related funds as applied to a face amount
                    certificate company, another type of fund, which will
                    continue to be subject to the $50 million test on a
                    company-by-company basis.

          <(38)>    Separate accounts contain assets used to fund certain
                    insurance and investment contracts between the
                    sponsoring insurance company and contract owners.  Each
                    account typically is organized as a UIT, or in some
                    cases as a management company having a sponsor-
                    affiliated investment adviser.  See generally Section
                    2(a)(37) of the Investment Company Act (15 U.S.C.
                    80a-2(a)(37)).

          <(39)>    Amended Rule 0-10(b) (17 CFR 270.0-10(b)).

                              ======END OF PAGE 12======





          B.  Investment Advisers

          The Commission is adopting proposed amendments to the rule under the

     Advisers Act that defines "small business" as applied to investment

     advisers, with changes designed to reflect recent legislation and to

     simplify the proposed amendments.<(40)>  The current rule defines as

     a small business each investment adviser that either (i) manages assets

     ("client assets") with a total value of $50 million or less as of the end

     of its most recent fiscal year, and performs no other advisory services; or

     (ii) performs other advisory services, manages client assets of $50 million

     or less if it manages client funds, and has assets related to its advisory

     business ("business assets") that do not exceed $50,000.<(41)>  As

     amended, Rule 0-7 treats an adviser as a small business if (i) neither the

     adviser nor an adviser it controls, is controlled by, or is under common

     control with has $25 million or more of assets under management, and (ii)

     neither the adviser nor any person it controls, is controlled by, or is

     under common control with has $5 million or more of total

     assets.<(42)> 
                              

          <(40)>    See amended Rule 0-7 (17 CFR 275.0-7); Proposing
                    Release, supra note 4.

          <(41)>    Rule 0-7 (17 CFR 275.0-7).

          <(42)>    Amended Rule 0-7.  "Total assets" is a broader and
                    simpler term than "business assets."  See amended Rule
                    0-7(b)(2) (total assets means total assets as shown on
                    the balance sheet of investment adviser or other
                    "person" in a control relationship with the adviser). 
                    It includes business assets, such as leases and
                    equipment, as well as other types of assets, such as
                    cash and accounts receivable.  Total assets should be
                    easier for advisers to calculate than business assets,
                    since the information on total assets is readily
                    available on the balance sheets of advisers and their
                    affiliates.

                              ======END OF PAGE 13======





          In the Proposing Release, the Commission requested comment whether, in

     light of the Improvement Act's transfer of primary responsibility for

     regulating small advisers to the states, a threshold of $25 million for

     client assets under management would be more appropriate than the $50

     million threshold.<(43)>  The Commission also requested comment

     whether the $50,000 threshold for business assets continued to be

     appropriate.<(44)>  The Commission has now determined that the $25

     million client asset threshold coupled with a $5 million total assets test

     more appropriately reflects the Improvement Act's allocation of regulatory

     responsibilities between the Commission and the states.

          The Improvement Act reallocated regulatory responsibility over

     investment advisers between the Commission (which is now responsible for

     larger advisers with national businesses) and state securities regulators

     (which are now responsible for smaller advisers with essentially local

     businesses).<(45)>  To effect this division of responsibility,

     Congress generally prohibited advisers with less than $25 million of assets

     under management from registering with the Commission after July 8,

     1997.<(46)>  Thus, Congress viewed "small advisers" as those having
                              

          <(43)>    See Proposing Release, supra note 4, at text
                    accompanying n.60.

          <(44)>    Id.  As noted above, the Commission received no
                    comments.

          <(45)>    See Rules Implementing Amendments to the Investment
                    Advisers Act of 1940, Investment Advisers Act Release
                    No. 1633 (May 15, 1997) at text accompanying note 5 (62
                    FR 28112 (May 22, 1997)) ("Adviser Registration
                    Release").

          <(46)>    See Section 203A(a)(1) of the Advisers Act (15 U.S.C.
                    80b-3a(a)(1)) (prohibiting an adviser from registering
                                                             (continued...)

                              ======END OF PAGE 14======





     less than $25 million of assets under management.<(47)>  The

     Commission believes that the definition of small business as applied to

     investment advisers for Reg. Flex. Act purposes should be revised to

     reflect the threshold that Congress used in the Improvement Act for similar

     purposes.  Therefore, the Commission is reducing the threshold to $25

     million of assets under management.<(48)>  
                              

          <(46)>(...continued)
                    with the Commission if it is subject to regulation by
                    its home state unless it has assets under management of
                    $25 million or more).  The Commission retains primary
                    responsibility for larger advisers, advisers to
                    investment companies, advisers whose principal office
                    and place of business is located in one of the four
                    states that do not regulate advisers or is located
                    overseas, and advisers exempted by rule from the
                    prohibition on registration with the Commission.  See
                    Section 203A(a)(1) and (c) of the Advisers Act (15
                    U.S.C. 80b-3a(a)(1) and (c)); Rule 203A-2 (17 CFR
                    275.203A-2) (exempting nationally recognized
                    statistical rating organizations, certain pension
                    consultants, any smaller adviser having the same
                    principal office and place of business as a registered
                    adviser affiliated with it through a control
                    relationship, and any new firm reasonably expecting to
                    have $25 million or more of assets under management).

          <(47)>    See Report on S. 1815, "The Securities Investment
                    Promotion Act of 1996," S. Rep. No. 293, 104th Cong.,
                    2d Sess. 1-4 (1996) (legislation would focus SEC
                    supervision "on investment advisers most likely to be
                    engaged in interstate commerce" and focus state
                    supervision "on advisers whose activities are most
                    likely to be centered in their home state";
                    "legislation allows states to assume the primary role
                    with respect to regulating advisers that are small,
                    local businesses, managing less than $25 million in
                    client assets, while the Commission's role is focused
                    on larger advisers with $25 million or more in client
                    assets under management").

          <(48)>    The Advisers Act permits the Commission to increase
                    (but not to reduce) the $25 million minimum threshold
                    for registration with the Commission.  See Section
                    203A(a)(1)(A) of the Advisers Act (15 U.S.C.
                                                             (continued...)

                              ======END OF PAGE 15======





          Under the proposed amendments, an adviser having less than $50 million

     of client assets would not have been considered a small business if the

     adviser (i) had substantial business assets or (ii) was affiliated with a

     large firm.<(49)>  Amended Rule 0-7 reflects the policy of extending

     an asset test to all investment advisers, but substantially simplifies the

     proposed amendments and reduces the amount of information the Commission

     must collect to determine whether an adviser is a small

     business.<(50)>  As adopted, the rule excludes from the definition of
                              

          <(48)>(...continued)
                    80b-3a(a)(1)(A)).  To coordinate amended Rule 0-7 with
                    future Commission rulemaking in this regard, the
                    amended rule provides that the maximum threshold for a
                    small business will increase in tandem with any
                    increase in the minimum threshold for Advisers Act
                    registration.  Amended Rule 0-7(a)(1) and (3) (17 CFR
                    275.0-7(a)(1) and (3)).  Rule 203A-1 (17 CFR
                    275.203A-1), which gives an adviser discretion whether
                    to register with the Commission instead of a state if
                    the adviser has between $25 million and $30 million of
                    assets under management, does not affect the definition
                    of small business for purposes of amended Rule 0-7. 
                    See Adviser Registration Release, supra note 45, at
                    text accompanying nn.48-49 (Rule 203A-1 merely makes
                    registration optional within a specified range without
                    raising the minimum threshold for registration).

          <(49)>    See Proposing Release, supra note 4, at nn.51-58 and
                    accompanying text (proposing to extend current Rule
                    0-7's $50,000 business asset test to all advisers;
                    proposing not to treat adviser as small entity if
                    affiliated with large adviser or fund or entity deemed
                    large under Rule 0-10 under the Exchange Act (17 CFR
                    240.0-10)).

          <(50)>    See 1981 Proposing Release, supra note 15 at 19257,
                    19263 (two attributes desirable in size standards are
                    capacity to differentiate the small members of an
                    industry from other members and the use of readily
                    available information to derive standards).  Under the
                    amended rule, the determination of the adviser's small
                    status will be based on information reported by the
                    adviser about its size and the size of its affiliates
                                                             (continued...)

                              ======END OF PAGE 16======





     small business an adviser having less than $25 million of assets under

     management if, based on information filed with the Commission, the adviser

     (i) has $5 million or more of "total assets," or (ii) controls, is

     controlled by, or is under common control with (a) another adviser that has

     $25 million or more of assets under management or (b) any person (other

     than a natural person) that has $5 million or more of total

     assets.<(51)>  The Commission estimates that under amended Rule 0-7,

     approximately 1,500 registered advisers will be treated as small

     businesses, approximately 500 fewer than under the proposed

     amendments.<(52)>  Most of this change is attributable to reducing

     the threshold for client assets to less than $25 million of assets under

     management.  The advisers considered small businesses under the amended

     rule will consist primarily of the advisers that have less than $25 million
                              

          <(50)>(...continued)
                    under two tests, as explained below.  In contrast, the
                    proposed amendments would have applied two size tests
                    to the adviser and several other tests to affiliates. 
                    The Commission expects to propose to amend Form ADV to
                    add questions needed to obtain the information.

          <(51)>    See amended Rule 0-7(a)(2) and (3) (17 CFR 275.0-
                    7(a)(2) and (3)).  The $5 million total assets test is
                    one measure of a small entity under Rule 0-10 (17 CFR
                    240.0-10(a)) under the Exchange Act.  Amended Rule 0-
                    7(b)(1) defines control consistent with Rule 203A-2(c)
                    under the Advisers Act (17 CFR 275.203A-2(c)).

          <(52)>    The number of small businesses for which the Commission
                    has primary regulatory responsibility has dropped
                    sharply as a result of the Improvement Act's
                    prohibiting most small advisers from registering with
                    the Commission.  See supra text accompanying notes 45-
                    47.  Following the final de-registration of those
                    advisers no longer eligible to register with the
                    Commission, there will be approximately 7,600
                    Commission-registered advisers.  In contrast, prior to
                    July 8, 1997 there were approximately 23,000 advisers
                    registered with the Commission.

                              ======END OF PAGE 17======





     of assets under management but are registered with the Commission because

     they have a principal office and place of business in one of the four

     states that does not regulate advisers.<(53)>  

          C.   Definitions Under the Exchange Act

               1.   Exchanges

               As discussed in the Proposing Release, the Commission is

     expanding the definition of "small business" as it applies to exchanges to

     include a requirement that an exchange also not be affiliated with any

     person (other than a natural person) that is not a small business as

     defined in Rule 0-10.<(54)>  Under the amended rule, an exchange is

     "affiliated" with another entity when the exchange controls, is controlled

     by, or is under common control with the other entity.  This change will

     conform the definition applicable to exchanges with other definitions of

     "small business" under the Exchange Act by applying the affiliation

     standard already applicable to broker-dealers, clearing agencies, bank
                              

          <(53)>    See supra note 46.  When one or more of these four
                    states institutes a registration scheme for advisers
                    with assets under management of less than $25 million,
                    the number of small business advisers registered with
                    the Commission will decrease.  See also Adviser
                    Registration Release, supra note 45, at n.42
                    ("Commission data suggests that most advisers that will
                    remain registered with the Commission have assets under
                    management well in excess of $25 million").

          <(54)>    The term "exchange" is defined in Section 3(a)(1) of
                    the Exchange Act (15 U.S.C. 78c(a)(1)).  The Commission
                    is retaining the existing provisions of Rule 0-10 that
                    define as "small" those exchanges that are exempt from
                    the requirements of rule 11Aa3-1 (17 CFR 240.11Aa3-1)
                    regarding the dissemination of transaction reports and
                    last sale data with respect to transactions in
                    securities.  Currently, none of the eight registered
                    exchanges is fully exempted from the requirements of
                    Rule 11Aa3-1 and, consequently, none is considered a
                    "small business" under Rule 0-10.

                              ======END OF PAGE 18======





     municipal securities dealers, securities information processors, and

     transfer agents.<(55)>

               2.   Securities Information Processors

               The Commission is retaining in substantially the same form the

     existing criteria for determining whether a securities information

     processor is a "small business."  This includes the requirement that, to be

     considered small, a securities information processor must have serviced

     less than 100 interrogation devices or moving tickers during the preceding

     fiscal year.<(56)>  As proposed, the Commission also is modifying the

     definition of "interrogation device" for purposes of Rule 0-10 to take into

     account new technologies used to disseminate securities industry

     information to markets and market participants through increasingly diverse

     methods.  Accordingly, for purposes of the amended small business

     definition, "interrogation device" includes any device that may be used to

     read or receive electronic information, including proprietary terminals or

     personal computers via computer-to-computer interfaces, or gateway access. 

     This will include electronic devices that display securities information






                              

          <(55)>    This amendment is consistent with the Commission's
                    belief that it is appropriate to exclude entities with
                    significant economic and financial resources from
                    regulatory treatment as small businesses under the Reg.
                    Flex. Act.  See 1981 Proposing Release, 46 FR at 19257.

          <(56)>    The term "securities information processor" is defined
                    in Section 3(a)(22) of the Exchange Act (15 U.S.C.
                    78c(a)(22)).  Currently, neither of the two registered
                    exclusive securities information processors is
                    designated as a "small business" under Rule 0-10.

                              ======END OF PAGE 19======





     such as quotations and indications of interest, as well as those that

     display only last sale data or transaction reports.

               3.   Transfer Agents and Issuers

               The amended small business definition for transfer agents retains

     the existing criteria based on volume of transfer business and number of

     shareholder accounts.<(57)>  As discussed in the Proposing Release,

     however, the Commission is adding a third criterion:  whether a transfer

     agent transfers only the items of "small issuers," as defined under

     Exchange Act Rule 0-10.<(58)>  The shares of small issuers, as

     opposed to those of large publicly-traded companies, typically are held by

     a small portion of the investing public and are less likely to be the

     subject of a substantial amount of trading activity.  Thus, the activities

     of small transfer agents, many of which are not subject to registration

     under Section 17A of the Exchange Act, are not likely to have a substantial

     effect on the investing public or the operation of the national clearance

     and settlement system.  In contrast, transfer agents for large companies

     whose shares are heavily traded are likely to have a far greater effect on

     securities processing, generally, and on the operation of the national

     clearance and settlement system.<(59)>  

          The Commission also is deleting language in Rule 0-10(a) that

     currently limits the definition of small business, as it refers to "issuer"
                              

          <(57)>    The term "transfer agent" is defined in Section
                    3(a)(25) of the Exchange Act (15 U.S.C. 78c(a)(25)).

          <(58)>    Small issuers, for this purpose, are issuers with total
                    assets of $5 million or less.

          <(59)>    See Securities and Exchange Commission, Study of Unsafe
                    and Unsound Practices of Broker and Dealers 37-39
                    (1971).

                              ======END OF PAGE 20======





     or "person," to Sections 12, 13, 14, 15(d), or 16 of the Exchange

     Act.<(60)>  This deletion reflects that, under the amended rule,

     transfer agents who transfer items of issuers with total assets greater

     than $5 million will not be considered small for purposes of the Reg. Flex.

     Act.  In addition, no transfer agent, broker-dealer, exchange, clearing

     agency, securities information processor, or bank municipal securities

     dealer will be classified as small if it is affiliated with an issuer that

     does not qualify as small under Rule 0-10.  This change is consistent with

     the intent of the Reg. Flex. Act that only businesses and organizations

     that are "independently owned" may qualify as small entities.<(61)>

               4.   Broker-Dealers

               As discussed in the Proposing Release, the Commission is

     retaining the capital standard currently set forth in Rule 0-10 that is

     used for determining whether a broker<(62)> or dealer<(63)> is




                              

          <(60)>    15 U.S.C. 78l, 78m, 78n, 78o(d), and 78p.

          <(61)>    See supra note 16.  As noted above, amended Rule 0-10
                    provides that only those transfer agents that limit the
                    number of items they transfer, handle a limited number
                    of shareholder accounts, and transfer small issuer
                    securities are considered small businesses.  Because
                    this category is limited to those transfer agents that
                    would generally be exempt from registration under
                    Exchange Act Section 17A, the Commission believes that
                    there will be few, if any, registered transfer agents
                    that qualify as small businesses for purposes of the
                    Reg. Flex. Act.

          <(62)>    The term "broker" is defined in Section 3(a)(4) of the
                    Exchange Act (15 U.S.C. 78c(a)(4)).

          <(63)>    The term "dealer" is defined in Section 3(a)(5) of the
                    Exchange Act (15 U.S.C. 78c(a)(5)).

                              ======END OF PAGE 21======





     deemed a "small business."<(64)>  The Commission, however, is

     expanding the affiliation standard applicable to broker-dealers.  Under the

     amended definition, the Commission estimates that approximately 13 percent

     of all registered broker-dealers will be characterized as "small."

          The affiliation test currently only looks to whether a broker-dealer

     controls, is controlled by, or is under common control with, an entity

     other than a small business or small organization.  This test focuses

     primarily on relationships between broker-dealers based on voting control

     or the sharing of profits.  As discussed in the Proposing Release, the

     structure and operation of broker-dealer activities suggest that other

     kinds of business relationships, such as the contractual relationship

     between an introducing broker and its clearing firm, can give rise to an

     opportunity by which a clearing firm can exercise substantial influence

     over the business of its introducing brokers.  In order to conform better

     its affiliation standard to the nature of business relationships that exist

     between broker-dealers, the Commission is expanding the definition of

     affiliation applicable to broker-dealers under Rule 0-10 to include

     arrangements whereby one broker-dealer introduces transactions in

     securities to another.<(65)>
                              

          <(64)>    Rule 0-10 under the Exchange Act (17 CFR 240.0-10(c))
                    currently defines "small business" to include any
                    broker or dealer that has total capital of less than
                    $500,000 and that is not affiliated with any person
                    (other than a natural person) that is not a small
                    business under the rule.

          <(65)>    From a functional perspective, introducing and clearing
                    brokers act as a unit in handling a customer's account. 
                    In most respects, introducing brokers are dependent on
                    clearing firms to clear and to execute customer trades,
                    to handle customer funds and securities, and to handle
                                                             (continued...)

                              ======END OF PAGE 22======





          This new affiliation standard is consistent with SBA regulations

     addressing affiliation that consider whether individuals or firms have

     identical or substantially identical business interests, as in the case of

     firms that are economically dependent through contractual or other

     relationships.<(66)>  As a practical matter, clearing and introducing

     firms have identical business interests.  In fact, most introducing brokers

     could not be in business without the capital, technology, and back-office

     support provided by the clearing firm.  Introducing and clearing brokers


                              

          <(65)>(...continued)
                    many back-office functions, including issuing
                    confirmations of customer trades and customer account
                    statements.  The clearing agreement outlining the
                    respective duties and obligations of an introducing
                    broker and its clearing firm typically contains various
                    requirements imposed by the clearing firm with respect
                    to the handling of customer accounts by the clearing
                    and introducing brokers, and the clearing firm's
                    maintenance of customer assets.  Although the customer
                    places its order directly with the introducing firm,
                    the Commission considers the account to be an account
                    of the clearing firm, which has primary legal
                    responsibility with respect to the handling of customer
                    funds and securities, and for sending account
                    statements to the customer.  Thus, both introducing and
                    clearing firms have a shared responsibility for
                    ensuring that a customer's account is handled properly.

          <(66)>    See supra notes 19-20 and accompanying text (SBA size
                    standard considerations in determining "small business
                    concern").  See also Report to Accompany H.R. 4660,
                    H.R. Rep. No. 96-519, pt.1, at 19 (1979) (suggesting
                    that the definition of "small businesses" was intended
                    to encompass businesses that are independently owned
                    and operated and not dominant in their field of
                    operation).  Consistent with the Reg. Flex. Act
                    definitions of small business, SBA regulations that
                    address affiliation consider whether individuals or
                    firms have identical or substantially identical
                    business interests, as in the case of firms that are
                    economically dependent through contractual or other
                    relationships.  13 C.F.R. 121.103(a).

                              ======END OF PAGE 23======





     also have a shared legal responsibility for ensuring that a customer's

     account is handled properly.<(67)> 

          Under amended Rule 0-10, an introducing broker that introduces

     transactions to a large clearing firm generally will not be considered a

     "small business" for purposes of the Reg. Flex. Act.  The Commission

     acknowledged in the Proposing Release, however, that certain broker-dealers

     that limit their activities to handling only investment company securities

     or interests or participations in insurance company separate accounts

     typically are small, sometimes one-person operations that combine limited

     securities activities with broader tax, financial planning, and insurance

     services.  Accordingly, the Commission is providing an exception from the

     affiliation standard for these broker-dealers.

     III. EFFECTS ON COMPETITION AND REGULATORY FLEXIBILITY CONSIDERATIONS

               Section 23(a)(2) of the Exchange Act<(68)> requires the

     Commission, in adopting rules under the Exchange Act, to consider the

     impact a rule would have on competition and to refrain from adopting a rule

     that would impose a burden on competition not necessary or appropriate in

     furtherance of the purposes of the Exchange Act.  The Commission is of the

     view that the amendments to Exchange Act Rule 0-10 will not impose any

     burden on competition.  The rule changes will not affect the manner in

     which any regulated entity conducts its business.  Moreover, entities that

                              

          <(67)>    As a legal matter, for purposes of the Securities
                    Investor Protection Act of 1970 (15 U.S.C. 78aaa et
                    seq.) and the Commission's financial responsibility
                    rules, a customer is the customer of the clearing firm. 
                    See Exchange Act Release No. 31511, 57 FR 56973 (Dec.
                    2, 1992).

          <(68)>    15 U.S.C. 78w(a)(2).

                              ======END OF PAGE 24======





     will no longer be classified as small businesses for Reg. Flex. Act

     purposes should suffer no resulting competitive disadvantage.  Although the

     Commission considers the impact of its rules and rule proposals on small

     entities, any modification or accommodation relating to size is based on

     objective criteria such as net assets and not whether an entity meets a

     "small business" definition under the Commission's Rules.

          As discussed in the Proposing Release, the Commission has conferred

     with the SBA and the SBA concurs that no regulatory flexibility analysis is

     required for the amendments.<(69)>  The definitions of the terms

     "small business" do not impose any requirements on small businesses.  The

     definitions are interpretations of terms that identify those entities that

     the Commission will study for Reg. Flex. Act purposes when proposing and

     adopting rules, and are rules of agency practice and procedure. 

     IV.  STATUTORY AUTHORITY

               The Commission is amending Rule 157 (17 CFR 230.157), Rule 0-10

     (17 CFR 240.0-10), Rule 0-10 (17 CFR 270.0-10), and Rule 0-7 (17 CFR

     275.0-7) pursuant to chapter 6 of title 5 of the United States Code

     (particularly Section 601 thereof (5 U.S.C. 601)), and pursuant to Section

     19 of the Securities Act of 1933 (15 U.S.C. 77s), Section 23 of the

     Securities Exchange Act of 1934 (15 U.S.C. 78w), Section 38 of the

     Investment Company Act of 1940 (15 U.S.C. 80a-37), and Section 211 of the

     Investment Advisers Act of 1940 (15 U.S.C. 80b-11).

     TEXT OF RULE AMENDMENTS

     List of Subjects

     17 CFR Parts 230 and 270
                              

          <(69)>    See Proposing Release, 62 FR at 4113.

                              ======END OF PAGE 25======





          Investment companies, Reporting and recordkeeping requirements,

     Securities.

     17 CFR Part 240

          Brokers, Reporting and recordkeeping requirements, Securities.

     17 CFR Part 275

          Investment advisers, Reporting and recordkeeping requirements,

     Securities.

          For the reasons set out in the preamble, Title 17, Chapter II of the

     Code of Federal Regulations is amended as follows:

     PART 230 - GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

          1.  The authority citation for Part 230 continues to read, in part, as

     follows:

          Authority:  15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78d,

     78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-29, 80a-30, and

     80a-37, unless otherwise noted.

                         *    *    *    *    *

          2.  Section 230.157 is amended by revising the section heading and

     paragraph (b) to read as follows:

      230.157 Small entities under the Securities Act for purposes of the

     Regulatory Flexibility Act.  

                         *    *    *    *    *

          (b) When used with reference to an investment company that is an

     issuer for purposes of the Act, have the meaning ascribed to those terms by

      270.0-10 of this chapter.

     PART 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934




                              ======END OF PAGE 26======





          3.   The authority citation for Part 240 continues to read in part as

     follows:

          Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 77ggg,

     77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m,

     78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 78mm, 79q, 79t, 80a-20,

     80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.

                         *    *    *    *    *

          4.   Section 240.0-10 is amended to revise the section heading and

     paragraphs (a), (b), (e), (g)(2), (g)(3), and (i); redesignate paragraphs

     (h)(2) and (h)(3) as paragraphs (h)(3) and (h)(4), respectively; and add

     paragraphs (h)(2), (j) and (k) to read as follows:

       240.0-10 Small entities under the Securities Exchange Act for purposes

     of the Regulatory Flexibility Act.

                         *    *    *    *    *

          (a)  When used with reference to an "issuer" or a "person," other than

     an investment company, mean an "issuer" or "person" that, on the last day

     of its most recent fiscal year, had total assets of $5 million or less;

          (b)  When used with reference to an "issuer" or "person" that is an

     investment company, have the meaning ascribed to those terms by  270.0-10

     of this chapter;

                         *    *    *    *    *

          (e)  When used with reference to an exchange, mean any exchange that:

          (1)  Has been exempted from the reporting requirements of  240.11Aa3-

     1; and






                              ======END OF PAGE 27======





          (2)  Is not affiliated with any person (other than a natural person)

     that is not a small business or small organization as defined in this

     section;

                         *    *    *    *    *

          (g)  *      *  *

          (2)  Provided service to fewer than 100 interrogation devices or

     moving tickers at all times during the preceding fiscal year (or in the

     time that it has been in business, if shorter); and

          (3)  Is not affiliated with any person (other than a natural person)

     that is not a small business or small organization under this section; and

          (h)  *    *    *

          (2)  Transferred items only of issuers that would be deemed "small

     businesses" or "small organizations" as defined in this section; and

                         *    *    *    *    *

          (i)  For purposes of paragraph (c) of this section, a broker or dealer

     is affiliated with another person if:

          (1)  Such broker or dealer controls, is controlled by, or is under

     common control with such other person; a person shall be deemed to control

     another person if that person has the right to vote 25 percent or more of

     the voting securities of such other person or is entitled to receive 25

     percent or more of the net profits of such other person or is otherwise

     able to direct or cause the direction of the management or policies of such

     other person; or

          (2)  Such broker or dealer introduces transactions in securities,

     other than registered investment company securities or interests or

     participations in insurance company separate accounts, to such other


                              ======END OF PAGE 28======





     person, or introduces accounts of customers or other brokers or dealers,

     other than accounts that hold only registered investment company securities

     or interests or participations in insurance company separate accounts, to

     such other person that carries such accounts on a fully disclosed basis.

          (j)  For purposes of paragraphs (d) through (h) of this section, a

     person is affiliated with another person if that person controls, is

     controlled by, or is under common control with such other person; a person

     shall be deemed to control another person if that person has the right to

     vote 25 percent or more of the voting securities of such other person or is

     entitled to receive 25 percent or more of the net profits of such other

     person or is otherwise able to direct or cause the direction of the

     management or policies of such other person.

          (k)  For purposes of paragraph (g) of this section, "interrogation

     device" shall refer to any device that may be used to read or receive

     securities information, including quotations, indications of interest, last

     sale data and transaction reports, and shall include proprietary terminals

     or personal computers that receive securities information via computer-to-

     computer interfaces or gateway access.

     PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

          5.  The authority citation for Part 270 continues to read, in part, as

     follows:

          Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, unless

     otherwise noted;

                    *    *    *    *    *

          6.  Section 270.0-10 is revised to read as follows:




                              ======END OF PAGE 29======





      270.0-10.  Small entities under the Investment Company Act for purposes
     of the Regulatory Flexibility Act.

          (a) General.  For purposes of Commission rulemaking in accordance with

     the provisions of Chapter Six of the Administrative Procedure Act (5 U.S.C.

     601 et seq.) and unless otherwise defined for purposes of a particular

     rulemaking, the term small business or small organization for purposes of

     the Investment Company Act of 1940 shall mean an investment company that,

     together with other investment companies in the same group of related

     investment companies, has net assets of $50 million or less as of the end

     of its most recent fiscal year.  For purposes of this section:

          (1) In the case of a management company, the term group of related

     investment companies shall mean two or more management companies (including

     series thereof) that:

          (i) Hold themselves out to investors as related companies for purposes

     of investment and investor services; and 

          (ii) Either:

          (A) Have a common investment adviser or have investment advisers that

     are affiliated persons of each other; or 

          (B) Have a common administrator; and 

          (2) In the case of a unit investment trust, the term group of related

     investment companies shall mean two or more unit investment trusts

     (including series thereof) that have a common sponsor.

          (b) Special rule for insurance company separate accounts.  In

     determining whether an insurance company separate account is a small

     business or small entity pursuant to paragraph (a) of this section, the

     assets of the separate account shall be cumulated with the assets of the

     general account and all other separate accounts of the insurance company.  

                              ======END OF PAGE 30======





          (c) Determination of net assets.  The Commission may calculate its

     determination of the net assets of a group of related investment companies

     based on the net assets of each investment company in the group as of the

     end of such company's fiscal year.

     PART 275 - RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

          7.  The authority citation for Part 275 continues to read, in part, as

     follows:

          Authority:  15 U.S.C. 80b-2(a), 80b-3, 80b-4, 80b-6(4), 80b-6A, 80b-

     11, unless otherwise noted.

                    *    *    *    *    *

          8.  Section 275.0-7 is revised to read as follows:

      275.0-7.  Small entities under the Investment Advisers Act for purposes
     of the Regulatory Flexibility Act.

          (a) For purposes of Commission rulemaking in accordance with the

     provisions of Chapter Six of the Administrative Procedure Act (5 U.S.C. 601

     et seq.) and unless otherwise defined for purposes of a particular

     rulemaking proceeding, the term small business or small organization for

     purposes of the Investment Advisers Act of 1940 shall mean an investment

     adviser that:

          (1) Has assets under management, as defined under Section 203A(a)(2)

     of the Act (15 U.S.C. 80b-3a(a)(2)) and reported on Form ADV-T (17 CFR

     279.3) or its most recent Schedule I to Form ADV (17 CFR 279.1), having a

     total value of less than $25 million, or such higher amount as the

     Commission may by rule deem appropriate under Section 203A(a)(1)(A) of the

     Act (15 U.S.C. 80b-3a(a)(1)(A)); 

          (2) Did not have total assets of $5 million or more on the last day of

     the most recent fiscal year; and

                              ======END OF PAGE 31======





          (3) 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 such higher amount as the Commission may deem

     appropriate), or any person (other than a natural person) that had total

     assets of $5 million or more on the last day of the most recent fiscal

     year.

          (b) For purposes of this section:

          (1) Control means the power to direct or cause the direction of the

     management or policies of a person, whether through ownership of

     securities, by contract, or otherwise.  Any person that directly or

     indirectly has the right to vote 25 percent or more of the voting

     securities, or is entitled to 25 percent or more of the profits, of another

     person is presumed to control the other person.   

          (2) Total assets means the total assets as shown on the balance sheet

     of the investment adviser or other person described above under paragraph

     (a)(3) of this section, or the balance sheet of the investment adviser or

     such other person with its subsidiaries consolidated, whichever is larger. 



          

     By the Commission.



                                   Jonathan G. Katz
                                   Secretary

     June 24, 1998







                              ======END OF PAGE 32======