-1-
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
(Release No. IA-1794; File No. S7-2-99)
RIN 3235-AH60
Transition Rule for Ohio Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: The Securities and Exchange Commission ("Commission")
is adopting a new rule and form amendments under the Investment
Advisers Act of 1940 for investment advisers that will be subject
to a new Ohio investment adviser statute. The new rule provides
a transition process for these investment advisers to switch from
Commission to state registration.
EFFECTIVE DATES: Rule 203A-6 will become effective May 3, 1999.
Amendments to Schedule I to Form ADV will become effective on
December 31, 1999.
FOR FURTHER INFORMATION CONTACT: Jeffrey O. Himstreet, Attorney,
at (202) 942-0716, Task Force on Investment Adviser Regulation,
Division of Investment Management, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0506.
SUPPLEMENTARY INFORMATION: The Commission is adopting rule 203A-
6 (17 CFR 275.203A-6) and technical amendments to Schedule I of
Form ADV (17 CFR 279.1), both under the Investment Advisers Act
of 1940 (15 U.S.C. 80b) ("Advisers Act" or "Act").
I. BACKGROUND
Under the Advisers Act, as amended by the Investment Advisers
Supervision Coordination Act ("Coordination Act"),<1> the
Commission has regulatory responsibility for investment
advisers that have at least $25 million of assets under
management or advise a registered investment company.<2>
The Commission also has regulatory responsibility for
advisers that have their principal place of business in a
state that has not enacted an investment adviser statute,
regardless of their assets under management.<3> At the time
the Coordination Act was adopted, Ohio was one of four
states that did not have an investment adviser statute.<4>
Recently, Ohio enacted investment adviser legislation that
will become effective on March 18, 1999.<5>
On January 29, 1999, we issued a release proposing rule 203A-6
("Proposing Release") to assist the Ohio Division of
Securities and to facilitate the transition of regulatory
responsibilities for smaller Ohio advisers.<6> We also
proposed technical, corresponding changes to Schedule I to
Form ADV. We received two comment letters in response to
the proposal, both of which supported the new rule and form
amendments.<7> The Commission is adopting rule 203A-6 and
technical revisions to Schedule I to Form ADV as proposed.
II. DISCUSSION
Under new rule 203A-6, new Ohio advisers (i.e., those
advisers that are not currently registered with the Commission)
that would not be eligible for Commission registration would
register with the Ohio Division of Securities on or after the
effective date of Ohio’s implementing rules.<8> Smaller Ohio
advisers (i.e. those that have less than $25 million in assets
under management) that are currently registered with the
Commission will switch over to registration with the Ohio
Division of Securities between March 18,1999 and December 31,
1999.<9> These advisers may withdraw their Commission
registration after they register with the Ohio Division of
Securities, but not later than March 30, 2000.<10>
With the enactment of the Ohio law, smaller Ohio advisers
may no longer rely on the location of their principal office and
place of business as a basis for Commission registration. The
Commission therefore is amending Schedule I by deleting the
references to Ohio from both Schedule I and the Instructions to
Schedule I. The amendments to Schedule I will become effective
on December 31, 1999. As a result of the amendments to Schedule
I, advisers will no longer be able to claim eligibility for
Commission registration based on the location of their principal
office and place of business in Ohio and must withdraw from
Commission registration, unless otherwise eligible.
III. COST/BENEFIT ANALYSIS
New rule 203A-6 and the technical amendments to Schedule I to Form ADV
are designed to facilitate the transition of certain advisers
from Commission to state registration. This transition further
implements congressional intent to reallocate regulatory
responsibilities for investment advisers between the Commission
and state securities authorities.
New rule 203A-6 will not have a significant effect on the
regulatory burden borne by investment advisers. The Coordination
Act imposes certain costs on advisers as a consequence of no
longer being registered with the Commission, and, at the same
time, confers benefits on these advisers, such as no longer
requiring them to file amendments to Form ADV with the
Commission. The costs the Advisers Act imposes on advisers
withdrawing from Commission registration is estimated to be $10
per adviser (or, $5,400 in the aggregate).<11> The new rule
does not alter these burdens and benefits, but merely establishes
a time by which advisers are required to switch their
registration from the Commission to the Ohio Division of
Securities.<12> Therefore, the net costs imposed by the new rule
and form amendments are negligible. Smaller Ohio advisers may
withdraw from Commission registration at any time and avoid any
potential burdens associated with new rule 203A-6.
In the Proposing Release, we requested comment on the
cost/benefit analysis. No comments on the cost/benefit analysis
were provided. The Commission believes that the costs imposed by
the new rule are insignificant.
IV. PAPERWORK REDUCTION ACT
As discussed in the Proposing Release, the amendments to Schedule I to
Form ADV contain a "collection of information" within the meaning
of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 to 3520).
The amendments to Schedule I to Form ADV are necessary to
implement the Coordination Act with respect to advisers with
their principal office in Ohio. The Commission received no
public comment in response to its request for comments on the
Paperwork Reduction Act analysis.
Under Office of Management and Budget rules, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the agency displays a valid OMB
control number.<13> Therefore, we have submitted the collection
of information requirements to the Office of Management and
Budget for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The title for the collection of information is
"Schedule I to Form ADV," under the Advisers Act. Schedule I to
Form ADV contains a currently approved collection of information
under OMB control number 3235-0490. OMB has approved the PRA
request in accordance with 44 U.S.C. 3507(d), and has assigned
control number 3235-0490 to Schedule I to Form ADV with an
expiration date of March 31, 2002.
The Commission is adopting amendments to Schedule I to Form
ADV that will delete references to Ohio contained in Schedule I
and the Instructions to Schedule I. Each investment adviser must
declare on Schedule I to Form ADV whether it is eligible for
Commission registration. The rules imposing this collection of
information are found at 17 CFR 275.203-1 and 17 CFR 279.1. Rule
204-1 (17 CFR 275.204-1) requires an investment adviser
registered with the Commission to file an amended Schedule I to
From ADV annually within 90 days after the end of the investment
adviser’s fiscal year. The Commission is amending Schedule I
only, and not Form ADV.
There are no additional burdens associated with this filing
that are not already imposed by the statutory requirement that
advisers withdraw from Commission registration if no longer
eligible for Commission registration. The withdrawal procedures
impose no additional paperwork burdens on advisers. The new rule
creates a March 30, 2000 deadline by which smaller Ohio advisers
must withdraw from Commission registration. Additionally,
smaller Ohio advisers may withdraw from Commission registration
at any time prior to March 30, 2000 and not be subject to the new
rule.
The Commission estimates that there are approximately 8,200
investment advisers registered with the Commission.
Approximately 899 investment advisers with their principal office
in Ohio that are registered with the Commission would respond
annually to the information requirements of Schedule I. In
addition, an estimated 760 new advisers will file Schedule I to
Form ADV annually, approximately 83 of which are estimated to
have their principal office in Ohio. Of these 83 advisers, an
estimated 72 will file Schedule I to Form ADV an average of once
a year, and the remaining 11 that rely on the exemption provided
by rule 203A-2(d) (17 CFR 275.203A-d) will file Schedule I to
Form ADV an average of twice each year. It is estimated that the
Commission will receive approximately 993 total responses from
investment advisers with their principal office in Ohio.
The form amendments will affect only investment advisers with
their principal office in Ohio, and will not materially alter the
number of burden hours for those advisers. It is estimated that
the amendments to Schedule I to Form ADV imposes on Ohio
investment advisers 852.75 total burden hours. This estimate
would likely remain constant absent the new rule and form
amendments. The collection of information required by Schedule I
is mandatory, and responses are not kept confidential. The form
amendments, as adopted, do not impose a greater paperwork burden
upon respondents than that estimated and described in the
Proposing Release.
V. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared a Final Regulatory Flexibility Analysis
("FRFA") in accordance with the Regulatory Flexibility Act ("Reg.
Flex. Act") (5 U.S.C. 604) in connection with the adoption of the
rule described in this Release. An Initial Regulatory
Flexibility Analysis ("IRFA") was prepared in accordance with 5
U.S.C. 603 in conjunction with the Proposing Release and was made
available to the public. A summary of the IRFA was published in
the Proposing Release. We received no comments on the IRFA.
The FRFA discusses both the need for, and objectives of, the
rule and form amendments adopted by the Commission. The new rule
and form amendments, as adopted, create a transition process for
smaller Ohio advisers. The new rule (a) provides a one-year
transition period for advisers to switch from Commission
registration to state registration, and (b) requires smaller Ohio
advisers to withdraw from Commission registration by March 30,
2000. The amendments to Schedule I delete references to Ohio to
reflect that Ohio has recently enacted an investment adviser
statute.
The FRFA also provides a description and an estimate of the
number of small entities to which the rule amendments will apply.
For the purposes of the Advisers Act and the Reg. Flex. Act, an
investment adviser, under Commission rules, generally is a small
entity if (i) it has assets under management of less than $25
million reported on its most recent Schedule I to Form ADV (17
CFR 279.1); (ii) it does not have total assets of $5 million or
more on the last day of the most recent fiscal year; and (iii) it
is not in a control relationship with another investment adviser
that is not a small entity.<14>
It is estimated that approximately 1,000 Commission-
registered advisers are small entities. It is estimated that
approximately 540 of these small-entity advisers have their
principal office in Ohio. Relatively few small entities thus
will be affected by the new rule and form amendments. As
explained in the FRFA, the majority of these advisers are smaller
Ohio advisers that will be required by the Coordination Act to
withdraw from Commission registration and register with the
various state securities authorities. Absent Commission
rulemaking, the Coordination Act requires smaller Ohio advisers
to withdraw from Commission registration after the Ohio law is
effective. It takes, on average, one hour to complete form ADV-
W.<15> The costs associated with withdrawing from Commission
registration would exist absent the new rule and form amendments.
Therefore, the net costs imposed by the new rule and form
amendments are negligible.
The FRFA states that the rule amendments will impose no new
reporting or recordkeeping requirements and will eliminate
certain other requirements. The new rule does, however, create a
deadline for complying with an existing requirement. Smaller
Ohio advisers no longer eligible for Commission registration will
be required to withdraw from Commission registration by March 30,
2000. These advisers will no longer be required to file an
amended Schedule I with the Commission each year, or the other
annual updates to Form ADV.
The new rule and form amendments will not materially alter the
time required for investment advisers to comply with these
rules.<16> The new rule and form amendments also are necessary
to implement the Coordination Act with respect to smaller Ohio
advisers. The FRFA states that the burden to investment advisers
subject to the rule should be outweighed by the benefits to the
investment advisers subject to the new rule and form amendments.
There are no rules that duplicate, overlap, or conflict with, the
new rule and form amendments.
Finally, the FRFA states that, in adopting the new rule and
form amendments, we considered (a) the establishment of differing
compliance or reporting requirements or timetables that take into
account resources available to small entities; (b) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the new rule for small entities; (c)
the use of performance rather than design standards; and (d) an
exemption from coverage of the new rule, or any part of the new
rule, for small entities. The FRFA explains that the Commission
concluded that establishing different standards for small
entities is unnecessary and inappropriate.
The FRFA is available for public inspection in File No. S7-2-
99, and a copy may be obtained by contacting Jeffrey O.
Himstreet, Attorney, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549-0506.
VI. STATUTORY AUTHORITY
The Commission is adopting new rule 203A-6 pursuant to the authority set
forth in section 203(h) (15 U.S.C. 80b-3(h)); section 203A(c) (15
U.S.C. 80b-3a(c)); and section 211(a) (15 U.S.C. 80b-11(a)) of
the Investment Advisers Act of 1940.
The Commission is adopting amendments to Form ADV pursuant to
the authority set forth in section 203(c)(1) (15 U.S.C. 80b-
3(c)(1)); and section 204 (15 U.S.C. 80b-4) of the Investment
Advisers Act of 1940.
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
TEXT OF RULE AND FORM AMENDMENTS
For the reasons set out in the preamble, Title 17, Chapter II
of the Code of Federal Regulations is amended as follows:
Part 275 -- Rules and Regulations, Investment Advisers Act of
1940
1. The authority citation for Part 275 continues to read in
part as follows:
Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4),
80b-6a, 80b-11, unless otherwise noted.
2. Section 275.203A-6 is added to read as follows:
§ 275.203A-6 Transition Period for Ohio Investment Advisers.
(a) Ohio Authority. Notwithstanding section 203A(b) of
the Act (15 U.S.C. 80b-3a(b)), the Ohio Revised Code, sections
1707.01 to 1707.99, is effective with respect to an investment
adviser registered with the Commission that, but for having its
principal office and place of business in Ohio, would be
prohibited from registering with the Commission under section
203A of the Act (15 U.S.C. 80b-3a).
(b) Withdrawal Required. Every investment adviser that is
registered with the Commission solely because its principal
office and place of business is located in Ohio must withdraw
from Commission registration by March 30, 2000.
PART 279 - FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
3. The authority citation for Part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C.
80b-1, et seq.
4. By revising Schedule I to Form ADV (referenced in §
279.1) to remove all references to "Ohio" and by amending the
Instructions to Schedule I to Form ADV (referenced in § 279.1) to
remove all references to "Ohio".
Note: The text of Schedule I to Form ADV (§ 279.1) does not
and the amendments will not appear in the Code of Federal
Regulations.
By the Commission.
Jonathan G. Katz
Secretary
Dated: March 25, 1999
**ENDNOTES**
<1>: Title III of the National Securities Markets Improvement Act of
1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in
scattered sections of the United States Code).
<2>: 15 U.S.C. 80b-3A(a).
<3>: See Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 1633 (May 15,
1997) (62 FR 28112 (May 22, 1997)) at II.E.1.
<4>: Colorado, Iowa and Wyoming also did not have investment adviser
statutes at the time Congress enacted the Coordination Act. Since
that time, Colorado and Iowa have enacted investment adviser
legislation, and we recently amended Schedule I to Form ADV to
reflect these developments. Technical Changes to Schedule I to
Form ADV, Investment Advisers Act Release No. 1733A (Jan. 7, 1999)
(64 FR 2120 (Jan. 13, 1999)).
<5>: H.B. 695, 122d Gen. Ass., Reg. Sess. (Ohio 1997-1998).
<6>: Transition Rule for Ohio Investment Advisers, Investment
Advisers Act Release No. 1787 (Jan. 29, 1999) (64 FR 5722 (Feb. 5,
1999)).
<7>: Letter from Thomas Geyer, Commissioner, Ohio Securities
Division to Jonathan G. Katz, Secretary, SEC (Feb. 17, 1999), File
No. S7-2-99; Letter from Peter C. Hildreth, President, North
American Securities Administrators Association, Inc. to Jonathan
G. Katz, Secretary, SEC (Mar. 8, 1999), File No. S7-2-99.
<8>: The Ohio Division of Securities estimates that its implementing
rules would be effective by March 24, 1999.
<9>: Ohio Legislation, supra note (to be codified at section
1707.161(E) of the Ohio Revised Code). In addition, advisers
ineligible for Commission registration may be required to register
with other state securities authorities, subject to the Advisers
Act. The Coordination Act amended the Advisers Act to add section
222(d) (15 U.S.C. 80b-22(d)), which makes 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.
<10>: New rule 203A-6(b). We recognize that Ohio investment
advisers may be registered with, and regulated by, both the Ohio
Division of Securities and the Commission until the advisers
withdraw from Commission registration. During this time, Ohio
investment advisers may be subject to both federal and state
regulatory requirements. Ohio investment advisers no longer
eligible for Commission registration may avoid this "duplicate
regulation" by withdrawing from Commission registration at any
time after they have registered with the State of Ohio.
<11>: The Office of Management and Budget has approved a collection
of information for Form ADV-W (OMB Control No. 3235-0313). The
estimated average burden is 1.0 hours, per response. Based on an
average salary of $10 per hour, including benefits, the total
costs imposed by the Advisers Act on Ohio advisers required to
withdraw from Commission registration is approximately $5,400.
<12>: Under current rules, advisers that are no longer eligible for
Commission registration under section 203A(a) of the Act (15
U.S.C. 80b-3a(a)) must withdraw from registration within 90 days
after the date the adviser is required by rule 204-1(a) (17 CFR
275.204-1(a)). See 17 CFR 279.1 (Schedule I, instruction 6).
<13>: 44 U.S.C. 3506(c)(1)(B)(v).
<14>: Rule 0-7 (17 CFR 275.0-7).
<15>: The Office of Management and Budget has approved a collection
of information for Form ADV-W (OMB Control No. 3235-0313). The
estimated average burden is 1.0 hours, per response. Based on an
average salary of $10 per hour, including benefits, the total
costs imposed by the Advisers Act on Ohio advisers required to
withdraw from Commission registration is approximately $5,400.
<16>: Currently, investment advisers that are required to withdraw
from Commission registration because they are no longer eligible
under section 203A(a) of the Act (15 U.S.C. 80b-3a(a)) are
required to withdraw from registration within 90 days after the
date the adviser’s Schedule I was required by rule 204-1(a) (17
CFR 275.204-1(a)) to have been filed with the Commission. See
Schedule I, instruction 6 (17 CFR 279.1).