SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-1681, File No. S7-28-97]
RIN 3235-AH22
Exemption for Investment Advisers Operating in Multiple States; Revisions
to Rules Implementing Amendments to the Investment Advisers Act of 1940
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
SUMMARY: The Commission is publishing for comment under the Investment
Advisers Act of 1940 rule amendments to exempt multi-state investment
advisers from the prohibition on Commission registration and two
alternative amendments to revise the definition of the term "investment
adviser representative." The Commission is proposing these amendments to
refine the rules implementing the Investment Advisers Supervision
Coordination Act.
DATES: Comments must be received on or before [60 days after publication
in the Federal Register].
ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Stop
6-9, Washington, D.C. 20549. Comments also may be submitted electronically
at the following E-mail address: rule-comments@sec.gov. All comment
letters should refer to File No. S7-28-97; this file number should be
included on the subject line if E-mail is used. Comment letters will be
available for public inspection and copying in the Commission's Public
Reference Room, 450 Fifth Street, N.W. Washington, D.C. 20549.
Electronically submitted comment letters also will be posted on the
Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Carolyn-Gail Gilheany, Attorney, or
Jennifer S. Choi, Special Counsel, at (202) 942-0716, Task Force on
Investment Adviser Regulation, Division of Investment Management, Stop 10-
6, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is requesting public comment on
proposed amendments to rule 203A-2 [17 CFR 275.203A-2], rule 203A-3 [17 CFR
275.203A-3], rule 206(4)-3 [17 CFR 275.206(4)-3] and Schedule I to Form ADV
[17 CFR 279.1] under the Investment Advisers Act of 1940 [15 U.S.C. 80b-1
et seq.] ("Advisers Act"). The Commission also is proposing to withdraw
rule 203A-5 [17 CFR 275.203A-5] and Form ADV-T [17 CFR 279.3] under the
Advisers Act.
TABLE OF CONTENTS
EXECUTIVE SUMMARY
I. BACKGROUND
II. DISCUSSION
A. Multi-State Investment Adviser Exemption from Prohibition on
Registration with the Commission
B. Definition of Investment Adviser Representative
1. Accommodation Clients
2. "High Net Worth" Clients
C. Other Amendments
1. Pension Consultants -- Determining the Value of Assets of
Plans
2. Rule 206(4)-3 -- Cash Payments for Client Solicitations
3. Schedule I to Form ADV
4. Transition Rule 203A-5 and Form ADV-T
D. General Request for Comment
III. COST-BENEFIT ANALYSIS
IV. PAPERWORK REDUCTION ACT
V. SUMMARY OF REGULATORY FLEXIBILITY ANALYSIS
VI. STATUTORY AUTHORITY
TEXT OF PROPOSED RULE AND FORM AMENDMENTS
APPENDIX A: SCHEDULE I TO FORM ADV
EXECUTIVE SUMMARY
======END OF PAGE 2======
Section 203A of the Advisers Act generally prohibits an investment
adviser from registering with the Commission unless it has more than $25
million of assets under management or is an adviser to a registered
investment company. Section 203A also preempts most state regulatory
requirements for Commission-registered investment advisers and their
supervised persons except for certain "investment adviser representatives."
The Commission is proposing an exemption from the prohibition on Commission
registration for advisers required to register as an investment adviser in
30 or more states. The Commission also is proposing two alternative
amendments to the definition of investment adviser representative. Under
the current definition, supervised persons of Commission-registered
investment advisers will not be subject to state qualification requirements
if no more than ten percent of their clients are natural persons ("ten
percent allowance"). The Commission is proposing either (1) to add a
provision that would permit supervised persons to have the greater of five
natural person clients or the number of natural person clients permitted
under the ten percent allowance, or (2) to eliminate the ten percent
allowance and permit supervised persons to have an unlimited number of
accommodation clients who have certain business or familial relationships
with the supervised person or the supervised person's business or
institutional clients.
I. BACKGROUND
Last year, Congress enacted the National Securities Markets
Improvement Act of 1996 ("1996 Act").<(1)> Title III of the 1996 Act,
<(1)> Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in
scattered sections of the United States Code).
======END OF PAGE 3======
the Investment Advisers Supervision Coordination Act ("Coordination Act"),
amended the Advisers Act by reallocating federal and state responsibilities
for regulation of investment advisers. By limiting federal registration
and preempting certain state laws, the Coordination Act divided regulatory
responsibilities for the approximately 23,350 investment advisers that were
registered with the Commission.<(2)> The Coordination Act became
effective on July 8, 1997.
Under new section 203A(a) of the Advisers Act,<(3)> an investment
adviser that is regulated or required to be regulated as an investment
adviser in the state in which it maintains its principal office and place
of business is prohibited from registering with the Commission unless the
investment adviser (i) has at least $25 million of assets under management,
or (ii) is an investment adviser to an investment company registered under
the Investment Company Act of 1940 ("Investment Company Act").<(4)>
<(2)> Other amendments made by the 1996 Act to the Advisers
Act include revisions to (i) section 205 [15 U.S.C.
80b-5] to create additional exceptions to the Advisers
Act's limitations on performance fee arrangements, (ii)
section 222 [15 U.S.C. 80b-18a] to impose certain
uniformity requirements on state investment adviser
laws, (iii) section 203(e) [15 U.S.C. 80b-3(e)] to
permit the Commission to deny or revoke the
registration of any person convicted of any felony (or
any person associated with such investment adviser),
and (iv) section 203(b) [15 U.S.C. 80b-3(b)] to exempt
from registration certain advisers to church employee
pension plans. See sections 210, 304, 305(a), and
508(d) of the 1996 Act.
<(3)> 15 U.S.C. 80b-3a(a).
<(4)> The Commission has authority to deny registration to
any applicant that does not meet the criteria for
Commission registration and to cancel the registration
of any adviser that no longer meets the registration
criteria. Section 203(c) and (h) of the Advisers Act
[15 U.S.C. 80b-3(c) and (h)].
======END OF PAGE 4======
Section 203A(b) of the Advisers Act generally preempts state law with
respect to Commission-registered investment advisers.<(5)>
On May 15, 1997, the Commission adopted new rules and rule amendments
to implement the Coordination Act.<(6)> These implementing rules
included rules that exempt four types of investment advisers from the
statutory prohibition on Commission registration and define certain terms
used in the Coordination Act.<(7)> In adopting these rules, the
Commission anticipated that experience with the new regulatory scheme might
reveal the need for additional rules or further refinement of existing
rules. Based on its experience, the Commission is proposing to exempt
multi-state investment advisers from the prohibition on Commission
registration, to amend the definition of investment adviser representative,
and to clarify certain other implementing rules.
II. DISCUSSION
A. Multi-State Investment Adviser Exemption from Prohibition on
Registration with the Commission
As discussed above, section 203A of the Advisers Act limits
registration with the Commission, in most cases, to investment advisers
with at least $25 million of assets under management and preempts state law
<(5)> 15 U.S.C. 80b-3a(b). In addition, state law is
preempted with respect to advisers that are excepted
from the definition of investment adviser under section
202(a)(11) of the Advisers Act [15 U.S.C. 80b-
2(a)(11)].
<(6)> 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)]
("Adopting Release").
<(7)> Id. The Commission also amended several rules under
the Advisers Act to reflect the changes made by the
1996 Act.
======END OF PAGE 5======
with respect to these investment advisers.<(8)> The $25 million
threshold was designed to allocate regulatory responsibility to the
Commission for larger investment advisers whose activities are likely to
affect national markets and to relieve them of the burdens imposed by
multiple state regulation.<(9)> Congress recognized, however, that
there may be investment advisers with less than $25 million of assets under
management that have national businesses and for which multiple state
registration would be burdensome.<(10)> Therefore, the Commission
was given authority in section 203A(c) of the Advisers Act to exempt
investment advisers, by rule or order, from the prohibition on Commission
registration if the prohibition would be "unfair, a burden on interstate
commerce, or otherwise inconsistent with the purposes" of section
203A.<(11)>
Pursuant to its authority, the Commission adopted rule 203A-2, which
permits Commission registration for nationally recognized statistical
<(8)> Section 203A(a) and (b). Notwithstanding section
203A(b), states retain authority over Commission-
registered advisers under state investment adviser
statutes to: (1) investigate and bring enforcement
actions with respect to fraud or deceit against an
investment adviser or a person associated with an
investment adviser; (2) require filings, for notice
purposes only, of documents filed with the Commission;
and (3) require payment of state filing, registration,
and licensing fees. Moreover, section 203A(b)
specifically preserves state law with respect to
investment adviser representatives of Commission-
registered advisers who have a place of business in the
state. See infra section II.B of this Release.
<(9)> See S. REP. No. 293, 104th Cong., 2d Sess. 3-5 (1996)
[hereinafter Senate Report].
<(10)> Id. at 5.
<(11)> Section 203A(c) [15 U.S.C. 80b-3a(c)].
======END OF PAGE 6======
rating organizations and certain pension consultants, affiliated investment
advisers, and newly formed investment advisers with reasonable expectations
that they would soon become eligible for Commission
registration.<(12)> The Commission also, by order, has granted
exemptive relief to investment advisers that do not have $25 million of
assets under management but have a national or multi-state practice and
conduct advisory activities that require them to register as investment
advisers in 30 or more states.<(13)> The Commission is proposing to
amend rule 203A-2 to codify the exemptions provided by individual orders to
investment advisers required to be registered in multiple states.
Under the proposed exemption, an investment adviser required to be
registered as an investment adviser with 30 or more state securities
authorities would be permitted to register with the Commission.<(14)>
<(12)> 17 CFR 275.203A-2.
<(13)> See Arthur Andersen Financial Advisers, Investment
Advisers Act Release Nos. 1637 (June 16, 1997), 62 FR
33689 (Notice of Application), 1642 (July 8, 1997), 64
SEC Docket 2417 (Order); Ernst & Young Investment
Advisers LLP, Investment Advisers Act Release Nos. 1638
(June 16, 1997), 62 FR 33692 (Notice of Application),
and 1641 (July 8, 1997), 64 SEC Docket 2416 (Order);
and KPMG Investment Advisors, Investment Advisers Act
Release Nos. 1639 (June 17, 1997), 62 FR 33945 (Notice
of Application), and 1643 (July 8, 1997), 64 SEC Docket
2418 (Order).
<(14)> In tallying the number of states in which an adviser is
required to register, the investment adviser would be
required to exclude those states in which it is not
required to register because of applicable state laws
or the national de minimis standard of section 222(d)
of the Advisers Act. [15 U.S.C. 80b-18a] The
Commission believes such an exclusion is appropriate
because it is the obligation to register in a state,
rather than the business decision to register
voluntarily, that demonstrates that the adviser is
(continued...)
======END OF PAGE 7======
The Commission believes that an investment adviser whose activities trigger
registration requirements in 30 states is a national firm and that the
multiple state registration requirements for such a firm would constitute a
burden on interstate commerce. For that reason, the Commission believes
that such an investment adviser would be the type of firm for which
Congress expected the Commission to exercise its section 203A(c) exemptive
authority and, as a result, would have a single, national
regulator.<(15)>
Under the proposed rule amendments, an adviser applying for
registration relying on the exemption would be required to submit a
representation that the investment adviser has reviewed its obligations
under state law and concluded that it is required to register as an
investment adviser with the securities authorities of at least 30
states.<(16)> Once registered with the Commission, the investment
adviser would continue to be eligible for the exemption as long as it is
<(14)>(...continued)
subject to the type of burden contemplated by the
exemption.
<(15)> See Senate Report at 5 (Congress recognized that the
"definition of 'assets under management'... may, in
some cases, exclude firms with a national or multistate
practice from being able to register with the SEC").
<(16)> Proposed paragraph (e)(2) of rule 203A-2. At the time
of its application for registration with the
Commission, the investment adviser would be required to
include on Schedule E to Form ADV an undertaking to
withdraw from registration with the Commission if it
would no longer be required to register in at least 25
states at the time of filing Schedule I. The exemption
would require an investment adviser that indicates that
it is no longer required to register in at least 25
states to withdraw from Commission registration by
filing Form ADV-W within 90 days of filing Schedule I.
Proposed paragraph (e)(3) of rule 203A-2.
======END OF PAGE 8======
annually able to provide a representation that the investment adviser has
determined that, but for the exemption, it would be obligated to register
in at least 25 states, five fewer states than when it initially
registered.<(17)> The Commission is proposing this five-state
difference to prevent an investment adviser registered with the Commission
from losing the exemption simply because, for example, it lost a few
clients in a small number of states.<(18)>
Like other exemptions in rule 203A-2, the proposed multi-state
exemption could be used by a newly formed investment adviser in conjunction
with the "start-up adviser" exemption in paragraph (d) of the
<(17)> This representation must be attached to the investment
adviser's annual amendment to Form ADV revising
Schedule I. Proposed paragraph (e)(2) of rule 203A-2.
Under the proposed multi-state exemption, the
investment adviser also would be required to maintain a
record of the states that the adviser believes it
would, but for the exemption, be required to register.
Proposed paragraph (e)(4) of rule 203A-2.
<(18)> This "five-state difference" is similar to the "$5
million window," which makes Commission registration
optional for an adviser having between $25 and $30
million of assets under management. See rule 203A-1(a),
(b) [17 CFR 275.203A-1(a), (b)]. The Commission
adopted the $5 million window to avoid transient
registration problems that could occur because of a
small decrease in the value of client assets (as a
result of a market decline) or the departure of one or
a few clients. See Rules Implementing Amendments to
the Investment Advisers Act of 1940, Investment
Advisers Act Release No. 1601 (Dec. 20, 1996) [61 FR
68480 (Dec. 27, 1996)] ("Proposing Release"). Under
the proposed five-state difference, an investment
adviser registered with the Commission in reliance upon
the multi-state exemption would not be required to de-
register and then re-register with the Commission
frequently as a result of a change in registration
obligation in one or a few states.
======END OF PAGE 9======
rule.<(19)> A newly formed investment adviser not registered in any
state could register with the Commission if it reasonably expected that it
would be required to register in 30 or more states within 120 days. After
the 120-day period, the investment adviser would be required to file an
amendment to Form ADV revising Schedule I and attach a representation
that, but for the proposed multi-state exemption, the investment adviser
would be required to register in at least 25 states.<(20)>
Comment is requested whether the 30 state threshold should be
increased or decreased and whether the five state difference is sufficient
to prevent transient registration problems. Because determining the
obligations to register under state law requires a legal analysis, should
the Commission require investment advisers to represent that counsel has
reviewed the applicable state and federal laws and has concluded that the
investment adviser qualifies for the proposed multi-state exemption?
Should the Commission prohibit a newly formed investment adviser from using
this exemption in conjunction with the reasonable expectation exemption?
B. Definition of Investment Adviser Representative
The Coordination Act preempts most state regulatory requirements for
Commission-registered investment advisers and their supervised
persons,<(21)> but permits states to continue to license, register,
<(19)> 17 CFR 275.203A-2(d).
<(20)> These requirements would be the result of the
conditions for the exemptions provided by rule 203A-
2(d) and proposed paragraph (e) of rule 203A-2.
<(21)> The term supervised person is defined in the Advisers
Act as any "partner, officer, director . . . or
employee of an investment adviser, or other person who
provides investment advice on behalf of the investment
(continued...)
======END OF PAGE 10======
or otherwise qualify an "investment adviser representative" who has a place
of business in the state.<(22)> In rule 203A-3(a), the Commission
defined investment adviser representative as a supervised person more than
ten percent of whose clients are natural persons other than excepted
persons.<(23)>
1. Accommodation Clients
The "ten percent allowance" in the definition of investment adviser
representative was designed to permit supervised persons who provide
advisory services principally to clients other than natural persons to
continue to accept so-called "accommodation clients" without being subject
to state qualification requirements.<(24)> In adopting the ten
<(21)>(...continued)
adviser and is subject to the supervision and control
of the investment adviser." Section 202(a)(25) of the
Advisers Act [15 U.S.C. 80b-2(a)(25)].
<(22)> Section 203A(b).
<(23)> 17 CFR 275.203A-3(a). The rule defines "excepted
persons" as natural persons who have $500,000 or more
under management with the representative's investment
advisory firm immediately after entering into the
advisory contract with the firm, or who the advisory
firm reasonably believes immediately prior to entering
into the advisory contract have a net worth in excess
of $1 million (collectively "high net worth
individuals"). Rule 203A-3(a)(3)(i) [17 CFR 275.203A-
3(a)(3)(i)]. (The Commission is proposing changes to
the criteria for determining high net worth
individuals. See infra section II.B.2 of this
Release.) The Commission also excluded from the term
"investment adviser representative" those supervised
persons who do not on a regular basis solicit, meet
with, or otherwise communicate with clients of the
investment adviser or who provide only impersonal
investment advice. Rule 203A-3(a)(2) [17 CFR 275.203A-
3(a)(2)].
<(24)> Adopting Release, supra note 6, at nn.113-117 and
accompanying text.
======END OF PAGE 11======
percent allowance, the Commission acknowledged that the allowance may pose
a problem for supervised persons with one or a few institutional clients
who would not be able to have any accommodation clients.<(25)> To
have one accommodation client, a supervised person would need to have at
least ten clients that are not natural persons. Therefore, the Commission
directed the staff to work with investment advisers whose supervised
persons would be affected by the definition to develop a workable method of
addressing this concern and indicated that it may propose revisions to the
definition.<(26)> The Commission staff has consulted with members of
the industry for their views and has recommended proposals to the
Commission to resolve this issue.
The Commission is now proposing two alternative amendments to the
definition of investment adviser representative to allow supervised persons
who provide services to one or a few institutional or business client
accounts to continue to have accommodation clients without being subject to
state qualification requirements. Under the first alternative, the
Commission proposes to retain the ten percent allowance and add a provision
that would permit supervised persons to have up to five natural person
clients. Supervised persons could have under the first alternative the
greater of five natural person clients or the number of natural person
<(25)> As originally proposed, the ten percent allowance would
have been measured either by reference to the assets
under management attributable to the supervised person
or by reference to clients of the supervised person.
The Commission adopted only the client test because
there did not appear to be any workable method of
attributing client assets to supervised persons. See
Adopting Release, supra note 6, at n.115 and
accompanying text.
<(26)> Id.
======END OF PAGE 12======
clients permitted under the ten percent allowance without being subject to
state qualification requirements.
The first alternative would allow supervised persons with one or a few
institutional or business clients to accept at least five natural person
clients and would address the problem with the current rule. Moreover,
this alternative would provide a simple, bright-line test for supervised
persons to determine when they are subject to state qualification
requirements. The disadvantage of this alternative, however, is that the
five clients may not necessarily be limited to those clients who the
supervised person advises on an accommodation basis; the proposed five
natural person minimum could include natural persons who have no
relationship to an investment adviser's institutional or business clients.
Furthermore, the five natural person minimum would permit supervised
persons who have only retail clients (i.e., natural person clients) to
avoid state qualification requirements until they obtained their sixth
client. The provision, however, likely would have a small effect on the
number of supervised persons who would not be subject to state
qualification requirements because many states do not require supervised
persons to register in the state until they have more than five clients in
their respective state.<(27)>
<(27)> See, e.g., UNIF. SEC. ACT section 201(c)(1997); BURNS
IND. CODE ANN. section 23-2-1-8(c)(3) (1997); MD. CODE
ANN. section 11-401(b)(3)(ii) (1997); UTAH CODE ANN.
section 61-1-3(3)(c) (1997). The first alternative is
narrower than these state exemptions because it would
permit supervised persons to have a total of five
natural person clients nationwide, rather than five
natural person clients per state as permitted by these
states.
======END OF PAGE 13======
Under the second alternative, supervised persons who have natural
person clients would be excluded from the definition of investment adviser
representative if the natural person clients either are "high net worth"
clients or have a familial or business relationship with the supervised
person or his business or institutional clients.<(28)> Under this
alternative, the Commission would eliminate the current ten percent
allowance, and a supervised person could have an unrestricted number of
clients who are natural persons without being subject to state
qualification requirements. These clients would be limited, however, to
either (i) high net worth clients (as currently permitted by the rule), or
(ii) persons who are (A) partners, officers, or directors of the investment
adviser for whom the supervised person works or of a business or
institutional client of the investment adviser for whom the supervised
person works, (B) relatives, spouses, or relatives of spouses of such
<(28)> The Investment Company Institute ("ICI") suggested that
the Commission retain the ten percent allowance and
exclude from the term natural persons certain clients
who are "affiliated with non-natural person clients."
See Letter from Craig S. Tyle, Vice-President and
Senior Counsel, ICI, dated August 12, 1997 (available
in File No. S7-28-97). Under the current rule, the ten
percent allowance is designed as a proxy for
accommodation clients and assumes that a supervised
person who has a small number of natural person clients
does so on the basis of an accommodation to her
institutional clients. The ICI proposal would permit
the supervised person to have a defined group of
accommodation clients in addition to a group of natural
persons (up to ten percent of the supervised person's
clients) who are unrelated to her institutional clients
without being subject to the state qualification
requirements. The Commission is proposing a narrower
version of the ICI's recommendation to limit the rule's
exception to clients who are or may reasonably be
presumed to be accommodation clients.
======END OF PAGE 14======
partners, officers or directors, or (C) relatives or spouses, or relatives
of spouses of the supervised person.
The advantage of this approach is that it extends the provision of the
rule for accommodation clients to supervised persons with one or a few
clients while more closely tying the accommodation client exception to the
purpose for which it was adopted. Instead of presuming that the natural
person clients of a supervised person having primarily business clients are
accommodation clients, the rule would (with the exception of high net worth
clients) require there be the type of relationship between the supervised
person and the client that customarily results in the client being
considered an accommodation client. This approach, however, could greatly
increase or decrease the number of natural person clients supervised
persons are permitted to have by the rule before they are subject to state
qualification requirements. Moreover, it would make the rule somewhat more
complex and, perhaps, the status of a supervised person as an investment
adviser representative less transparent to a state securities commissioner
seeking to enforce state law. Comment is requested on the scope of the
accommodation client exception under this alternative. Are there
additional relationships between the investment adviser, supervised person,
and client that suggest the client is an accommodation client?
Comment is requested on the advantages and disadvantages of the two
approaches. Comment is requested on whether additional approaches could be
used to permit a supervised person with one or a few institutional or
business clients to accept a small number of natural person clients on an
accommodation basis without being subject to state qualification
requirements. Commenters suggesting an additional approach should address
======END OF PAGE 15======
whether the approach limits the scope of the exception to its original
purpose (i.e., to permit accommodation clients), any additional complexity
it adds to the rule, and the ease with which supervised persons can
determine whether they are subject to state qualification requirements.
2. "High Net Worth" Clients
Under the current rule, certain "high net worth" individuals are
excepted persons for purposes of the definition of investment adviser
representative and are not counted towards the ten percent allowance. The
criteria for determining high net worth individuals are based on the
criteria in rule 205-3 under the Advisers Act for determining those clients
with whom investment advisers may enter into a performance fee contract
under that exemptive rule.<(29)> The Commission excluded these high
net worth individuals from the definition of investment adviser
representative because the Commission presumed that these individuals, who
are less dependent on the protections of the performance fee prohibition,
do not need the protections of state qualification
requirements.<(30)>
In a companion release, the Commission is proposing to revise the high
net worth criteria in rule 205-3 to reflect, among other things, the
effects of inflation since the standards were adopted in 1985.<(31)>
The criteria for determining which individuals qualify as high net worth
<(29)> 17 CFR 275.205-3.
<(30)> See Adopting Release, supra note 6, at nn. 110-112 and
accompanying text.
<(31)> See Investment Advisers Release No. 1682 (November 13,
1997). In the companion release, the Commission also
is proposing to add a third alternative test of
sophistication.
======END OF PAGE 16======
individuals in the definition of investment adviser representative would be
revised to reflect the changes being proposed in the companion release.
Therefore, the threshold levels for high net worth individuals would
increase from $500,000 under management and $1,000,000 net worth to
$750,000 and $1,500,000, respectively.
C. Other Amendments
1. Pension Consultants -- Determining the Value of Assets of
Plans
The Commission adopted rule 203A-2(b) to exempt certain pension
consultants from the prohibition on Commission registration. Under the
rule, pension consultants that provide investment advice to employee
benefit plans with respect to assets having an aggregate value of at least
$50 million are required to register with the Commission even if they do
not otherwise meet the criteria for Commission registration.<(32)>
Rule 203A-2(b)(3) requires investment advisers relying on the exemption to
value plan assets as of the date during the investment adviser's most
recent fiscal year that the investment adviser was last employed or
retained by contract to provide investment advice to the plan with respect
to those assets.<(33)> Because of the fiscal year requirement, an
investment adviser could not rely on the pension consultant exemption when,
in fact, it provides investment advice to over $50 million of assets of
employee benefit plans if the amount of assets grew to more than $50
million after the end of the investment adviser's fiscal year, but before
<(32)> See rule 203A-2(b) [17 CFR 275.203A-2(b)]; Adopting
Release, supra note 6, at nn.58-61 and accompanying
text.
<(33)> 17 CFR 275.203A-2(b)(3).
======END OF PAGE 17======
it filed Schedule I.<(34)> The Commission, therefore, is proposing
to amend the rule to permit investment advisers to determine the aggregate
value of plan assets during a 12-month period ending within 90 days before
the investment adviser files Schedule I.<(35)>
2. Rule 206(4)-3 -- Cash Payments for Client Solicitations
The Coordination Act amended section 203(e) of the Advisers Act by
adding new section 203(e)(3), which provided the Commission with the
authority to deny or revoke the registration of any investment adviser if
the investment adviser (or any person associated with the investment
adviser) is convicted of any felony, and redesignating section 203(e)(3) as
section 203(e)(4).<(36)> The Commission proposes to conform a cross-
reference in rule 206(4)-3(a)(1)(ii)(D) to the redesignated
section.<(37)>
<(34)> Conversely, if the value of the assets of plans was
above $50 million as of the adviser's last fiscal year,
but decreased to below $50 million before Schedule I is
filed, under the current rule, the adviser would be
eligible to rely on the pension consultant exemption.
<(35)> An adviser seeking to rely on the pension consultant
exemption would be required to aggregate: (i) the value
of plan assets for which it provided advisory services
at the end of the 12-month period, and (ii) the value
of any other plan assets for which it provided advisory
services at the end of its employment or contract (if
terminated before the end of the 12-month period).
During the interim period before the proposed rule is
adopted, the Commission would not object if pension
consultants chose to value plan assets under the method
being proposed rather than under the method provided by
the current rule.
<(36)> See section 305 of the 1996 Act.
<(37)> Rule 206(4)-3 prohibits cash payments for client
solicitation under certain circumstances.
======END OF PAGE 18======
3. Schedule I to Form ADV
Instructions to Schedule I provide guidance on how an investment
adviser should determine the amount of its assets under management for
purposes of section 203A of the Advisers Act. The Commission is proposing
to amend Instruction 7 to Schedule I to clarify that, in determining the
total amount of assets under management, investment advisers may include
only those securities portfolios for which they provide continuous and
regular supervisory or management services as of the date of filing
Schedule I. In valuing these securities portfolios, however, investment
advisers may use market values as determined within 90 days prior to the
filing of Schedule I. The Commission also is proposing several other
miscellaneous conforming amendments to Schedule I.<(38)>
4. Transition Rule 203A-5 and Form ADV-T
The Commission is proposing to withdraw transition rule 203A-5 and
Form ADV-T. The rule and form are unnecessary because the transition under
the Coordination Act is now complete. D. General Request for Comment
Any interested persons wishing to submit written comments on the
proposed rule amendments and form changes that are the subject of this
Release, to suggest additional changes (including changes to the provisions
of the rules that the Commission is not proposing to amend), or to submit
comments on other matters that might have an effect on the proposals
<(38)> Instruction 5 would be revised to eliminate an
unnecessary reference to July 8, 1997, amend the
instruction with respect to the pension consultant
exemption consistent with the revision proposed in this
Release, and add an instruction with respect to the
proposed multi-state adviser exemption. In addition,
the Commission is proposing to delete Instruction 8 and
the unnecessary reference to the date of the valuation
of the assets under management in Schedule I, Part II.
======END OF PAGE 19======
described above, are requested to do so. Commenters suggesting alternative
approaches are encouraged to submit their proposed rule text.
III. COST-BENEFIT ANALYSIS
As discussed above, the proposed multi-state investment adviser
exemption would permit investment advisers required to register with 30 or
more states to register with the Commission even though they do not
otherwise meet the criteria for Commission registration.<(39)> The
Commission has limited data on the number of investment advisers that would
qualify for the proposed multi-state investment adviser
exemption.<(40)> Because investment advisers must be required to
register in a large number of states to qualify for the proposed multi-
state investment adviser exemption, the Commission expects that only a few
investment advisers would be eligible. For Paperwork Reduction Act
purposes, the Commission estimates that there may be ten investment
advisers that would qualify each year.<(41)> Comment is requested on
<(39)> See supra section II.A of this Release.
<(40)> Every investment adviser applying for registration with
the Commission is required to file Form ADV with the
Commission and to file an amended Form ADV when
information on the form has changed. Form ADV requires
information about the states in which an investment
adviser is registered, but does not distinguish between
states where the registration is mandatory and where
registration is voluntary. Moreover, the Commission no
longer receives Form ADV information for state-
registered advisers.
<(41)> According to information obtained from the one-time
form, Form ADV-T, there are approximately 21 advisers
that are registered with 30 or more states and no
longer registered with the Commission. Although
approximately 21 investment advisers are registered in
more than 30 states, the Commission estimates that only
about half of these advisers are required to register
(continued...)
======END OF PAGE 20======
whether there may be more than ten investment advisers eligible for this
proposed multi-state investment adviser exemption annually. Investment
advisers that believe they would qualify for this exemption are requested
to notify the Commission.
The proposed multi-state investment adviser exemption would benefit
investment advisers by permitting them to save costs they otherwise would
incur if they were required to comply with 30 separate sets of state
regulations, especially where state regulations may be duplicative or
conflicting. These benefits would include cost savings for complying with
state registration requirements, which the Commission estimates may be as
much as $300,000 annually.<(42)> Although these annual costs may
vary from adviser to adviser, the Commission assumes, for purposes of this
analysis, that it would cost each adviser $30,000 to comply with state-law
registration requirements.<(43)> Based on that figure, the
<(41)>(...continued)
in 30 or more states. Therefore, the Commission
estimates that there may be ten investment advisers
that would qualify for the proposed multi-state
exemption each year.
<(42)> The Coordination Act expressly preserved the authority
of the states to require Commission-registered
investment advisers to pay state filing, registration,
and licensing fees. Section 307(b) of the Coordination
Act.
<(43)> In the Cost-Benefit Analysis of Rules Implementing
Amendments to the Investment Advisers Act of 1940, the
Commission estimated that the cost for a mid-size
adviser to comply with state-law registration
requirements could be as much as $20,000. See Cost-
Benefit Memorandum (available in File No. S7-31-96)
("Implementing Amendments Cost-Benefit Analysis"). The
Commission believes that, because advisers eligible for
the proposed multi-state exemption would typically be
required to register in more states than the average
(continued...)
======END OF PAGE 21======
Commission estimates that the annual benefit from the proposed multi-state
investment adviser exemption, in the form of the foregone costs of state
registration, would be approximately $300,000 for all ten investment
advisers expected to be eligible for the proposed multi-state investment
adviser exemption. Comment is requested on the reasonableness of this cost
estimate. Commenters are requested to provide factual support or
assumptions underlying any alternative cost estimate.
The benefits also would include savings for investment advisers from
the cost of being examined by 30 different state regulators. State
regulators would save the expense of examining these investment
advisers.<(44)> The Commission does not have information to estimate
the costs of state examinations for investment advisers because the
Commission has no data on the frequency with which these investment
advisers would be examined by a particular state or the number of states
that would examine these investment advisers each year. The Commission
requests comment on the state examination costs saved by investment
advisers that are regulated only by the Commission. Finally, the proposed
multi-state investment adviser exemption would produce certain
unquantifiable regulatory benefits in allowing qualifying investment
<(43)>(...continued)
adviser registered with the Commission (i.e., at least
30 states), the cost would be at least $30,000 per
adviser. These dollar estimates were based on
discussions with law firms that provide these kinds of
services to investment advisers.
<(44)> The Commission requests comment from the states on the
costs of investment adviser examinations and the
frequency of such examinations.
======END OF PAGE 22======
advisers to be regulated by one entity rather than 30 separate state
regulators.
The proposed multi-state investment adviser exemption would impose
certain costs on investment advisers relying on the proposed exemption.
Under the proposed multi-state investment adviser exemption, an investment
adviser would be required to attach a representation to Schedule I
initially, when registering, and annually, when amending Form ADV, about
the number of states in which the investment adviser would be required to
register. The investment adviser also would be required to maintain a
record of the states in which it believes it would, but for the exemption,
be required to register that was the basis of its representation included
on the attachment to Schedule I.
The Commission estimates that the total cost to each eligible
investment adviser to comply with the requirements of the proposed multi-
state investment adviser exemption would be approximately
$24,000.<(45)> Thus, the Commission estimates that the total cost
for the ten investment advisers expected to be eligible for the proposed
multi-state investment adviser exemption would be approximately $240,000.
There also may be incidental costs to the Commission of registering
investment advisers that qualify for this proposed multi-state investment
<(45)> The Commission estimated this figure by multiplying the
aggregate burden hours required to attach a
representation to Schedule I to Form ADV (240 hours) by
an average hourly compensation rate of $100. The
estimation of the aggregate burden hours for complying
with the requirements of the proposed multi-state
exemption is based on the Commission's Paperwork
Reduction Act Submission. See infra section IV of this
Release.
======END OF PAGE 23======
adviser exemption and costs associated with examining those investment
advisers.
Overall, the Commission believes that the proposed rule amendments
would not impose significant additional costs on investment advisers, but
rather would result in a net savings when compared with the costs of
complying with state registration requirements. Comment is requested
concerning the savings for complying with state registration requirements
and any benefit to multi-state advisers in having one regulator. Comment
is also requested concerning the costs associated with the requirements of
the proposed multi-state investment adviser exemption.
As discussed in more detail above, the Commission is proposing two
alternative amendments to the definition of investment adviser
representative.<(46)> Although the Commission has never registered
investment adviser representatives, the Commission estimates that
Commission-registered advisers employ a total of approximately 153,000
investment adviser representatives.<(47)> The Commission, however,
does not have data on the number of representatives who may be affected by
the proposed amendments. The Commission, therefore, is unable to quantify
the total benefits and costs that may result from these proposed
amendments. The Commission believes, nonetheless, that the proposed
amendments could provide benefits to Commission-registered investment
advisers and their supervised persons because the proposed amendments would
<(46)> See supra section II.B of this Release.
<(47)> This estimate of the number of investment adviser
representatives employed by Commission-registered
advisers was made for purposes of the Implementing
Amendments Cost-Benefit Analysis. See Cost-Benefit
Memorandum, supra note 43.
======END OF PAGE 24======
reduce their regulatory burdens by permitting supervised persons who
provide services to a few institutional clients to have a small number of
natural persons as accommodation clients without being subject to state
qualification requirements. The Commission requests comment on the
percentage of all investment adviser representatives who would be exempt
from state qualification requirements under each of the alternatives being
proposed.
The first proposed alternative amendment to the definition of
investment adviser representative would retain the present ten percent
allowance and also permit a supervised person to have up to five natural
person clients. The first alternative definition would benefit supervised
persons who provide advice to five natural person clients because they
would no longer be subject to state qualification requirements even if they
are not able to take advantage of the ten percent allowance. Under the
current rule, a supervised person would need to have ten institutional
clients to have one accommodation client. The first proposed alternative
amendment would provide a bright line test that would allow supervised
persons and their firms to determine easily when supervised persons must
register with the states.
The first alternative would increase the number of supervised persons
of Commission-registered advisers who would no longer be subject to state
qualification requirements. This proposal would benefit affected
supervised persons by permitting them to save the expense associated with
investment adviser representative qualification examinations, such as the
costs of monitoring state registration requirements and preparing and
======END OF PAGE 25======
registering for state exams.<(48)> The Commission is unable to
quantify the total savings because the Commission does not have data on the
number of representatives who would be affected by this proposed amendment.
Because the Coordination Act preserved the authority of states to require
the payment of state filing, registration, and licensing fees, there would
be no loss to the states of fees collected.
Costs associated with the first proposed amendment include the
foregone fees collected by the National Association of Securities Dealers
Regulation ("NASDR") and the North American Securities Administrators
Association, Inc. ("NASAA") for state examinations for investment adviser
representatives.<(49)> The Commission is unable to quantify the
total costs because the Commission does not have data on the number of
representatives who would be affected by this proposed amendment. Comment
is requested on the effect this provision will have on the costs incurred
or avoided by investment advisers and their supervised persons and on the
exam fees collected by the NASDR and NASAA.
As detailed above, the second alternative proposed amendment to the
definition of investment adviser representative would replace the ten
percent allowance and allow supervised persons to have accommodation
clients who have a familial or business relationship with the supervised
<(48)> In the Implementing Amendments Cost-Benefit Analysis,
the Commission estimated the following costs: $96 to
take an exam, $850 for exam preparation, and $150
annually per investment adviser representative to
monitor state registration requirements. See Cost-
Benefit Memorandum, supra note 43.
<(49)> In the Implementing Amendments Cost-Benefit Analysis,
the Commission estimated that foregone revenue from the
exam fees would $32 per exam. Id.
======END OF PAGE 26======
persons or their institutional clients without limitation on the number of
accommodation clients. This alternative proposal might have the effect of
either increasing or decreasing the number of supervised persons subject to
state qualification requirements, and comment is requested on which outcome
is more likely.
To the extent that the second alternative increases the number of
supervised persons who are no longer subject to state qualification
requirements, affected supervised persons would save state examination and
examination preparation fees.<(50)> The costs associated with such
an increase would be the foregone fees collected by the NASDR and NASAA for
the state examinations.<(51)>
If the second alternative decreases the number of supervised persons
who are not subject to state qualification requirements, the alternative
would produce unquantifiable benefits by tying the accommodation client
exception more closely to the purpose for which it was adopted. The second
alternative would permit supervised persons to accept clients who have a
relationship with the supervised person or his institutional clients that
would result in the individual client being considered an accommodation
client. The costs of the second alternative, if it decreases the number of
supervised persons not subject to state qualification requirements, would
be the expense associated with state investment adviser representative
<(50)> See supra note 48 and accompanying text.
<(51)> See supra note 49 and accompanying text. The
Commission does not believe that there are any
substantial costs to investor protection that would be
associated with this proposed amendment.
======END OF PAGE 27======
examinations.<(52)> Comment is requested on the effect of the second
alternative amendment on the costs incurred or avoided by investment
advisers and their supervised persons.
The other proposed rule amendments would revise the time period for
determining the value of assets of plans for pension consultants, clarify
the instructions in Schedule I to Form ADV, and provide an additional
instruction in Schedule I to Form ADV. The benefits of these proposed
amendments would be to eliminate any confusion that the language of the
rules or instructions may have created. The Commission believes that these
amendments would not impose any additional costs to investment advisers.
Comment is requested on this cost-benefit analysis. Commenters are
requested to provide views and empirical data relating to any costs and
benefits associated with the proposed rule amendments.
For purposes of making determinations required by the Small Business
Regulatory Enforcement Fairness Act of 1996, the Commission is requesting
information regarding the potential effect of the proposed rule amendments
on the economy on an annual basis. Commenters should provide data to
support their views.
IV. PAPERWORK REDUCTION ACT
Certain provisions of the proposed rule amendments contain "collection
of information" requirements within the meaning of the Paperwork Reduction
Act of 1995,<(53)> and the Commission has submitted them to the
Office of Management and Budget ("OMB") for review in accordance with 44
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collections of
<(52)> See supra note 48 and accompanying text.
<(53)> 44 U.S.C. 3501 et seq.
======END OF PAGE 28======
information are "Form ADV" and "Schedule I to Form ADV," both under the
Advisers Act. Form ADV and Schedule I to Form ADV, which the Commission is
proposing to amend, contain currently approved collections of information
under OMB control numbers 3235-0049 and 3235-0490, respectively. The
proposed rule amendments are necessary to clarify previously-adopted rules
that implemented changes to the Advisers Act. An agency may not sponsor,
conduct, or require response to an information collection unless a
currently valid OMB control number is displayed.
Form ADV
Form ADV is required by rule 203-1 [17 CFR 275.203-1] to be filed by
every adviser that applies for registration with the Commission as an
investment adviser. Rule 204-1 [17 CFR 275.204-1] sets forth the
circumstances requiring the filing of an amendment to Form ADV.
Registrants must file an amended Form ADV when information on the initial
Form ADV has changed, either at the end of the fiscal year or promptly for
certain material changes. In addition, rule 204-1 also requires an
investment adviser to file the cover page of Form ADV (along with a
Schedule I) annually within 90 days after the end of the investment
adviser's fiscal year regardless of whether other changes have taken place
during the year.
After 1997, the Commission estimates approximately 7,300 investment
advisers would be registered with the Commission and required to amend Form
ADV on an annual basis as required by rule 204-1.<(54)> The
<(54)> Under rule 203A-5 of the Advisers Act, all investment
advisers registered with the Commission were required
to file a completed Form ADV-T with the Commission by
July 8, 1997, indicating whether they remain eligible
(continued...)
======END OF PAGE 29======
Commission previously estimated that there would be 750 new investment
advisers registering with the Commission each year. The Commission
estimates that an additional ten investment advisers each year would be
eligible for Commission registration under the proposed multi-state
exemption. Thus, the annual number of responses for filing an application
for investment adviser registration is estimated to be approximately 760.
The 760 new advisers each year also will be subject to the annual amendment
requirement. The Commission estimates that there would be 8,060 total
respondents to this collection of information on an annual basis.
The Commission estimates that each of the 7,300 investment advisers
registered with the Commission will amend Form ADV, as required by rule
204-1, an average of 1.5 times annually. Of the 760 new advisers each
year, 660 will amend Form ADV an average of once annually. The estimated
100 newly-formed investment advisers that will rely on rule 203A-2(d) will
amend Form ADV an average of twice annually. Thus, the annual number of
responses for completing amended Form ADV is estimated to be approximately
11,810.
The total number of annual responses for Form ADV (initial
registration and amendments) is estimated to be 760 responses for new
<(54)>(...continued)
for Commission registration. Of the 23,350 Commission-
registered investment advisers, approximately 7,200
advisers indicated that they remain eligible for
Commission registration, 10,600 advisers withdrew their
registrations, and 5,800 advisers did not file their
Form ADV-T. The Commission believes that most of the
investment advisers that did not file Form ADV-T are
either no longer in the advisory business or no longer
eligible to register with the Commission. The
Commission expects to cancel the registrations of most
of these investment advisers.
======END OF PAGE 30======
advisers (including ten responses for new advisers relying on the proposed
multi-state exemption) and 11,810 responses for annual amendments. The
average burden hours for completing Form ADV for initial registration is
9.0063 hours for each respondent (unchanged from previous estimate). The
average burden hours for completing Form ADV as an annual amendment is
1.0672 hours (unchanged from previous estimate). The total burden hours
imposed by Form ADV is estimated to be 19,448.42.
The collection of information required by Form ADV is mandatory, and
responses are not kept confidential.
Schedule I
Schedule I requires an investment adviser to declare whether it is
eligible for Commission registration. Schedule I, as part of Form ADV, is
required to be filed with an investment adviser's initial application on
Form ADV. 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] sets
forth the circumstances requiring the filing of an amended Form ADV. Rule
204-1 requires an investment adviser registered with the Commission to file
an amended Schedule I to Form ADV annually within 90 days after the end of
the investment adviser's fiscal year.
The Commission estimates that 7,300 investment advisers registered
with the Commission would respond to the information collection
requirements of Schedule I to Form ADV an average of once a year. In
addition, the Commission estimates that approximately 760 new advisers each
year will file Schedule I of Form ADV. Of the 760 advisers, 660 will file
Schedule I to Form ADV an average of once each year, and the remaining 100
that rely on the exemption provided by rule 203A-2(d) will file Schedule I
======END OF PAGE 31======
to Form ADV an average of twice each year. It is estimated that the total
number of responses would be 8,160.
For the 765 investment advisers that must calculate assets under
management for the purpose of completing Schedule I (9.5% of respondents -
excluding the ten investment advisers expected to rely on the proposed
multi-state exemption), compliance with the requirement to file an amended
Schedule I would impose a total annual burden for each investment adviser
of approximately 2 hours (unchanged from previous estimate). For the 7,285
investment advisers that either do not need to calculate assets under
management to complete Schedule I or calculate assets under management as
part of their normal business operations (90.5% of respondents - excluding
the ten investment advisers expected to rely on the proposed multi-state
exemption) this burden would be 0.75 of an hour (unchanged from previous
estimate).
The Commission estimates that an additional ten investment advisers
would be eligible for the proposed multi-state exemption. For the ten
investment advisers that would rely on the proposed multi-state exemption,
the Commission estimates compliance with the requirement to file an amended
Schedule I attaching a representation that the investment adviser is
required to register as an investment adviser in 30 or more states would
impose a total annual burden for each investment adviser of approximately
240 hours.<(55)>
<(55)> Investment advisers also would be required to maintain
a record of the states in which they believe they
would, but for the exemption, be required to register
that was the basis of their representation included on
the attachment to Schedule I. The Commission believes
that the requirement that the investment advisers
(continued...)
======END OF PAGE 32======
The total burden hours imposed by Schedule I to Form ADV is estimated
to be 9,480.313.
The collection of information required by Schedule I is mandatory, and
responses are not kept confidential.
The Commission estimates that these collections of Form ADV and
Schedule I together would impose a total hourly burden of 28,928.73 hours.
The total burdens associated with Form ADV and Schedule I to Form ADV
would change from the filing of the last Paperwork Reduction Act Submission
because of the proposed multi-state exemption and the tabulation of Form
ADV-Ts.<(56)> The current total Form ADV burden is 18,127.88 hours.
The new total Form ADV burden would be 19,448.42 hours. The total change
in burden hours for Form ADV would be 1,320.54 hours. The current total
burden for Schedule I is 6,418.94 hours. The new total burden for Schedule
I would be 9,480.313 hours. The total change in burden for Schedule I of
Form ADV would be 3,061.373 hours.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
to (i) evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
<(55)>(...continued)
maintain a record would impose a nominal burden on
investment advisers because the information would have
to be gathered for purposes of making the
representation.
<(56)> The total hourly burdens for Form ADV and Schedule I
would change because (1) the proposed multi-state
exemption would permit a small number of additional
advisers to register with the Commission, and (2) the
tabulation of information from the completed Forms ADV-
T has provided the Commission with a more accurate
number of advisers it regulates after the July 8, 1997
division of regulatory responsibilities between the
federal and state governments.
======END OF PAGE 33======
including whether the information will have practical utility; (ii)
evaluate the accuracy of the agency's estimate of the burden of the
proposed collections of information; (iii) enhance the quality, utility,
and clarity of the information to be collected; and (iv) minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other forms
of information technology.
Persons desiring to submit comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission, Office
of Information and Regulatory Affairs, Washington, D.C. 20503, and should
also send a copy of their comments to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Stop 6-9,
Washington, D.C. 20549 with reference to File No. S7-28-97. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication, so that a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.
V. SUMMARY OF REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared an Initial Regulatory Flexibility Analysis
("IRFA") in accordance with 5 U.S.C. 603 regarding amendments to rules
203A-2, 203A-3, 206(4)-3 and Schedule I to Form ADV, and the withdrawal of
rule 203A-5 and Form ADV-T under the Advisers Act. The following
summarizes the IRFA.
As set forth in greater detail in the IRFA, the Coordination Act,
which became effective on July 8, 1997, amended the Advisers Act by
======END OF PAGE 34======
reallocating federal and state responsibilities for regulation of
investment advisers. On May 15, 1997, the Commission adopted new rules and
rule amendments to implement the Coordination Act.<(57)> The
Commission proposes to revise some of these implementing rules. The IRFA
states that the proposed rule amendments would exempt multi-state
investment advisers from the prohibition on Commission registration, amend
the definition of investment adviser representative, and clarify certain
other implementing rules.
The IRFA sets forth the statutory authority for the proposed rule
amendments. The IRFA also discusses the effect of the proposed rule
amendments on small entities. For purposes of the Advisers Act and the
Regulatory Flexibility Act, an investment adviser generally is a small
entity (i) if it manages assets of $50 million or less, in discretionary or
nondiscretionary accounts, as of the end of its most recent fiscal year or
(ii) if it renders other advisory services, has $50,000 or less in assets
related to its advisory business.<(58)>
The proposed multi-state exemption for investment advisers would be
available to any investment adviser that is prohibited from registering
with the Commission and is required to register in 30 or more states. The
<(57)> See Adopting Release, supra note 6.
<(58)> Rule 275.0-7 [17 CFR 275.0-7]. In January 1997, the
Commission proposed to revise this definition of "small
entity." See 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,
Release Nos. 33-7383, 34-38190, IC-22478, and IA-1609
(Jan. 22, 1997) [62 FR 4106 (Jan. 28, 1997)]. The
Commission expects to adopt a revised definition of
small investment adviser for Regulatory Flexibility Act
purposes to reflect the Coordination Act.
======END OF PAGE 35======
Commission estimates that there may be ten such investment advisers that
would be eligible for the proposed multi-state exemption each
year.<(59)> Therefore, the Commission believes that there would be a
few small entities that would be affected by the proposed rule.
The proposed rule amendments minimize regulatory burdens on small-
entity investment advisers that are eligible for the proposed multi-state
exemption by permitting the investment adviser, once registered with the
Commission, to continue to be eligible for the proposed multi-state
exemption until it is obligated to register in less than 25 states. This
five-state difference prevents an investment adviser from being required to
register and then de-register frequently with the Commission as a result of
a change in its registration obligation in one state or few states.
The proposed amendments to the definition of investment adviser
representative would permit supervised persons of Commission-registered
investment advisers who only have a few business or institutional clients
to accept accommodation clients. The Commission does not have information
from which to estimate the number of Commission-registered investment
advisers managing assets of $50 million or less or having less than $50,000
in assets relating to its advisory business whose supervised persons would
be exempt from the definition of investment adviser representative under
the proposed amendments.
The other proposed rule amendments affect only Commission-registered
investment advisers. For purposes of these amendments, the Commission
<(59)> See supra note 41.
======END OF PAGE 36======
estimates that approximately 850 investment advisers are small
entities.<(60)> These proposed amendments clarify the implementing
rules and do not impose any additional burden on investment advisers.
Therefore, the Commission believes that it is reasonable to estimate that
these clarifying amendments would not have a significant economic effect on
small entities. Comment is requested on the number of small entities that
would be affected by these proposed amendments.
The proposed withdrawal of rule 203A-5 and Form ADV-T would have no
effect on small entities because no investment advisers currently should be
filing Form ADV-T.
The proposed rule amendments would impose certain new reporting and
recordkeeping requirements and eliminate certain other requirements.
Investment advisers relying on the proposed multi-state exemption would be
required at initial registration to attach a representation to Schedule I
that the investment adviser has determined that it must register in at
least 30 states and a representation on Schedule E to Form ADV that it will
withdraw from Commission registration when it is no longer required to
<(60)> This estimate of the number of small entities was made
for purposes of the Final Regulatory Flexibility
Analysis for the rules implementing the Coordination
Act. See Adopting Release, supra note 6, at nn.189-190
and accompanying text. Of the 23,350 Commission-
registered investment advisers, 5,800 advisers have not
filed their Form ADV-T, indicating their eligibility to
remain registered with the Commission. See supra note
54. The Commission also expects to adopt a revised
definition of small entity for purposes of the
Regulatory Flexibility Act. See supra note 58.
Therefore, the Commission plans to revise its estimate
of the number of Commission-registered advisers that
are small entities after the transition is complete so
that the Commission would have more accurate
information to estimate the number of small entities
under the new definition of that term.
======END OF PAGE 37======
register in at least 25 states.<(61)> Thereafter, in the annual
amendment to Form ADV revising Schedule I, the investment adviser would be
required to submit a representation that it has concluded that, but for the
proposed multi-state exemption, it would be required to register in at
least 25 states. If the amended Schedule I indicated that the investment
adviser was no longer eligible for Commission registration, the proposed
amendment would require the investment adviser to file a Form ADV-W within
90 days to withdraw its registration with the Commission.
The Commission estimates that it will take approximately 240 hours,
annually on average, to comply with these requirements. This burden on
investment advisers that use this proposed rule would be outweighed by the
cost savings and benefits to the multi-state investment advisers relying on
the proposed multi-state exemption.
The proposed withdrawal of Form ADV-T and rule 203A-5 would eliminate
any incidental burden that may continue to be imposed by the transition
rule. The proposed rule amendments to rule 206(4)-3 and Form ADV would not
impose any new reporting, recordkeeping or other compliance requirements.
The Commission believes that there are no rules that duplicate,
overlap, or conflict with, the proposed rule amendments.
The IRFA discusses the various alternatives considered by the
Commission in connection with the proposed rule amendments that might
minimize the effect on small entities, including (a) the establishment of
differing compliance or reporting requirements or timetables that take into
<(61)> The proposed multi-state investment adviser exemption
also would require investment advisers to maintain a
record of the states in which they would, but for the
exemption, be required to register.
======END OF PAGE 38======
account resources available to small entities; (b) the clarification,
consolidation, or simplification of compliance and reporting requirements
under the rule for small entities; (c) the use of performance rather than
design standards; and (d) an exemption from coverage of the rule, or any
part thereof, for small entities.
As stated in the IRFA, after taking into account the resources
available to small entities and the potential burden that could be placed
on investment advisers that may no longer qualify for the proposed multi-
state exemption because of a change in the registration obligations in a
few states, the Commission proposes to permit an investment adviser, once
registered with the Commission, to continue to be eligible for the proposed
multi-state exemption as long as it would be obligated to register in at
least 25 states, five fewer states than when it initially registered.
Moreover, the burdens associated with complying with the requirements of
the rule would affect only a very small number of investment advisers each
year.
With respect to the other proposed rule amendments, the Commission
believes that the establishment of different compliance or reporting
requirements for small entities is neither necessary nor practicable. The
information required by Form ADV and Schedule I is necessary for the
Commission to determine whether the investment advisers are eligible for
Commission registration. The proposed rule amendments will not change
significantly any compliance costs. Further clarification, consolidation
or simplification of the requirements for small entities does not seem
feasible. The Commission believes that the rule amendments, as proposed,
======END OF PAGE 39======
will not adversely affect small entities and, instead, include regulatory
alternatives that minimize the effect on small entities.
The IRFA includes information concerning the solicitation of comments
with respect to the IRFA generally, and in particular, the number of small
entities that would be affected by the proposed rule amendments. A copy of
the IRFA may be obtained by contacting Carolyn-Gail Gilheany, Securities
and Exchange Commission, 450 5th Street, N.W., Mail Stop 10-6, Washington,
D.C. 20549.
VI. STATUTORY AUTHORITY
The Commission is proposing amendments to rule 203A-2 pursuant to the
authority set forth in section 203A(c) of the Investment Advisers Act of
1940 [15 U.S.C. 80b-3a(c)].
The Commission is proposing amendments to rule 203A-3 pursuant to the
authority set forth in sections 202(a)(17) and 211(a) of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-2(a)(17), 80b-11(a)].
The Commission is proposing amendments rule 206(4)-3 pursuant to the
authority set forth in sections 204, 206, and 211 of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-4, 80b-6, 80b-11].
The Commission is proposing to withdraw rule 203A-5 pursuant to the
authority set forth in sections 204 and 211(a) of the Investment Advisers
Act of 1940 [15 U.S.C. 80b-4, 80b-11(a)].
The Commission is proposing amendments to Schedule I to Form ADV
pursuant to the authority set forth in sections 203(c)(1) and 204 of the
Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1) and 80b-4].
The Commission is proposing to remove and reserve rule 279.3 and
proposing to remove Form ADV-T pursuant to the authority set forth in
======END OF PAGE 40======
sections 204 and 211(a) of the Investment Advisers Act of 1940 [15 U.S.C.
80b-4, 80b-11(a)].
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
TEXT OF PROPOSED RULE AND FORM AMENDMENTS
For the reasons set out in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is proposed to be amended as follows:
PART 275 - RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1. The authority citation for Part 275 is revised to read 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.
Section 275.203A-1 is also issued under 15 U.S.C. 80b-3a.
Section 275.203A-2 is also issued under 15 U.S.C. 80b-3a.
Section 275.204-2 is also issued under 15 U.S.C. 80b-6.
Section 275.205-3 is also issued under 15 U.S.C. 80b-5(e).
2. Section 275.203A-2 is amended by revising the introductory text
of 275.203A-2 and paragraph (b)(3) and adding paragraph (e) to read as
follows:
275.203A-2 Exemptions from prohibition on Commission registration.
The prohibition of section 203A(a) of the Act [15 U.S.C. 80b-3a(a)]
shall not apply to:
(b)(1) Pension Consultants.
* * * * *
(3) In determining the aggregate value of assets of plans, include
only that portion of a plan's assets for which the investment adviser
======END OF PAGE 41======
provided investment advice (including any advice with respect to the
selection of an investment adviser to manage such assets). Determine the
aggregate value of assets by cumulating the value of assets of plans with
respect to which the investment adviser was last employed or retained by
contract to provide investment advice during the 12-month period ended
within 90 days of filing Schedule I to Form ADV [17 CFR 279.1].
* * * * *
(e) Multi-State Investment Advisers. An investment adviser that:
(1) Upon submission of its application for registration with the
Commission, is required by the laws of 30 or more States to register as an
investment adviser with securities commissioners (or any agencies or
officers performing like functions) in the respective States, and
thereafter would, but for this section, be required by the laws of at least
25 States to register as an investment adviser with securities
commissioners (or any agencies or officers performing like functions) in
the respective States;
(2) Attaches a representation to Schedule I to Form ADV [17 CFR
279.1] that the investment adviser has reviewed the applicable State and
federal laws and has concluded that, in the case of an application for
registration with the Commission, it is required by the laws of 30 or more
States to register as an investment adviser with the securities
commissioners (or any agencies or officers performing like functions) in
the respective States and, in the case of an amendment to Form ADV revising
Schedule I to Form ADV, it would be required by the laws of at least 25
States to register with the securities commissioners (or any agencies or
======END OF PAGE 42======
officers performing like functions) in the respective States within 90 days
prior to the date of filing Schedule I;
(3) Includes on Schedule E to its Form ADV [17 CFR 279.1], an
undertaking to withdraw from registration with the Commission if an
amendment to Form ADV revising Schedule I to Form ADV indicates that the
investment adviser would be required by the laws of fewer than 25 States to
register as an investment adviser with the securities commissioners (or any
agencies or officers performing like functions) in the respective States,
and, within 90 days after filing Schedule I to Form ADV, files a completed
Form ADV-W [17 CFR 279.2] whereby the investment adviser withdraws from
registration with the Commission if the amendment to Form ADV revising
Schedule I indicates that the investment adviser would be prohibited by
section 203A of the Act [15 U.S.C. 80b-3a] from registering with the
Commission; and
(4) Maintains in an easily accessible place a record of the States
that the investment adviser has determined it would, but for the exemption,
be required to register for a period of not less than five years from the
filing of a Schedule I to Form ADV that includes a representation that is
based on such record.
3. Section 275.203A-3(a) is revised to read as follows:
Proposal I
275.203A-3 Definitions.
For purposes of section 203A of the Act [15 U.S.C. 80b-3a] and the
rules thereunder:
======END OF PAGE 43======
(a)(1) Investment Adviser Representative. "Investment adviser
representative" of an investment adviser means a supervised person of the
investment adviser:
(i) Who has more than five clients who are natural persons other than
excepted persons described in paragraph (a)(3)(i) of this section; or
(ii) More than ten percent of whose clients are natural persons other
than excepted persons described in paragraph (a)(3)(i) of this section.
(2) Notwithstanding paragraph (a)(1) of this section, a supervised
person is not an investment adviser representative if the supervised
person:
(i) Does not on a regular basis solicit, meet with, or otherwise
communicate with clients of the investment adviser; or
(ii) Provides only impersonal investment advice.
(3) For purposes of this section:
(i) "Excepted person" means a natural person who is a qualified
client as defined in 275.205-3(d)(1).
(ii) "Impersonal investment advice" means investment advisory
services provided by means of written material or oral statements that do
not purport to meet the objectives or needs of specific individuals or
accounts.
(4) Supervised persons may rely on the definition of "client" in
275.203(b)(3)-1 to identify clients for purposes of paragraph (a)(1) of
this section, except that supervised persons need not count clients that
are not residents of the United States.
Proposal II
275.203A-3 Definitions.
======END OF PAGE 44======
For purposes of section 203A of the Act [15 U.S.C. 80b-3a] and the
rules thereunder:
(a)(1) Investment Adviser Representative. "Investment adviser
representative" of an investment adviser means a supervised person of the
investment adviser whose clients are natural persons other than excepted
persons described in paragraph (a)(3)(i) of this section.
(2) Notwithstanding paragraph (a)(1) of this section, a supervised
person is not an investment adviser representative if the supervised
person:
(i) Does not on a regular basis solicit, meet with, or otherwise
communicate with clients of the investment adviser; or
(ii) Provides only impersonal investment advice.
(3) For purposes of this section:
(i) "Excepted person" means a natural person who is a:
(A) Qualified client as defined in 275.205-3(d)(1);
(B) Partner, officer, director, (or other person occupying a similar
status or performing similar functions), of the investment adviser for whom
the supervised person works or of a client that is not a natural person of
the investment adviser for whom the supervised person works;
(C) Relative, spouse, or relative of spouse of such partner, officer
or director; or
(D) Relative, spouse or relative of spouse of the supervised person.
(ii) "Impersonal investment advice" means investment advisory
services provided by means of written material or oral statements that do
not purport to meet the objectives or needs of specific individuals or
accounts.
======END OF PAGE 45======
(4) Supervised persons may rely on the definition of "client" in
275.203(b)(3)-1 to identify clients for purposes of paragraph (a)(1) of
this section, except that supervised persons need not count clients that
are not residents of the United States.
4. Section 275.203A-5 is removed and reserved.
5. Section 275.206(4)-3(a)(1)(ii)(D) is amended by revising the cite
"203(e)(3)" to read "203(e)(4)".
275.203A-1 and 275.203A-2 [Amended]
6. In 17 CFR part 275 remove "[15 U.S.C. 80b-3A(a)]" and add, in its
place, "[15 U.S.C. 80b-3a(a)]" in the following places:
a. Section 275.203A-1(b)(2), (c), and (d); and
b. Section 275.203A-2(d)(2) and (d)(3).
PART 279 - FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 1940
7. 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.
8. By revising Schedule I to Form ADV (referenced in 279.1) to
read as follows:
Note: The text of Schedule I to Form ADV [ 279.1] does not and the
amendments will not appear in the Code of Federal Regulation. Schedule I
is attached as Appendix A.
9. Section 279.3 is removed and reserved.
10. Form ADV-T is removed.
Note: Form ADV-T does not appear in the Code of Federal Regulation.
By the Commission
======END OF PAGE 46======
Jonathan G. Katz
Secretary
November 13, 1997
APPENDIX A: SCHEDULE I
[THE TEXT OF SCHEDULE I DOES NOT APPEAR ON THE WORLD WIDE WEB. TO
OBTAIN A COPY OF PROPOSED AMENDMENTS TO SCHEDULE I, CALL THE
COMMISSION'S PUBLIC REFERENCE ROOM AT (202) 942-8090 AND REQUEST A
COPY OF THIS RELEASE.]
======END OF PAGE 47======