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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
(Release No. IA-1787; File No. S7-2-99)
RIN 3235-AH60
Transition Rule for Ohio Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
SUMMARY: The Securities and Exchange Commission ("Commission")
is publishing for comment a proposed rule under the Investment
Advisers Act of 1940 to assist investment advisers that will be
subject to a new Ohio investment adviser statute. The proposed
rule would provide a transition process for these investment
advisers to change from Commission to state registration.
DATES: Comments must be received on or before March 8, 1999.
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. S7-2-99; 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: Jeffrey O. Himstreet, Attorney,
or Arthur B. Laby, Special Counsel, at (202) 942-0716, Task Force
on Investment Adviser Regulation, Division of Investment
Management, Securities and Exchange Commission, 450 Fifth Street,
N.W., Mail Stop 5-6, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is publishing for
comment proposed rule 203A-6 (17 CFR 275.203A-6) and a proposed
amendment 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 less than $25 million of assets under
management and have their principal place of business in a
state that has not enacted an investment adviser statute.[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 by March 31, 1999.[5]
The Commissioner of the Ohio Division of Securities has requested
that we create a transition process to assist in the
implementation of the Ohio law.[6] The transition process
would primarily affect investment advisers that have their
principal place of business in Ohio and are eligible for
Commission registration only because of the location of
their principal office and place of business ("smaller Ohio
advisers"). Absent a transition rule, the preemptive
provisions of the Coordination Act would prevent the Ohio
Division of Securities (and other state securities
authorities) from requiring the registration of smaller Ohio
advisers until the advisers withdrew from Commission
registration or we canceled their registrations.[7] To
assist the Ohio Division of Securities and to facilitate the
transition of regulatory responsibilities for smaller Ohio
advisers, we are proposing for public comment new rule 203A-6.
II. DISCUSSION
Under the proposed rule, 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 that are currently registered with the Commission would
switch over to registration with the Ohio Division of Securities
during a one year transition period.[9] These advisers could
withdraw their Commission registration at the time they register
with the Ohio Division of Securities, or by the end of the
transition period.[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 proposing to amend Schedule I by deleting
the references to Ohio from both Schedule I and the Instructions
to Schedule I. As a result of the proposed amendments to
Schedule I, advisers would 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.[11] The
amendments to Schedule I would become effective on December 31,
1999.
III. General Request for Comment
Any interested persons wishing to submit written comments on
the proposed rule and form changes that are the subject of this
release, to suggest additional changes or submit comments on
other matters that might have an effect on the proposals
described above, are requested to do so. Commenters suggesting
alternative approaches are encouraged to submit proposed rule
text.
For purposes of making determinations required by the Small
Business Regulatory Enforcement Fairness Act of 1996, discussed
below, the Commission also is requesting information regarding
the potential impact of the proposed rule and Schedule I
amendment on the economy on an annual basis. Commenters should
provide empirical data to support their views.
IV. COST-BENEFIT ANALYSIS
The proposed rule and form amendment are designed to
facilitate the transition of certain advisers from Commission to
state registration. This transition would further implement
congressional intent to reallocate regulatory responsibilities
for investment advisers between the Commission and state
securities authorities.
Proposed rule 203A-6 would 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 proposed rule does not alter these burdens
and benefits, but merely establishes a time by which advisers are
required to switch registrations from the Commission to the Ohio
Division of Securities.[12] Advisers may withdraw from
Commission registration at any time and avoid any potential
burdens associated with the proposed rule.
Comment is requested on any costs that may be imposed by the
proposed rule and form amendment. Commenters should submit data
indicating the cost of filing Schedule I to Form ADV and Form
ADV-W. Commenters also should submit data on the expected
effects of the proposed rule and form amendment on the customers
of investment advisers (such as the amount of fees paid).
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 and form amendment.
V. PAPERWORK REDUCTION ACT
The proposed amendments to Schedule I to Form ADV contains a
"collection of information" within the meaning of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 to 3520), and the
Commission has submitted them to the Office of Management and
Budget 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. An agency may not sponsor, conduct, or
require response to an information collection unless a currently
valid OMB control number is displayed.
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 proposing amendments to Schedule I only, and not to
Form ADV. The burdens associated with this filing are the same
as the burdens Form ADV-W imposes on all advisers withdrawing
from registration. The proposed withdrawal procedures impose no
additional paperwork burdens on advisers. The rule would create
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 proposed
rule.
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. The Commission would
receive an estimated 993 total responses from investment advisers
with their principal office in Ohio.
The proposed form amendment will not materially alter the
number of burden hours for investment advisers with their
principal office in Ohio. An estimated 889 advisers with their
principal office in Ohio (90.5% of respondents, excluding the
estimated ten advisers nationwide expected to rely on the multi-
state exemption) 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. The
burden for these advisers would be 0.75 of an hour (unchanged
from previous estimate). For the estimated 93 investment
advisers with their principal office in Ohio that must calculate
assets under management to complete Schedule I (9.5% of
respondents, excluding the estimated ten advisers nationwide
expected to rely on the multi-state exemption provided by rule
203A-2(e) (17 CFR 275.203A-2(e))), compliance with the
requirement to file an amended Schedule I would impose a total
annual burden for each investment adviser of approximately two
hours (unchanged from previous estimate). Schedule I to Form ADV
therefore is estimated to impose 852.75 total burden hours on
advisers with their principal office in Ohio. This estimate
would likely remain constant absent the proposed rule and form
amendment.
The collection of information required by Schedule I is
mandatory, and responses are not kept confidential.
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, including whether the information will
have practical utility; (ii) evaluate the accuracy of the
agency’s estimate of the burden of the proposed collection 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 also should send
a copy of their comments to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 5th Street, N.W., Stop 6-
9, Washington, D.C. 20549 with reference to File No. S7-2-99.
OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication. A comment
to OMB is best assured of having its full effect if OMB receives
it within 30 days of publication.
VI. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared an Initial Regulatory
Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. 603
regarding proposed rule 203A-6 and amendment to Schedule I to
Form ADV. The following summarizes the IRFA.
The IRFA sets forth the statutory authority for the proposed
rule and amendment to Schedule I. The IRFA also discusses the
effect of the proposed rule and form amendment on small entities.
For the purposes of the Advisers Act and the Regulatory
Flexibility Act, an investment adviser, under Commission rules,
generally is a small entity if (i) it has assets under management
of $25 million or less 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.[13]
The Commission estimates that approximately 1,000
Commission-registered advisers are small entities. Approximately
540 of these small entities have their principal office in Ohio.
As explained in the IRFA, 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 will require smaller Ohio
advisers to withdraw from Commission registration after the Ohio
law is effective. Relatively few small entities thus would be
affected by the proposed rule.
The IRFA states that the proposed rule amendments would
impose no new reporting or recordkeeping requirements and would
eliminate certain other requirements. The proposed rule would,
however, create a deadline for complying with an existing
requirement. Smaller Ohio advisers no longer eligible for
Commission registration would 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 proposed rule and rule amendment will not materially
alter the time required for investment advisers to comply with
these rules.[14] The proposed rule and form amendment also are
necessary to implement the Coordination Act with respect to
smaller Ohio advisers. The IRFA states that the burden to
investment advisers subject to the rule should be outweighed by
the benefits to the investment advisers subject to the proposed
rule and form amendment.
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 and form
amendment that might minimize the effect on small entities,
including (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 proposed rule for small entities; (c) the
use of performance rather than design standards; and (d) an
exemption from coverage of the proposed rule, or any part of the
proposed rule, for small entities.
As stated in the IRFA, it would be inconsistent with the
Coordination Act to exempt small entities from the proposed rule
and form amendment. This determination was made 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 be eligible for Commission registration. It does
not appear feasible to establish different reporting or
compliance requirements or to further clarify, consolidate or
simplify the reporting or compliance requirements. The proposed
rule and form amendment, as proposed, would not adversely affect
small entities. The proposed rule and form amendment, 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 and form amendment. A copy of the IRFA may be
obtained by contacting Jeffrey O. Himstreet, Securities and
Exchange Commission , 450 5th Street, N.W., Mail Stop 5-6,
Washington, D.C. 20549.
VII. STATUTORY AUTHORITY
The Commission is proposing 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 proposing 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.
TEXT OF PROPOSED RULE AND FORM AMENDMENTS
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
For the reasons discussed in the preamble, the Commission
proposes to amend Title 17, Chapter II of the Code of Regulations
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,, the investment
adviser 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 amending 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: January 29, 1999
**FOOTNOTES**
[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]: Id.
[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 ("Implementing Release").
[4]: Colorado, Iowa and Wyoming also did not have investment adviser
statutes at the time Congress enacted the Coordination Act. The
Commission recently amended Schedule I to Form ADV necessitated by
the enactment of investment adviser statutes in both Colorado and
Iowa. Technical Changes to Schedule I to Form ADV, Investment
Advisers Act Release No. 1733A (Jan. 7, 1999).
[5]: H.B. 695, 122d Gen. Ass., Reg. Sess. (Ohio 1997-1998).
[6]: See Letter from Thomas E. Geyer, Commissioner, Ohio Division of
Securities, dated September 25, 1998 (available in File No. S7-2-
99).
[7]: Section 203A(b) of the Act (15 U.S.C. 80b-3a(b)) preempts state
laws that would require the registration, qualification and
licensing of investment advisers registered with the Commission.
See Implementing Release, supra note at II.H.1.
[8]: The Ohio Division of Securities estimates that its implementing
rules would be effective by March 31, 1999.
[9]: In addition, advisers ineligible for Commission registration may
be required to register with other state securities authorities.
See Section 222(d) of the Advisers Act (15 U.S.C. 80b-22(d)) (the
national de minimis standard). The timing of an investment
adviser’s state registration obligations would be governed by
state law.
[10]: Proposed 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 withdraw from Commission
registration at any time and thus avoid dual regulation.
[11]: The Commission is proposing to require smaller Ohio advisers to
withdraw from Commission registration by March 30, 2000. Proposed
rule 203A-6(b).
[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]: Rule 0-7 (17 CFR 275.0-7).
[14]: 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).