May 17, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Comments of SaveDaily.com, Inc. to the SEC's Proposed Rule Regarding an Exemption from Section 203A of the Investment Advisers Act for Internet-Based Investment Advisers
File No. S7-10-02
Dear Mr. Katz:
This letter is written in response to the Commission's request for comment on its proposal to create an exemption from Section 203A of the Investment Advisers Act for investment advisers who conduct "substantially all" of their business over the Internet (the "Proposed Rule").
These comments are written on behalf of SaveDaily.com, Inc. ("SaveDaily"), an SEC registered investment adviser. SaveDaily currently conducts substantially all of its business over the Internet and is registered with the Commission pursuant to the "multi-state adviser" exemption contained in Rule 203A-2(e) under the Investment Advisers Act of 1940 (hereinafter, the "IA Act"). SaveDaily believes that that the Proposed Rule would apply to it and that, if enacted, SaveDaily would be entitled to register with the Commission as an "Internet investment adviser" under the Proposed Rule.
Nevertheless, it is SaveDaily's opinion that the Proposed Rule would result in granting Commission registration to many investment advisers whose businesses are local in nature or confined to relatively limited regions. Because the National Securities Markets Improvements Act of 1996 ("NSMIA") was intended to limit the Commission's regulatory oversight responsibility to large, national advisers, SaveDaily respectfully requests that the Commission decline to enact the Proposed Rule.
Below is a discussion of the congressional intent underlying NSMIA and the reasons why SaveDaily believes that the Proposed Rule would undermine Congress's intent. In addition, this letter contains some suggested alternatives that SaveDaily believes would accomplish much of what the Commission seeks, without destroying the state/federal division intended by NSMIA.
As the Commission points out in its Proposed Rule, the provisions of NSMIA related to investment adviser regulation were intended to divide regulatory authority over investment advisers between the Commission and the states. "The states should play an important and logical role in regulating small investment advisers whose activities are likely to be concentrated in their home state. Larger advisers, with national businesses, should be registered with the Commission and be subject to national rules." S. Rep. No. 293, 104th Cong., 2d Sess. 4 (1996) (hereinafter "Senate Report").
In order to make this federal/state division, Congress set a $25 million threshold for Commission registration. Advisers with more than $25 million under management would be required to register with the Commission and those with less than that amount would be required to register with the state(s) in which the adviser does business. IA Act § 203A(a).
Thus, Congress clearly expressed an intent to limit Commission registration to large, national investment advisers. However, Congress also noted that there may be situations in which it would be unreasonable for certain investment advisers with less than $25 million under management to register with the states. Therefore, Congress granted the Commission "some flexibility" by granting the Commission authority, "by rule or regulation upon its own motion, or by order upon application," to "permit the registration with the Commission of any person or class of persons to which the application of [the $25 million rule] would be unfair, a burden on interstate commerce, or otherwise inconsistent with the purpose of this section." IA Act § 203A(c); see also Senate Report at 4.
Invoking its exemptive authority under Section 203A(c), the Commission enacted Rule 203A-2(e) which allows advisers with less than $25 million under management to register with the Commission if the adviser would be "required by the law of 30 or more states to register as an investment adviser" with state authorities. Rule 203A-2(e) (hereinafter the "Multi-State Adviser Rule").
In enacting the Multi-State Adviser Rule, the Commission noted that the 30-state threshold for Commission registration was intended to ensure that advisers taking advantage of the rule were truly "national" investment advisers:
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.
Investment Advisers Act Release No. 1681, 1997 WL 703188 (Nov. 13, 1997).
The Commission's statement clearly indicates that, as of the time it enacted the Multi-State Adviser Rule, it understood its authority to be limited to granting exemptive relief to those advisers who were "national firms" who merely were unable to fulfill the $25 million requirement for Commission registration.
What the Commission proposes in the Proposed Rule is a substantial expansion of its authority under Section 203A(c). Under the Proposed Rule, an Internet investment adviser does not need to make any showing that it is doing business in multiple states. Instead, the adviser would merely have to make a showing that it conducts "substantially all" of its business over the Internet. Thus, a purely intrastate adviser (or an adviser with clients in a handful of states over a limited geographical area) would be eligible for Commission registration. This, clearly, undermines the federal/state division intended by Congress when it enacted Section 203A of the IA Act.
Moreover, the Proposed Rule would result in differing treatment of "online" and "offline" investment advisers, based solely on the manner in which they deliver their services to their clients, rather than on the firms' local or national focus, as intended by NSMIA. The business of an investment adviser is not fundamentally changed by the fact that the adviser conducts substantially all of its business over the Internet. Nevertheless, under the Proposed Rule, an Internet investment adviser who provides services to clients in only six states will be allowed to register with the Commission, while a traditional, or "offline," adviser with clients in six states will not be allowed to take advantage of the same rule. The Commission has provided no justification for granting Internet investment advisers such benefits.
SaveDaily respectfully suggests that the Commission's proposed rule goes far beyond what is necessary to provide relief to the small number of advisers who may be affected by the proposed rule (which the Commission itself estimates at twenty or fewer). Instead of enacting the Proposed Rule, the Commission could take one or more of the following steps to grant some degree of relief to these advisers while still maintaining the Commission's focus on truly national investment advisers:
In short, SaveDaily believes that in order for an investment adviser to be entitled to register with the Commission, it should be required to make some showing that it is the type of adviser Congress intended to be regulated by the Commission. Thus, the adviser should demonstrate either (1) that it is a large investment adviser (i.e., an adviser with more than $25 million under management) or (2) that it is conducting its operations in numerous states. The Proposed Rule, as currently written, would open up Commission registration to any number of investment advisers who conduct their business in only one or several states, merely upon a showing that the services are offered over the Internet. SaveDaily believes that this is an unwarranted expansion of the Commission's regulatory authority. SaveDaily therefore respectfully suggests that one or more of the alternatives discussed above be enacted rather than the Proposed Rule. SaveDaily believes that these alternatives would more accurately achieve the Commission's stated goal of limiting its oversight to large and/or national investment advisers.
We appreciate the opportunity to comment on the Proposed Rule. If you have any questions, or would like to discuss the contents of this letter, please feel free to contact the undersigned.