E-Mail February 7, 1997 Mr. Jonathan Katz Secretary US Securities and Exchange Commission 450 5th Street, NW Washington, DC 20549 RE: Rules Implementing Amendments to the Investment Advisers Act of 1940 Rel. No. IA-1601 File No. S7-31-96 Dear Secretary Katz: I appreciate the opportunity to comment on Release IA-1601 proposing rules to implement the provisions of the Investment Advisers Supervision Coordination Act, a key part of the National Securities Markets Improvement Act of 1996 ("NSMIA"). The Commission staff is to be commended for its recognition of the need for clarifying rules and its prompt response in promulgating the proposals of IA-1601. The State of North Carolina is a member of the North American Securities Administrators Association ("NASAA") which filed a lengthy comment letter with the Commission on February 3, 1997. In general, I concur with the comments contained in the NASAA filing, but would like to comment of several of the issues raised by IA-1601 in my capacity as North Carolina's Secretary of State and Securities Administrator. First, I believe that the Commission's interpretation of the scope of NSMIA's preemptive provisions as they relate to the states' enforcement authority is incorrect under the 10th Amendment and current case law. All of the precedent in this area is directed towards limiting the scope of preemption to that which Congress specifically preempts, and NSMIA limits its preemption to specific provisions relating to licensing, registration and qualification of certain large investment advisers and the registration, licensing and qualification of certain supervised persons of the larger investment advisers. Further, I find nothing in NSMIA or its legislative history to indicate that it was the intent of Congress that the SEC be empowered to extend by rule the preemptive provisions of the Act. I urge the Commission to exercise restraint and withdraw from this position. February 7, 1997 Rules Implementing Amendments Page 2 Second, I object to the Commission's attempt to federally define "investment adviser representative." Such a federal definition is neither necessary nor desirable, nor is it contemplated by NSMIA. It is only the state and not the Commission that has the authority to require the licensing, registration, and qualification of any person as an investment adviser representative, and it follows logically that only the state should determine on whom those requirements will be imposed. Should a state wish to exclude a particular group, such as economics degree holders, from its licensing requirements, it should be able to do so. Further, there is a high degree of uniformity in state definitions of investment adviser representatives and no federal definition is needed. I suggest this definition be withdrawn. Third, I support the Commission's decision to define "place of business" as used in the statute. The introduction of this new term into the legislation has provoked considerable discussion among regulators and the industry--probably generating more heat than light. Unlike the term "investment adviser representative" which is defined in the various state laws, "place of business" is new to securities laws and needs a single definition to provide guidance to practitioners and regulators. I believe the proposed definition is generally satisfactory because it recognizes many of the realities of the industry. I would only suggest that the use of the term "regular" in the proposal adds another element of interpretation that may be unnecessary. The occasional North Carolina contact by an unlicensed investment adviser representative is provided safe-harbor through an existing de minimis exemption, and I would expect most states to similarly extend the NSMIA national de-minimis exemption for firms to the representatives employed by them. Omission of the word "regular" would remove some confusion and potential conflict as the states add their interpretations, and with the extension of the de minimis exemption to investment adviser representatives, impose no additional licensing burdens. Fourth, I suggest that the Commission include consideration of the Internet in its rules concerning an adviser's place of business. The increased use of the Internet by investment advisers is a reality that will continue and will pose new challenges in the coming years. At a minimum, the place from which the supervised person is transmitting investment advice should be considered a place of business for licensing purposes. Fifth, I consider the Commission's introduction of dual licensing issues inappropriate and beyond the scope of its authority under NSMIA. For all of the same reasons that I object to the Commission attempting to define investment adviser representative, I object to the attempt to exempt broker- dealer sales representatives from that definition. The functional difference between investment adviser representatives and broker-dealer sales representatives is obvious and should be maintained. There is nothing in NSMIA that empowers the Commission to eliminate that distinction nor should it be eliminated. February 7, 1997 Rules Implementing Amendments Page 3 Thank you for this opportunity to comment on the proposed rules. I will be happy to expand or clarify these comments on your request. Sincerely, Elaine F. Marshall