E-mail SOCIETY OF ASSET ALLOCATORS AND FUND TIMERS, INC. 11275 E. Mississippi Avenue, Suite 2E3 Aurora, CO 80012 (303) 366-7796 FAX (303) 366-4020 February 7, 1997 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: File No. S7-31-96 Gentlemen: SAAFTI is a national trade association with membership in excess of 190 investment advisers and mutual fund managers who manage, in the aggregate, in excess of $10 billion in investment portfolios. It is the purpose of this letter to comment upon the Proposed Rules in Commission release No. IA-1601, particularly from the viewpoint of investment advisers who may be prohibited from registration under Section 203(a). (A) Exemption from Prohibition on Commission Registration. The rule does not go far enough in delineating when the prohibition on Sec 203 registration is "...unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes..." of the Coordination Act. Many under $25 million advisers ("Small Advisers") have multi-state businesses. There is also a perception among Small Advisers that the prohibition on Commission registration places them at a disadvantage to Commission registered advisers for several reasons: 1) they may be perceived by clients or presented by competitors as potentially "second class" advisers viz-a-viz Commission registered advisers; 2) they may be faced with the vast complexity of multi-state registration from which the larger advisers have already sought relief; and 3) their ability to continue to manage ERISA plan assets is in question. The Commission should consider including in the rule specification of standards, including multiple State registrations, beyond which the Small Adviser may opt for Section 203(a) registration and/or apply for individual exemptive relief. For example, the rule might provide that a Small Adviser has an option to register under Section 203(a): (a) if assets under management outside of the State of the adviser's principal office exceed __% of the advisers total assets under management; or (b) the adviser is required to register in more than __ States. In addition, the rule should supply guidelines for exemption applications based upon individual adviser concerns under the 203A(c) tests. These guidelines should specify parameters under which the Commission would entertain exemption requests on a case by case basis. For example, two area of concerns to our members : 1) if the prohibition on registration places the adviser at a competitive disadvantage to SEC-registered advisers; or 2)if at the time in question, the right of state registered advisers to manage ERISA plan assets is subject to qualification, termination or restriction that does not apply to a SEC registered adviser. The foregoing is not exhaustive, and case by case exemptions should be liberally granted. (B) Definition of Client for National De Minimis. The Proposed Rule provides a clear definition which is consistent with other regulatory provisions. However, it does not clearly draw bright line standards or indicia to determine whether investment advice is based on entity objectives versus beneficial owner objectives. Generally, investment advice to any entity with a small number of beneficial owners would consider the objectives of the owners collectively. Would this collective attention to the investment profiles of a small number of beneficial owners mean, for example, that a family trust (with beneficiaries having different principal residences) advised as a single fund would have to count each beneficiary as a "client"? Surely a conclusion based upon such fine distinctions is cumbersome, if not unworkable. We would propose that the following be added to the entity definition: "Investment advice is based upon the investment objectives of the entity unless that investment advice to the entity is segmented based upon differing identities of its beneficial owners." The words "related to" should be further defined to mean a relationship by blood, marriage or adoption. The relationship should be the only test. Residence can vary without the adviser's knowledge. In addition, the definition should include entities that are materially alter egos of the natural person, such as a trust of which a natural person is a (1) trustee, (2) settlor, or (3) a current income beneficiary. (C) Mandates on the States. The Act prohibits a State from imposing books and records or bonding requirements on an adviser which differ from those imposed by the State where the adviser maintains its principal office, assuming that the adviser is registered there. The Proposed Rule is silent on two issues of major importance to advisers: (1) "books and records" should be defined to include financial statements; and (2) "bonds" should be defined to include all contracts of insurance required for protection of investors. The requirements imposed by various States respecting financial statements are widely disparate. They vary from "balance sheet" to "financial statements prepared in accordance with generally accepted accounting principles" ("GAAP"). An adviser registered in a State where its principal office is located may be permitted to file an internally prepared cash basis balance sheet while the same adviser's registration in another State requires GAAP financial statements -- that is, accrual basis with an independent auditor's opinion. The later may be procured by the cash basis adviser only at substantial cost and with great effort. Likewise, for example, the State of Hawaii requires errors and omissions insurance while the State of adviser's principal office may not even require a surety bond. The following is proposed as a definition: "For purposes of section 222(c) books and records shall include financial statements and bonds shall include any contract of insurance which is required for the protection of investors." (D) Prohibitions on the States. We believe the rule should clearly define "registration, licensing, or qualification" as used in Section 203A(b)(1) to make it clear that a State may not circumvent the intent by expansion of its retained powers to prevent fraud and deceit. We are concerned that particularly aggressive States may couple these words with the preservation of investigative powers respecting fraud and deceit contained in Section 203A(b)(2) as a basis for indirectly imposing contract, capital, bonding, books and records, and ethical practice requirements on SEC registered advisers to the potential effect that no substantive change has been made by the Act. While the Executive Summary recognizes this potential, incorporation of its conclusions in the rule would give them the force of law. We suggest inclusion of a definition similar to the following: "The words "registration, licensing, or qualification" as used in Section 203A(b) include any direct or indirect condition imposed by any state on an investment adviser registered under Section 203 for the privilege of conducting investment advisory activities in such state, but excluding those conditions which are specifically reserved to the state by the Act or the rules and regulations thereunder." (E) Place of Business as Related to National De Minimis. Section 222(d) of the Act grants an exemption for de minimis contacts with a State provided the adviser: (1) does not have a place of business located within the State and (2) during the 12 month period has had fewer than 6 clients resident in the State. The Proposed Rule in defining a "place of business" excludes only a motor vehicle unless the adviser operates only out of a motor vehicle. While the Executive Summary claims this is the same as the "place of business" definition for an IAR, it isn't unless the intent is to destroy the exemption for any adviser who meets with a single client in a State: (a) in person, (b) by telephone, or (c) by computer modem. The Proposed Rule attempts to read out of the statute the place of business requirement Congress imposed. We also suggest that "place of business" be defined so as to conform to a more generally accepted standard rather than the fiction suggested in the proposed rule. The statute specifies "has a place of business located within the State". The plain meaning of these words requires a continuing physical business location. The statute does not use qualifiers such as "directly or indirectly has a place of business", nor should it be so construed. The statute does not use the words "conducts business within the State", nor should it be so construed. Surely, Congressional intent was to describe what is commonly accepted as a continuing physical business presence at a location within a State before that State should be permitted to regulate. (F) Section 203A-2(c) Identity of Affiliate Offices. 203A-2(c) should be amended to delete the proviso in the first sentence requiring identity of offices to be an affiliate entitled to continuing SEC registration. The Discussion suggests that affiliates in the same office would be likely to have overlapping operations, similar books and records and integrated compliance systems, and so should automatically be exempted from the prohibition on SEC registration. Instead of speculating as to the impact of geography, the SEC should simply require such affiliates to be reasonably overlapping in operations, books and records and compliance system integration. In the electronic age, affiliates in different areas with the same computer systems and substantive specialties may well better meet the criteria than diffuse, uncoordinated operations that happen to occupy the same office building. (G) State Adviser not Required to Register. In Section II.E.a. of the Executive Summary, The Commission requests comment on whether it should ask for a statutory amendment to prohibit Commission registration if a state has "an investment adviser statue" but does not require that adviser to register. The present approach is correct and the statute should not be amended. The genius of the 1940 ACT was its early recognition that a national market in securities existed and could be disrupted by advisers acting from states that had no regulation or incompetent regulation. Congress should, if anything, restore national uniformity and not further dismantle it. SAAFTI remains very concerned about the possibility of the burdens of reform falling too heavily on small advisers and urges the Commission in all aspects of its rule-making to give careful attention to the needs and concerns of small business. In this spirit, our smaller members have been impressed with the consideration for their needs shown by the regulations creating the $25 million to $30 million registration zone. The staff is to be commended for its foresight in developing this approach. Very truly yours, The Society of Asset Allocators and Fund Timers, Inc. by___________________________________ Jerry C. Wagner, its Chairman SOCIETY OF ASSET ALLOCATORS AND FUND TIMERS, INC. 11275 E. Mississippi Avenue, Suite 2E3 Aurora, CO 80012 (303) 366-7796 FAX (303) 366-4020 COPY November 6, 1995 Hon. Jack Fields, Chairman Subcommittee on Telecommunications and Finance Committee on Commerce United States House of Representatives 2125 Rayburn House Office Building Washington, DC 20515-6115 Dear Representative Fields: We commend your efforts to address, in HR 2131, the burdensome over-regulation of the entire securities industry and, particularly, the investment advisory segment of that industry. SAAFTI is a trade association with a membership of over 150 investment advisors, mutual funds, and service providers who collectively manage in excess of ten billion dollars of client assets. The most burdensome aspect of conducting a large investment advisory business, managing the investments of clients who are resident in many states, is the required registration and ongoing compliance and record keeping efforts with respect to the laws and regulations of multiple jurisdictions. The registration and compliance burden is exacerbated by the fact that the laws of these jurisdictions do not approach any semblance of uniformity and those that are similar in enactment become grossly dissimilar in the interpretations made and positions taken by local administrators. Notwithstanding, any inadvertent oversight of these myriad rules can be cause for the imposition of substantial fines or other discipline which may threaten the very existence of an advisory business. The present system of shared federal and state regulation of what is, in fact, a true national industry, imposes an astronomical financial cost on the entire process of capital formation and investment, from initial capitalization of the smallest business, through its transition to public ownership, and ultimately finding appropriate positioning of the resulting investment vehicles in the investment portfolios of institutional and private investors. With respect to our membership, the multiple regulatory scheme produces a "crazy-quilt" of fundamental differences in compliance requirements. Just a few of the more aberrational are cited here: 1. De minimis Variance: Many states provide for a limited number of client contacts before registration is required. These so-called "de minimis" exemptions vary from state to state, ranging from 0 to 40 (with 5 being the most prevalent), and in each case may depend on the existence of other and different facts. Even the number "5" does not mean "5" in every state. Hawaii counts a joint account of a husband and wife as 2 clients and each of their IRAs as another client and their personal trusts as another 2 clients and their personal accounts as another two. In this case two persons are counted as using eight exemptions. At the very least, one account can easily be counted as a minimum of two clients. 2. Exam Requirements: Formal examination requirements imposed by various states differ as to identity of examination, scoring thereof, who must have, and the length of time the results are valid as well as standards for waivers of the requirement if any. A capsule summary of the examination requirements for those states imposing them requires 7 typewritten pages, and references 16 separate examinations and 5 professional designations which are required singly or in various combinations. 3. Registration Variances: In order to receive referral fees as a solicitor for an investment advisor, some states require registered representatives of registered Broker/Dealers to also be registered investment advisor representatives of the Broker/Dealer while others say the Broker/Dealer must be registered as an Investment Advisor in order to qualify its registered representatives. Washington provides for an exemption for the Broker/Dealer but no exemption is allowed for its registered representatives unless the Broker/Dealer is actually registered as an Investment Advisor. Otherwise, there is a requirement for the registered representative to also be registered as an investment advisor representative. 4. Dual Registrations: Indiana requires dual registration of Investment Advisor Agents who are not employees of the Investment Advisor but rather are the employees of other Advisors or Broker/Dealers with whom the Investment Advisor contracts in order to offer its services. This is analogous to a mutual fund already registered in the state having to register the agents of Broker/Dealers who offer to sell shares of the fund. Other states prohibit dual registrations. The reason offered by Indiana is the desire to "track these relationships". This is in very much a grey area of interpretation of Indiana law which does not explicitly so provide. It also blurs the central question as to who has supervisory responsibility over the agent with dual registration. 5. Joint Liability: Oregon requires an Investment Advisor who uses a registered representative of another firm to offer the Advisor's services, to file a joint liability agreement with the other firm, agreeing to be jointly and severally liable for the acts of the registered representative. The other firm may even be a competitor of the Advisor but the agreement is imposed by Oregon anyway. 6. Disclosure Variances: In addition to the Federal disclosure rules for solicitors' cash referral fees under Rule 206(4)3, Washington has special lengthy disclosure requirements per "Disclosure Form 101" for Advisors who also happen to be registered representatives of Broker/Dealers. 7. Written Procedure Variances: 14 States have requirements for a written procedures manual and each of those differ as to what must be contained in the manual. 8. Affidavits: Some states require an affidavit concerning prior activity in the state to be submitted with an original application for registration. If an advisor's existing client has simply moved into such state before registration is complete, a truthful disclosure in the affidavit will trigger an enforcement response from the state regulator. 9. Wholesale Activities: Some states require that, even without contact with the investing public, a wholesale representative negotiating a selling agreement with another registered entity must be registered in the state in order to receive wholesale commissions if those commissions are based on volume of business generated. 10. Financial Statements: Each state has its separate requirements for the presentation of financial statements of the registered investment advisor. Many require preparation of statements in accord with general accepted accounting principles which has the effect of requiring a small advisor keeping its books on the cash basis to incur substantial professional fees to convert the cash basis balance sheet to audited accrual basis statements. 11. Contracts: Several States dictate what must be in or what is not permitted in an investment advisory contract which otherwise meets the requirements of the federal Investment Advisors Act. Often, language required by one state will directly contradict language accepted in another. 12. Strained Statutory Construction: Texas, as an example, takes the position that a solicitor for an investment advisor, while not required to be registered by the statute, must nevertheless be registered, since a securities salesman for a Broker/Dealer is required to be registered under the statute and the solicitor is "analogous" to such a salesman. 13. Independent Contractor equals Employee. Many states interpret their statute's reference to employee as including independent contractor. The result, in Arizona and Florida, is to require advisors to report independent sales representatives, self employed or employed by others, as employees of the advisor and therefor under its "control and supervision". We stand one hundred percent committed to support of this proposed legislation. We do believe that it might be preferable to deal with the investment advisory industry in specific terms preserving the ability of the states to preserve their fee base and require local registration for informational purposes, as is proposed for the brokerage industry. It should be made clear that states may regulate purely local (intra-state) advisors or those below a given dollar limit of assets managed as proposed by Senator Gramm's bill. However when dealing with advisors with an interstate business, enforcement of registration, record-keeping and anti-fraud requirements, the new law should require that the states be limited to enforcement of federal laws and regulations. Only in this manner may uniformity among the states be achieved so that this form of interstate commerce can expand and flourish. Very truly yours, SOCIETY OF ASSET ALLOCATORS AND FUND TIMERS, INC. Jerry C. Wagner President RTM/ce