97-13284. Rules Implementing Amendments to the Investment Advisers Act of 1940  

  • [Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
    [Rules and Regulations]
    [Pages 28112-28151]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-13284]
    
    
    
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    _______________________________________________________________________
    
    Part II
    
    
    
    
    
    Securities and Exchange Commission
    
    
    
    
    
    _______________________________________________________________________
    
    
    
    17 CFR Parts 275 and 279
    
    
    
    Rules Implementing Amendments to the Investment Advisers Act of 1940; 
    Final Rule
    
    Federal Register / Vol. 62, No. 99 / Thursday, May 22, 1997 / Rules 
    and Regulations
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    17 CFR Parts 275 and 279
    
    [Release No. IA-1633, File No. S7-31-96]
    RIN 3235-AH07
    
    
    Rules Implementing Amendments to the Investment Advisers Act of 
    1940
    
    AGENCY: Securities and Exchange Commission.
    
    ACTION: Final rules.
    
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    SUMMARY: The Commission is adopting new rules and rule amendments under 
    the Investment Advisers Act of 1940 (``Advisers Act'') to implement 
    provisions of the Investment Advisers Supervision Coordination Act 
    (``Coordination Act'') that reallocate regulatory responsibilities for 
    investment advisers between the Commission and the states. The rules 
    establish the process by which certain advisers will withdraw from 
    Commission registration, exempt certain advisers from the prohibition 
    on Commission registration, and define certain terms. The Commission 
    also is amending several rules under the Advisers Act to reflect the 
    changes made by the Coordination Act. The rules and rule amendments are 
    intended to clarify provisions of the Coordination Act and assist 
    investment advisers in ascertaining their regulatory status.
    
    EFFECTIVE DATES: July 8, 1997, except for Sec. 275.203A-2, which will 
    become effective on July 21, 1997. See section iii of this Release.
    
    FOR FURTHER INFORMATION CONTACT: Catherine M. Saadeh, Staff Attorney, 
    or Cynthia G. Pugh, Staff Attorney, at (202) 942-0691, Task Force on 
    Investment Adviser Regulation, Division of Investment Management, Stop 
    10-2, Securities and Exchange Commission, 450 Fifth Street, NW., 
    Washington, DC 20549. The Commission has placed a list of frequently 
    asked questions and answers about Form ADV-T and the changes in the 
    regulation of investment advisers on the Commission's Internet web 
    site. This list is located at http://www.sec.gov/rules/othern/
    advfaq.htm. The Commission staff will update these questions and 
    answers from time to time. The Commission urges interested persons with 
    access to the World Wide Web to review these questions and answers 
    before contacting Commission staff.
    
    SUPPLEMENTARY INFORMATION: The Commission is adopting new rules 203A-1, 
    203A-2, 203A-3, 203A-4, 203A-5, 222-1, and 222-2 (17 CFR 275.203A-1, 
    275.203A-2, 275.203A-3, 275.203A-4, 275.203A-5, 275.222-1, and 275.222-
    2), and amendments to rules 203(b)(3)-1, 204-1, 204-2, 205-3, 206(3)-2, 
    206(4)-1, 206(4)-2, 206(4)-3, and 206(4)-4 (17 CFR 275.203(b)(3)-1, 
    275.204-1, 275.204-2, 275.205-3, 275.206(3)-2, 275.206(4)-1, 
    275.206(4)-2, 275.206(4)-3, and 275.206(4)-4), and Form ADV (17 CFR 
    279.1) under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1) (the 
    ``Advisers Act'' or the ``Act''). The Commission is rescinding Form 
    ADV-S (17 CFR 279.3) under the Advisers Act.
    
    Table of Contents
    
    Executive Summary
    I. Background
    II. Discussion
    A. Form ADV-T
    B. Assets Under Management
        1. Securities Portfolios
        2. Continuous and Regular Supervisory or Management Services
        3. Safe Harbor for State-Registered Investment Advisers
        4. Valuation and Reporting of Securities Portfolios
    C. Transitions Between State and Commission Registration
        1. Transition from Commission to State Registration
        a. Annual Reporting of Continued Eligibility
        b. 90-Day Grace Period
        c. Cancellation of Commission Registration
        2. Transition from State to Commission Registration
        a. The $5 Million ``Window''
        b. Registration with the Commission
    D. Exemptions from Prohibition on Registration with the Commission
        1. Nationally Recognized Statistical Rating Organizations
        2. Pension Consultants
        3. Certain Affiliated Investment Advisers
        4. Investment Advisers With Reasonable Expectation of 
    Eligibility
        5. Advisers to ERISA Plans
    E. Investment Advisers Not Regulated or Required to be Regulated by 
    States
        1. ``Regulated or Required to be Regulated''
        2. ``Principal Office and Place of Business''
    F. Persons Who Act on Behalf of Investment Advisers
        1. ``Investment Adviser Representative''
        a. Retail Clients
        b. Accommodation Clients
        c. Supervised Persons Providing Indirect or Impersonal Advice
        d. Dually Registered Investment Adviser Representatives
        e. Solicitors
        2. ``Place of Business''
    G. National De Minimis Standard
    H. Scope of State Authority Over Commission-Registered Investment 
    Advisers
        1. Preemption of State Regulatory Authority
        2. Preservation of State Anti-Fraud Authority
    I. Other Amendments to Advisers Act Rules
        1. Amendments to Form ADV; Elimination of Form ADV-S
        2. Rule 204-2--Books and Records
        3. Rule 205-3--Performance Fee Arrangements
        4. Rule 206(3)-2--Agency Cross Transactions
        5. Rules 206(4)-1, 206(4)-2, and 206(4)-4--Anti-Fraud Rules
    III. Effective Dates
    IV. Paperwork Reduction Act
    V. Cost/Benefit Analysis
    VI. Summary of Regulatory Flexibility Analysis
    VII. Statutory Authority
        Text of Rules and Forms
        Appendix A: Form ADV-T
        Appendix B: Schedule I to Form ADV
    
    Executive Summary
    
        The Commission is adopting rules and rule amendments to implement 
    certain provisions of the Investment Advisers Supervision Coordination 
    Act. The Coordination Act amended the Advisers Act to, among other 
    things, reallocate the responsibilities for regulating investment 
    advisers (``investment advisers'' or ``advisers'') between the 
    Commission and the securities regulatory authorities of the states. 
    Generally, the Coordination Act provides for Commission regulation of 
    advisers with $25 million or more of assets under management, and state 
    regulation of advisers with less than $25 million of assets under 
    management. The rules and rule amendments:
         Establish the process by which advisers that are currently 
    registered with the Commission determine their status as Commission-or 
    state-registered advisers after July 8, 1997, the effective date of the 
    Coordination Act;
         Amend Form ADV to require advisers to report annually to 
    the Commission information relevant to their status as Commission-
    registered advisers;
         Relieve advisers of the burden of frequently having to 
    register and then de-register with the Commission as a result of 
    changes in the amount of their assets under management;
         Provide certain exemptions from the prohibition on 
    registration with the Commission;
         Define certain terms used in the Coordination Act, 
    including ``investment adviser representative,'' ``principal office and 
    place of business,'' and ``place of business''; and
         Clarify how advisers should count clients for purposes of 
    both the new national de minimis exemption from state regulation and 
    the federal de minimis exemption from Commission registration.
    
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    I. Background
    
        On October 11, 1996, President Clinton signed into law the National 
    Securities Markets Improvement Act of 1996 (``1996 Act'').1 
    Title III of the 1996 Act, the Coordination Act, makes several 
    amendments to the Advisers Act. The most significant of these 
    amendments reallocates federal and state responsibilities for the 
    regulation of the approximately 23,350 investment advisers currently 
    registered with the Commission.2 These amendments will 
    become effective on July 8, 1997.3
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        \1\ Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in 
    scattered sections of the United States Code).
        \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 (see infra section II. G of this Release), (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 
    of any adviser associated with such a person), 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\ See section 308(a) of the Coordination Act. The effective 
    date of the Coordination Act was originally April 9, 1997. On March 
    31, 1997, President Clinton signed into law Pub. L. 105-8, which 
    extended the effective date of the Coordination Act to July 8, 1997. 
    See 111 Stat. 15 (1997).
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        The reallocation of regulatory responsibilities grew out of a 
    number of Congressional concerns regarding the regulation of investment 
    advisers. Congress was concerned that the Commission's resources are 
    inadequate to supervise the activities of the growing number of 
    investment advisers registered with the Commission, many of which are 
    small, locally operated, financial planning firms.4 Congress 
    concluded that if the overlapping regulatory responsibilities of the 
    Commission and the states were divided by making the states primarily 
    responsible for smaller advisory firms and the Commission primarily 
    responsible for larger firms, the regulatory resources of the 
    Commission and the states could be put to better, more efficient 
    use.5
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        \4\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-4 (1996) 
    (hereinafter Senate Report). The number of investment advisers 
    registered with the Commission increased dramatically from 5,680 in 
    1980 to approximately 23,350 today. By 1995, the Commission was able 
    to examine smaller advisers on a routine basis on average only once 
    every 44 years. See The Securities Investment Promotion Act of 1996: 
    Hearing on S. 1815 Before the Senate Comm. on Banking, Housing, and 
    Urban Affairs, 104th Cong., 2d Sess. 36 (1996) (hereinafter Senate 
    Hearing) (testimony of Arthur Levitt, Chairman, SEC).
        \5\ See Senate Report, supra note 4, at 3-4.
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        Congress also was concerned with the cost imposed on investment 
    advisers and their clients by overlapping, and in some cases, 
    duplicative, regulation.6 In addition to the Commission, 
    forty-six states regulate the activities of investment advisers under 
    state investment adviser statutes.7 States generally have 
    asserted jurisdiction over investment advisers that ``transact 
    business'' in their state.8 Consequently, many large 
    advisers operating nationally have been subject to the differing laws 
    of many states. Industry participants strongly asserted that compliance 
    with differing state laws has imposed significant regulatory burdens on 
    these large advisers.9 Congress intended to reduce these 
    burdens by subjecting large advisers to a single regulatory program 
    administered by the Commission.10
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        \6\ Id. at 2.
        \7\ The District of Columbia, Guam, and Puerto Rico also have 
    enacted statutes regulating investment advisers. See D.C. Code Ann. 
    sections 2-2631 to -2651 (1994); 22 Guam Code Ann. sections 46201-
    46206 (1995); P.R. Laws Ann. tit. 10, sections 861-864 (1976). The 
    four states that currently do not have investment adviser statutes 
    are Colorado, Iowa, Ohio, and Wyoming.
        \8\ See, e.g., Unif. Sec. Act section 201(c) (1988); Ark. Code 
    Ann. section 23-42-301(c) (Michie Supp. 1995); Md. Code Ann., Corps 
    & Ass'ns section 11-401(b) (1993).
        \9\ See Senate Hearing, supra note 4, at 153 (Testimony of Mark 
    D. Tomasko, Executive Vice President, Investment Counsel Association 
    of America, Inc.) (``In some (advisory) firms, there are one or more 
    persons whose sole job is to work on State registrations and 
    requirements.'').
        \10\ See Senate Report, supra note 4, at 2.
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        The Coordination Act reallocates regulatory responsibilities over 
    advisers by limiting the application of federal law and preempting 
    certain state laws. Under new section 203A(a) of the Advisers 
    Act,11 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 adviser (i) has assets under 
    management of not less than $25 million (or such higher amount as the 
    Commission may, by rule, deem appropriate), or (ii) is an adviser to an 
    investment company registered under the Investment Company Act of 1940 
    (the ``Investment Company Act'').12 The Commission is 
    authorized to deny registration to any applicant that does not meet the 
    criteria for Commission registration,13 and is directed to 
    cancel the registration of any adviser that no longer meets the 
    criteria for registration.14
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        \11\ 15 U.S.C. 80b-3A(a).
        \12\ 15 U.S.C. 80a. Any person that is an investment adviser to 
    an investment company under section 2(a)(20) of the Investment 
    Company Act (15 U.S.C. 80a-2(a)(20)), including a ``sub-adviser,'' 
    is eligible to register with the Commission, regardless of the 
    amount of assets under management.
        \13\ Section 203(c) of the Advisers Act (15 U.S.C. 80b-3(c)).
        \14\ Section 203(h) of the Advisers Act (15 U.S.C. 80b-3(h)).
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        On December 20, 1996, the Commission proposed rules and rule 
    amendments to implement the Coordination Act.15 The proposed 
    rules would establish the process by which advisers no longer eligible 
    to register with the Commission would withdraw from Commission 
    registration, exempt certain advisers from the prohibition on 
    Commission registration, and define certain terms used in the 
    Coordination Act. The Commission also proposed to amend several rules 
    under the Advisers Act to reflect the changes made by the Coordination 
    Act.
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        \15\ Rules Implementing Amendments to the Investment Advisers 
    Act of 1940, Investment Advisers Act Rel. No. 1601 (Dec. 20, 1996) 
    (61 FR 68480 (Dec. 27, 1996)) (``Proposing Release'').
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        The Commission received 105 comment letters in response to the 
    proposal, most of which were from investment advisers and their trade 
    groups and counsel (hereinafter collectively referred to as 
    ``investment adviser commenters''). Twenty-six comment letters were 
    received from state securities regulators (hereinafter referred to as 
    ``states''), including the North American Securities Administrators 
    Association, Inc. (``NASAA'').16
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        \16\ NASAA represents the 50 U.S. state securities agencies 
    responsible for the administration of state securities laws, also 
    known as ``blue sky laws.''
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        In preparing these implementing rules for adoption, the Commission 
    has been guided by the language of the Coordination Act and the policy 
    considerations that led to its enactment. The Commission does not 
    believe that it would be appropriate or within its proper authority to 
    revisit policy decisions made by Congress, as some commenters appear to 
    have suggested.
    
    II. Discussion
    
        The Commission is adopting several rules implementing the 
    provisions of the Coordination Act designed to reallocate the 
    regulatory responsibilities for investment advisers between the 
    Commission and the states.
    
    A. Form ADV-T
    
        Approximately 23,350 investment advisers currently are registered 
    with the Commission. Based on information provided by these advisers, 
    the Commission estimates that more than two-thirds of them would not be 
    eligible to register with the Commission after July 8, 1997. These 
    advisers must withdraw from registration or their registrations will be 
    subject to
    
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    cancellation.17 To allow the Commission to determine each 
    adviser's status under the Advisers Act, as amended by the Coordination 
    Act, and to provide for the orderly withdrawal from Commission 
    registration of advisers that are no longer eligible, the Commission 
    proposed a transition rule, rule 203A-5.18 Among other 
    things, rule 203A-5 would require all Commission-registered advisers to 
    make a one-time filing of a new form, Form ADV-T. The Commission is 
    adopting the rule and the form largely as proposed.19 
    Paragraph (a) of rule 203A-5 requires all advisers registered with the 
    Commission on July 8, 1997 to file a completed Form ADV-T with the 
    Commission no later than that date.20 Form ADV-T contains 
    instructions designed to assist an adviser in determining whether it 
    meets the criteria for Commission registration set forth in the 
    Coordination Act and the exemptive rules adopted by the 
    Commission.21 Form ADV-T requires each adviser to indicate 
    whether it remains eligible for Commission registration. For an adviser 
    that indicates that it is not eligible for Commission registration, 
    filing of Form ADV-T serves as the adviser's request for withdrawal 
    from registration as of July 8, 1997.22 An adviser that does 
    not return the form or that fails to withdraw voluntarily from 
    Commission registration if no longer eligible will be subject to having 
    its registration canceled pursuant to section 203(h).23
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        \17\ See supra note 14 and accompanying text.
        \18\ See Proposing Release at section II.A.
        \19\ 17 CFR 275.203A-5; 17 CFR 279.3.
        \20\ 17 CFR 275.203A-5(a). Although Form ADV-T will not be 
    effective until July 8, 1997, advisers may file Form ADV-T prior to 
    that date. The registrations of advisers that indicate on Form ADV-T 
    that they are no longer eligible to be registered with the 
    Commission will not be withdrawn until July 8, 1997. See rule 203A-
    5(c)(1) (17 CFR 275.203A-5(c)(1)).
        \21\ See infra sections II.B, II.D, and II.E of this Release.
        \22\ See rule 203A-5(c) (17 CFR 275.203A-5(c)); Instruction 6 to 
    Form ADV-T. An adviser that indicates that it is not eligible for 
    Commission registration on Form ADV-T is not required to file 
    separately Form ADV-W (17 CFR 279.2) to withdraw from registration 
    with the Commission. Commission-registered advisers seeking to 
    withdraw their state registrations should contact their state 
    regulators. The Commission will provide NASAA with a copy of each 
    Form ADV-T filed with the Commission.
        \23\ See Instruction 1(f) to Form ADV-T.
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        Form ADV-T is attached as Appendix A to this Release. Shortly after 
    the publication of this Release, the Commission will mail a copy of 
    Form ADV-T to each investment adviser registered with the Commission. 
    In addition to a copy of Form ADV-T, each adviser will receive pre-
    printed address labels that will assist the Commission in processing 
    the forms. The Commission asks advisers to return the Form ADV-T they 
    receive in the mail using these pre-printed labels.
    
    B. Assets Under Management
    
        In most cases, the amount of assets an adviser has under management 
    will determine whether the adviser will be registered with the 
    Commission or the states. Section 203A(a)(2) of the Advisers Act 
    defines ``assets under management'' as the ``securities portfolios'' 
    with respect to which an investment adviser provides ``continuous and 
    regular supervisory or management services.'' 24 Form ADV-T 
    contains instructions that clarify when an account is a ``securities 
    portfolio,'' what services constitute ``continuous and regular 
    supervisory or management services,'' and the appropriate method of 
    valuing the account.25
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        \24\ 15 U.S.C. 80b-3A(a)(2).
        \25\ Instruction 8 to Form ADV-T. Several commenters believed 
    that the proposed three-step process for determining assets under 
    management was unnecessarily complex. Each step, however, is 
    contemplated by section 203A(a), which limits assets under 
    management to ``securities portfolios'' with respect to which the 
    adviser provides ``continuous and regular supervisory or management 
    services,'' and requires that the amount of assets under management 
    equal or exceed $25 million for Commission registration.
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    1. Securities Portfolios
        The Commission proposed an instruction to Form ADV-T to define a 
    ``securities portfolio'' as any account at least fifty percent of the 
    total value of which consists of securities.26 Some 
    commenters argued that the fifty percent test was too low and suggested 
    a higher percentage, such as eighty percent. The Commission believes 
    that Congress used the term ``securities portfolio'' to refer to the 
    types of accounts typically managed by investment advisers, which 
    include investments other than securities. The Commission believes that 
    an account fifty percent of the total value of which consists of 
    securities may be fairly characterized as a securities portfolio, and 
    is adopting the fifty percent test substantially as 
    proposed.27
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        \26\ See Proposing Release at section II.B.1.
        \27\ Instruction 8(a) to Form ADV-T. Real estate, commodities, 
    and collectibles are not securities, and therefore should not be 
    included as securities in determining whether an account meets the 
    fifty percent test.
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        Because advisers in the normal course of business maintain portions 
    of client accounts in cash, the Commission proposed that cash and cash 
    equivalents be excluded by an adviser in determining whether an account 
    is a securities portfolio.28 Two commenters expressed 
    concern that, under the proposal, if securities in a client's account 
    were converted to cash to create a defensive investment position, and 
    the remaining investments in the account were held, for example, in 
    real estate, the account would not be deemed to be a securities 
    portfolio. Such a result, one commenter pointed out, seemed at odds 
    with the purpose of excluding cash when determining whether an account 
    is a securities portfolio. To avoid such a result, the Commission has 
    revised the instruction to permit an adviser to treat cash and cash 
    equivalents as securities for the purpose of determining whether an 
    account is a securities portfolio.29
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        \28\ See Proposing Release at section II.B.1.
        \29\ See Instruction 8(a). ``Cash equivalents'' include bank 
    deposits, certificates of deposit, bankers acceptances, and similar 
    bank instruments. Instruction 8(a) permits, but does not require, 
    cash and cash equivalents to be treated as securities. Because cash 
    and cash equivalents typically comprise a small component of most 
    advisory accounts, the Commission believes that allowing advisers to 
    treat these items as securities will not have a significant effect 
    on the number of advisers that are eligible to register with the 
    Commission.
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    2. Continuous and Regular Supervisory or Management Services
        The Commission proposed to provide guidance in an instruction to 
    Form ADV-T for determining whether an adviser provides an account with 
    ``continuous and regular supervisory or management services'' within 
    the meaning of section 203A(a)(2). As proposed, the instruction 
    provided several examples of advisory arrangements and drew conclusions 
    whether the accounts were provided with continuous and regular 
    supervisory or management services. Commenters requested that the 
    Commission provide greater clarity in the instruction, disagreed with 
    some of the conclusions the Commission drew, and provided the 
    Commission with examples of additional arrangements that would and 
    would not receive continuous and regular supervisory or management 
    services.
        The Commission has redrafted the instruction in light of the 
    commenters' suggestions. As adopted, Instruction 8(c) to Form ADV-T 
    sets forth general criteria, lists certain factors that should be 
    considered in determining whether the criteria apply to an account, and 
    provides examples designed to apply those criteria and factors. This 
    approach should be more helpful to advisers in determining whether an 
    account is provided continuous and regular supervisory or management 
    services.
        Instruction 8(c) states that accounts over which an adviser has 
    discretionary authority and for which it provides ongoing supervisory 
    or management services receive continuous and regular
    
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    supervisory or management services. The Commission expects that most 
    discretionary accounts would meet this standard. In addition, a limited 
    number of non-discretionary advisory arrangements may receive 
    continuous and regular supervisory or management services, but only if 
    the adviser ``has an ongoing responsibility to select or make 
    recommendations, based upon the needs of the client, as to specific 
    securities or other investments the account may purchase or sell and, 
    if such recommendations are accepted by the client, is responsible for 
    arranging or effecting the purchase or sale.'' 30 Thus, an 
    advisory relationship under which the adviser does not have 
    discretionary authority must assign to the adviser other 
    responsibilities typically associated with a discretionary 
    account.31
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        \30\ See Instruction 8(c).
        \31\ To enable the Commission to evaluate the claims of advisers 
    relying on the non-discretionary management of assets as the basis 
    of eligibility to remain registered with the Commission, Form ADV-T 
    requires these advisers to append a written statement explaining the 
    nature of the non-discretionary supervisory or management services. 
    See Part III, Item (c) of Form ADV-T; Instruction 9 to Form ADV-T.
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        Instruction 8(c) provides three factors that advisers should use 
    (and which the Commission will use) in applying these general 
    principles. These factors are the terms of the advisory contract, the 
    form of compensation, and the management practice of the adviser. No 
    single factor is determinative. For example, advisers that provide 
    portfolio management services are typically compensated on the basis of 
    a percentage of the amount of assets under management averaged over 
    some period of time. The use of this type of a compensation arrangement 
    would tend to suggest that the account receives continuous and regular 
    supervisory or management services, although a different compensation 
    arrangement would not preclude that conclusion.
    3. Safe Harbor for State-Registered Investment Advisers
        The Commission recognizes that section 203A(a)(2) does not and the 
    instructions to Form ADV-T do not provide a ``bright line'' test as to 
    whether a particular arrangement involves the provision of continuous 
    and regular supervisory or management services. The Commission, 
    therefore, is adopting rule 203A-4, which provides a safe harbor from 
    Commission registration for an adviser that is registered with a state 
    securities authority (rather than the Commission) based on a reasonable 
    belief that it is not required to register with the Commission because 
    it does not have sufficient assets under management.32 
    Commenters strongly supported the rule's adoption.
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        \32\ 17 CFR 275.203A-4.
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        Under rule 203A-4, the Commission will not assert a violation of 
    the Advisers Act for failure to register with the Commission (or to 
    comply with the provisions of the Advisers Act to which an adviser is 
    subject if required to register) if the adviser reasonably believes 
    that it does not have sufficient assets under management (at least $30 
    million) and is therefore not required to register with the 
    Commission.33 This safe harbor is available only to an 
    adviser that is registered with the state in which it has its principal 
    office and place of business.
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        \33\ As discussed infra, the Commission is increasing the $25 
    million assets under management threshold for mandatory Commission 
    registration to $30 million, and providing an optional exemption 
    from the prohibition on registering with the Commission for advisers 
    having between $25 and $30 million of assets under management. See 
    infra section II.C.2.a of this Release.
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    4. Valuation and Reporting of Securities Portfolios
        Under a proposed instruction to Form ADV-T, once an adviser has 
    determined that an account is a ``securities portfolio'' that receives 
    ``continuous and regular supervisory or management services,'' the 
    entire value of the account would be included in determining the amount 
    of the adviser's assets under management. Several commenters objected 
    to this approach, arguing that only the value of securities should be 
    included as assets under management. The Commission believes that 
    including only the value of securities would be inconsistent with 
    section 203A(a)(2), which requires that ``securities portfolios,'' not 
    ``securities,'' be included in assets under management. The use of the 
    term ``securities portfolios'' rather than ``securities'' suggests that 
    once an account is determined to be a securities portfolio, all assets 
    in the account should be included as assets under 
    management.34
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        \34\ In addition, the Commission believes that a requirement 
    that advisers segregate the securities components of an account 
    principally consisting of securities holdings would be unnecessarily 
    burdensome.
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        The Commission is aware that in some cases an adviser may have 
    responsibility for an account only a portion of which receives 
    continuous and regular supervisory or management services. As adopted, 
    Instruction 8(b) to Form ADV-T provides that only the portion of a 
    securities portfolio that receives continuous and regular supervisory 
    or management services may be included as part of the adviser's assets 
    under management.
        Under a proposed instruction to Form ADV-T, the value of a 
    securities portfolio would be determined as of a date no more than ten 
    business days before the filing of Form ADV-T. Several commenters said 
    that more time was needed because some advisers obtain information on 
    the value of client accounts from third parties that provide the 
    information on a monthly or quarterly basis.35 To provide 
    advisers with greater flexibility, the Commission has revised the 
    instruction so that the value of securities portfolios may be 
    determined as of a date no more than 90 days prior to the date Form 
    ADV-T is filed with the Commission.36
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        \35\ Other commenters noted that additional time may be needed 
    to value illiquid securities, closely-held businesses, and other 
    difficult-to-value assets.
        \36\ Instruction 8(d) to Form ADV-T. Instruction 8(d) does not 
    require all the assets in a securities portfolio to be valued as of 
    the same date. An adviser, however, may not select the dates for 
    valuation of assets so as to maximize (or minimize) the value of the 
    adviser's assets under management. An amount determined by such a 
    method would not, in the Commission's view, reflect the adviser's 
    actual assets under management.
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        The Commission proposed that the method by which the accounts are 
    valued for purposes of determining assets under management be the same 
    as that used to value the accounts for purposes of client reporting or 
    to determine fees for investment advisory services. Commenters 
    supported this proposal, which the Commission is adopting substantially 
    as proposed.37
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        \37\ See Instruction 8(d).
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    C. Transitions Between State and Commission Registration
    
        The Coordination Act contemplates that a state-registered adviser 
    whose assets under management increase to $25 million will withdraw its 
    state registration and register with the Commission. Conversely, an 
    adviser whose assets under management decrease below $25 million will 
    withdraw its Commission registration and register with a state (or 
    states). The Commission proposed to use its rulemaking authority under 
    the Advisers Act, as amended, to reduce the regulatory burdens that may 
    be caused by these transitions.38
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        \38\ See Proposing Release at section II.C.
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    1. Transition From Commission to State Registration
        a. Annual reporting of continued eligibility. The Commission is 
    amending Form ADV by adding new Schedule I (``eye'') that requires 
    advisers to report
    
    [[Page 28116]]
    
    information on an ongoing basis similar to that reported on Form ADV-
    T.39 Schedule I will be used both to determine whether new 
    applicants are eligible for Commission registration, and to determine 
    whether advisers registered with the Commission continue to be eligible 
    for such registration. Schedule I must be updated annually, within 90 
    days after the end of the adviser's fiscal year.40
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        \39\ Schedule I is attached to this Release as Appendix B. For a 
    discussion of the reporting requirements of Form ADV-T, see supra 
    sections II.A and II.B and of this Release.
        \40\ Rule 204-1(a)(1) (17 CFR 275.204-1(a)(1)). As amended, rule 
    204-1(a) (17 CFR 275.204-1(a) requires advisers to amend Form ADV 
    annually, regardless of whether data reported on the form changes. 
    This annual amendment replaces Form ADV-S, which the Commission is 
    rescinding. Because Form ADV-S is being rescinded, advisers are no 
    longer required to file the written disclosure statement 
    (``brochure'') required by rule 204-3 (17 CFR 275.204-3) with the 
    Commission. The brochure, however, must be maintained as part of the 
    adviser's books and records, and the Commission will continue to 
    review these brochures during investment adviser examinations.
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        The Commission proposed to require advisers to determine and report 
    their assets under management annually in order to reduce the frequency 
    with which advisers are required to change regulators as a result of a 
    decrease in the amount of assets they have under 
    management.41 Under the proposal, an adviser whose assets 
    under management fell below $25 million would not be required to report 
    this event until after the end of its fiscal year (and not at all 
    unless its assets under management remained below $25 million at the 
    time it filed its Schedule I). Some state commenters asserted that an 
    adviser should be required to withdraw its Commission registration 
    promptly when its assets under management decrease below $25 million, 
    or decrease by some percentage below $25 million. The Commission 
    believes that these approaches could result in some advisers changing 
    regulators too frequently, and is adopting the annual reporting 
    requirement as proposed.42
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        \41\ See Proposing Release at section II.C.2.
        \42\ Commission data suggests that most advisers that will 
    remain registered with the Commission have assets under management 
    well in excess of $25 million. It is likely that only a few advisers 
    each year will be required to move from Commission to state 
    registration as a result of a decrease of assets under management, 
    and thus few advisers will be registered temporarily with the 
    Commission prior to reporting a reduced amount of assets under 
    management on Schedule I.
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        Under rule 204-1(a), a Commission-registered adviser must evaluate 
    and report its continued eligibility for Commission registration once a 
    year. An adviser that reports that it is no longer eligible must 
    withdraw its registration within the 90-day grace period provided by 
    rule 203A-1(c), discussed below, or be subject to a cancellation 
    proceeding under section 203(h).43
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        \43\ 17 CFR 275.203A-1(c). See Instruction 6 to Schedule I. An 
    adviser may withdraw from Commission registration as soon as it is 
    no longer eligible to maintain its registration with the Commission, 
    or it may wait until filing its annual Schedule I to withdraw. An 
    adviser who becomes ineligible for Commission registration for 
    reasons other than the amount of its assets under management also is 
    permitted to wait until filing its annual Schedule I to withdraw.
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        b. 90-day grace period. An adviser that withdraws from Commission 
    registration will be subject to the registration requirements of one or 
    more states. To allow such an adviser sufficient time to register under 
    applicable state statutes, the Commission proposed to provide a ``grace 
    period'' of 90 days after the date the adviser files its Schedule I 
    indicating that it would not be eligible for Commission 
    registration.44 Several commenters argued that 90 days was 
    insufficient, while a number of state commenters requested that the 90-
    day period be shortened, asserting that state registration generally is 
    effected quickly.
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        \44\ See Proposing Release at section II.C.2. The Commission did 
    not propose a similar grace period in connection with the filing of 
    Form ADV-T. The Commission presumes that an adviser not eligible to 
    maintain its registration with the Commission on July 8, 1997 would 
    already be registered with the appropriate state or states at the 
    time of filing Form ADV-T. See Proposing Release at note 43.
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        In light of these conflicting views, the Commission is adopting the 
    90-day grace period substantially as proposed.45 A shorter 
    period may not provide advisers with sufficient time to comply with the 
    registration requirements of multiple states, particularly where the 
    adviser must change its business practices or ensure that its employees 
    prepare for and pass qualification examinations. On the other hand, a 
    longer period may be unnecessary because, as a result of the annual 
    determination of eligibility discussed above, a withdrawing adviser 
    usually will have more than 90 days to come into compliance with state 
    law. The Commission will monitor the operation of the rule and, if 
    necessary, will shorten or lengthen the grace period.
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        \45\ Rule 203A-1(c). The Commission is adopting rule 203A-1(c) 
    with a slight revision. Under the rule as proposed, the grace period 
    would have run from the date on which the adviser filed its Schedule 
    I to indicate that it was no longer eligible to maintain its 
    registration. As adopted, however, the grace period begins to run on 
    the date on which the adviser was obligated by rule 204-1(a) to file 
    such amendment. Thus, an adviser could not extend the grace period 
    by failing to timely file Schedule I.
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        c. Cancellation of Commission registration. Upon the expiration of 
    the grace period, the Commission may institute proceedings to cancel 
    the adviser's registration if it has not yet been 
    withdrawn.46 As provided under the Advisers Act, the adviser 
    will be given notice and an opportunity to show why its registration 
    should not be cancelled.47 Upon a showing by the adviser 
    that it requires additional time to comply with state registration 
    requirements, the Commission may stay the cancellation proceeding for a 
    reasonable period, provided that the adviser has made a good faith 
    effort to meet the registration requirements of state law and complied 
    in good faith with the obligation to update Schedule I.
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        \46\ If the adviser amends Schedule I during the grace period to 
    report that it once again has become eligible for Commission 
    registration (for example, because the amount of its assets under 
    management increased since the adviser filed its Schedule I), the 
    Commission will not institute cancellation proceedings.
        \47\ See section 211(c) of the Advisers Act (15 U.S.C. 80b-
    21(c)); rule 0-5 (17 CFR 275.0-5).
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    2. Transition From State to Commission Registration
        a. The $5 million ``window''. The Commission proposed to make 
    Commission registration optional for an adviser having between $25 and 
    $30 million of assets under management.48 The proposed rule 
    would permit such an adviser to determine whether and when to change 
    from state to Commission registration. In order to avoid having to de-
    register shortly after registering with the Commission, an adviser 
    reaching the $25 million assets under management threshold could defer 
    registration with the Commission. The adviser would not be required to 
    register with the Commission until its assets under management reached 
    $30 million, and would not be subject to Commission cancellation of its 
    registration until its assets under management had fallen below $25 
    million.
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        \48\ See Proposing Release at section II.C.1.
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        Most commenters supported the proposed rule as providing useful 
    flexibility, although some commenters urged that the ``window'' be 
    increased from $5 to $10 million. The Commission is adopting the rule 
    as proposed, but will monitor its operation.49 If the $5 
    million window proves to be inadequate to prevent transient 
    registration, the Commission will consider expanding the provision.
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        \49\ Rule 203A-1 (a), (b) (17 CFR 275.203A-1 (a), (b)).
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        b. Registration with the Commission. Under the proposal, a state-
    registered adviser would have been required to register with the 
    Commission promptly when the adviser's assets under
    
    [[Page 28117]]
    
    management reached $30 million.50 In response to the 
    suggestion of several commenters, the Commission is adopting paragraph 
    (d) to rule 203A-1 to make the transition from state to Commission 
    registration parallel with the transition from Commission to state 
    registration.51
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        \50\ See Proposing Release at section II.C.1.
        \51\ Rule 203A-1(d) (17 CFR 275.203A-1(d)). Rule 203A-1(d) does 
    not affect the operation of the $5 million window. An adviser that 
    has between $25 and $30 million of assets under management is 
    permitted, but not required, to register with the Commission. Such 
    an adviser may register with the Commission at any time. Rule 203A-
    1(d) addresses only the question of when an adviser is required to 
    register with the Commission.
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        Under rule 203A-1(d), certain advisers whose assets under 
    management grow to $30 million may (but are not required to) postpone 
    Commission registration until 90 days after the date the adviser is 
    required to report $30 million or more of assets under management to 
    its state securities authority.52 If, however, the assets of 
    an adviser relying on the rule are less than $30 million when it 
    registers with the Commission, the adviser's application for 
    registration would not be made effective.
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        \52\ Rule 203A-1(d) is available only to advisers that are 
    registered in a state that requires Schedule I (or a substantially 
    similar form or rule) to be filed and annually updated. An adviser 
    not registered in such a state must register promptly with the 
    Commission upon reaching $30 million of assets under management. 
    Rule 203A-1(d) is not available to an adviser whose eligibility for 
    registration is based on becoming an adviser to an investment 
    company or becoming eligible for one of the exemptions provided by 
    rule 203A-2 (17 CFR 275.203A-2). See section II.D of this Release.
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    D. Exemptions From Prohibition on Registration With the Commission
    
        Section 203A(c) of the Advisers Act 53 authorizes the 
    Commission to exempt advisers 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 of the Act.54 Pursuant to this authority, the 
    Commission proposed a new rule, rule 203A-2, that would exempt from the 
    prohibition on Commission registration four types of advisers that 
    otherwise would not be eligible for Commission registration. The 
    Commission is adopting rule 203A-2 substantially as proposed. An 
    adviser that meets the conditions of a rule 203A-2 exemption is 
    required by section 203 of the Advisers Act to register with the 
    Commission, unless it qualifies for an exemption from registration 
    under section 203(b) of the Act.55
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        \53\ 15 U.S.C. 80b-3A(c).
        \54\ 15 U.S.C. 80b-3A.
        \55\ 15 U.S.C. 80b-3, 80b-3(b).
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    1. Nationally Recognized Statistical Rating Organizations
        The Commission proposed to exempt from the prohibition on 
    Commission registration ``nationally recognized statistical rating 
    organizations'' (``NRSROs''), commonly referred to as rating agencies, 
    which are registered with the Commission as investment 
    advisers.56 The Proposing Release explained that, while 
    NRSROs do not themselves have assets under management, their activities 
    have a significant effect on the national securities markets and the 
    operation of federal securities laws. All commenters addressing this 
    exemption supported it, and the Commission is adopting the exemption as 
    proposed.57
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        \56\ See Proposing Release at section II.D.1.
        \57\ Rule 203A-2(a) (17 CFR 275.203A-2(a)).
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    2. Pension Consultants
        The Commission proposed to exempt from the prohibition on 
    Commission registration pension consultants that provide investment 
    advice to employee benefit plans with respect to assets having an 
    aggregate value of at least $50 million during the adviser's last 
    fiscal year.58 Pension consultants provide various advisory 
    services to plans and plan fiduciaries, including assistance in 
    selecting and monitoring investment advisers that manage assets of such 
    plans, but may not themselves have assets under management. In the 
    Proposing Release, the Commission explained that the activities of 
    pension consultants have a direct effect on the management of billions 
    of dollars of plan assets, and that it would be inconsistent with the 
    purposes of the Coordination Act for these advisers to be regulated by 
    the states, rather than by the Commission.
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        \58\ See Proposing Release at section II.D.2.
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        Most commenters addressing this exemption supported it, and the 
    Commission is adopting the exemption substantially as 
    proposed.59 Several commenters raised questions, however, as 
    to the scope of the exemption. The exemption is available to advisers 
    that provide advice to employee benefit plans--not to plan 
    participants. An adviser that provides advice to plan participants 
    (e.g., regarding the allocation of the participant's contributions in 
    an employee directed defined contribution plan) would not be eligible 
    for the exemption unless the adviser also provides advice to employee 
    benefit plans with respect to $50 million of plan assets.60 
    The advice, for example, could concern the funding of a defined benefit 
    plan or the selection of funding vehicles for a defined contribution 
    plan, but would have to be provided to the plan or the plan 
    fiduciary.61
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        \59\ Rule 203A-2(b) (17 CFR 275.203A-2(b)). The proposed rule 
    would have exempted pension consultants to employee benefit plans, 
    governmental plans, and church plans, each as defined in the 
    Employee Retirement Income Security Act of 1974 (``ERISA'') (29 
    U.S.C. 1001), as well as ``(a)ny plan established and maintained by 
    a state, its political subdivisions, or any agency or 
    instrumentality of a state or its political subdivisions for the 
    benefit of its employees.'' The Commission has withdrawn this latter 
    category in response to a comment noting that these plans come 
    within ERISA's definition of ``governmental plan.'' The deletion of 
    this category does not affect the scope of the exemption.
        \60\ Although the Coordination Act provides a $25 million 
    threshold for Commission registration, the Commission is adopting a 
    $50 million threshold for the pension consultant exemption. This 
    higher threshold reflects the fact that a pension consultant has 
    substantially less control over client assets than an adviser that 
    has assets under management. A higher threshold is necessary to 
    demonstrate that a pension consultant's activities have an effect on 
    national markets.
        \61\ In determining the aggregate value of advised assets, the 
    adviser may include only that portion of a plan's assets for which 
    the adviser provided investment advice (including any advice with 
    respect to the selection of an investment adviser to manage the 
    assets). The value of assets must be determined as of the date 
    during the adviser's most recently completed fiscal year that the 
    adviser was last employed or retained by contract to provide 
    investment advice to the plan or plan fiduciary with respect to 
    those assets. See rule 203A-2(b)(3) (17 CFR 275.203A-2(b)(3)).
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        Several commenters requested clarification whether the exemption 
    would apply to an investment adviser that provides advisory services to 
    pension plans, but not with respect to ``securities portfolios'' of 
    those plans. These commenters are (or represent) firms that provide 
    advice to plans regarding large real estate investments that are held 
    both directly and indirectly through real estate investment trusts or 
    other investment vehicles. Many of these firms provide advice with 
    respect to plan assets worth hundreds of millions of dollars and are 
    clearly ``large'' enterprises whose activities have an effect on 
    national markets. As used in rule 203A-2(b), the term ``assets of 
    plans'' is not limited to securities portfolios, and thus such 
    investment advisers are eligible for the exemption.
    3. Certain Affiliated Investment Advisers
        The Commission proposed to exempt from the prohibition on 
    Commission registration advisers that are affiliated with a Commission-
    registered adviser if the principal office and place of business of the 
    affiliate is the same as
    
    [[Page 28118]]
    
    that of the registered adviser.62 In proposing the 
    exemption, the Commission explained that when the activities of 
    affiliated advisers are centrally managed, subjecting them to different 
    regulatory schemes would be burdensome and inefficient.
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        \62\ See Proposing Release at section II.D.3.
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        Most commenters that addressed this exemption supported it, stating 
    that Commission registration of affiliated advisers would be more 
    efficient. Many, however, urged that the availability of the exemption 
    not be limited to advisers having the same principal office. In 
    particular, some commenters suggested that the exemption be expanded to 
    permit Commission registration of affiliated advisers whose compliance 
    or books and records systems are integrated with those of a Commission-
    registered adviser.
        The Commission is not expanding the exemption as suggested because 
    it is concerned that such an expansion could result in Commission 
    registration of a large number of small, locally operated advisers, 
    which Congress intended to be registered with the states.63 
    The Commission understands that, as a result, some advisers whose 
    operations are integrated with those of a Commission-registered adviser 
    will be prohibited from registering with the Commission.64 
    The Commission will entertain requests for exemptive relief from these 
    advisers on a case-by-case basis under section 203A(c), and may 
    consider expanding the exemption if experience suggests expansion would 
    be appropriate.
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        \63\ This could occur as a result of the National Association of 
    Securities Dealers' (``NASD'') requirement that its member broker-
    dealer firms supervise and keep books and records regarding certain 
    private securities transactions of their registered representatives 
    who also are registered individually as investment advisers. See 
    NASD Notice to Members No. 94-44 (May 1994); see also NASD Notice to 
    Members No. 96-33 (May 1996). Many of these broker-dealer firms are 
    themselves registered investment advisers that will remain eligible 
    for Commission registration after July 8, 1997. In some cases, a 
    firm's registered representatives form a large network of 
    individually registered investment advisers that use a broker-dealer 
    firm to effect certain securities transactions on behalf of advisory 
    clients. A broker-dealer firm's compliance with the obligation to 
    supervise both its own trades and those that are effected through 
    unaffiliated broker-dealers may result in its control of these 
    registered advisers. Under the commenters' suggested approach, this 
    control, together with the books and records the NASD requires, 
    might qualify each individually registered adviser for the 
    exemption, even though each such adviser has only a small, local 
    business and would not otherwise be eligible for Commission 
    registration.
        \64\ Of course, an adviser may choose to register its affiliates 
    under its registration as a single registrant. If the adviser and 
    its affiliates have aggregate assets under management of $25 million 
    or more, the registrant would meet the threshold for Commission 
    registration, regardless of whether the operations of the adviser 
    and the affiliates are integrated.
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        Under rule 203A-2(c) as adopted, an adviser that controls, is 
    controlled by, or is under common control with an adviser eligible to 
    register (and in fact registered) with the Commission must register 
    with the Commission if the two advisers have the same principal office 
    and place of business.65 The rule defines ``control'' as the 
    power to direct or cause the direction of the management or policies of 
    an adviser, whether through ownership of securities, by contract, or 
    otherwise.66
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        \65\ 17 CFR 275.203A-2(c). The definition of principal office 
    and place of business in rule 203A-3(c) (17 CFR 275.203A-3(c)) 
    applies to this rule. See infra section II.E.2 of this Release. The 
    Commission will consider a Commission-registered adviser and an 
    affiliated adviser to have the same principal office and place of 
    business if the principal office of the affiliate is in the 
    proximate geographic area as the principal office of the registered 
    adviser.
        \66\ In the Proposing Release, the Commission explained that by 
    proposing rule 203A-2(c), it did not intend to suggest that an 
    advisory firm may reorganize its operations in order to circumvent 
    the requirements of the Advisers Act. See Proposing Release at note 
    54. Thus, for example, an adviser may not avoid application of the 
    Advisers Act by creating a state-registered affiliate that is not 
    separately and independently organized.
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    4. Investment Advisers With Reasonable Expectation of Eligibility
        The Commission proposed an exemption to permit a newly formed 
    adviser to register with the Commission at the time of its formation if 
    the adviser has a reasonable expectation that within 90 days it will 
    become eligible for Commission registration.67 All 
    commenters addressing this exemption supported it. Many, however, urged 
    the Commission to give newly formed advisers a longer period than 90 
    days to become eligible for Commission registration. Some pointed out 
    that even if the start-up adviser has obtained commitments from 
    prospective clients for more than $25 million of assets, it may take 
    more than 90 days for clients (particularly institutional clients) to 
    transfer their assets to the adviser. To address this concern, the rule 
    as adopted allows for a period of 120 days.68
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        \67\ See Proposing Release at section II.D.4.
        \68\ Rule 203A-2(d) (17 CFR 275.203A-2(d)). Some commenters also 
    asked for clarification as to what constitutes a ``reasonable 
    expectation.'' In proposing the exemption, the Commission 
    anticipated that it would be used primarily by persons who start 
    their own advisory firms after having been employed by or affiliated 
    with other advisers, and that have received an indication from 
    clients with substantial assets that they will transfer those assets 
    to the management of the newly formed adviser. In such a case, an 
    adviser would have a ``reasonable expectation'' that it would become 
    eligible for Commission registration in the prescribed time. Other 
    circumstances, however, also could support an adviser's reasonable 
    expectation of becoming eligible.
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        Under rule 203A-2(d), an adviser is exempt from the prohibition on 
    Commission registration if, at the time of registration, it is not 
    registered (or required to be registered) with the Commission or any 
    state and has a reasonable expectation that it would be eligible for 
    Commission registration within 120 days after the date its registration 
    becomes effective.69 At the end of the 120-day period, the 
    adviser is required to file an amended Schedule I.70 If the 
    adviser indicates on the amended Schedule I that it has not become 
    eligible to register with the Commission (e.g., it does not have at 
    least $25 million of assets under management), the adviser is required 
    to file a Form ADV-W concurrently with the Schedule I, thereby 
    withdrawing from registration with the Commission.71
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        \69\ The requirement that the adviser not be registered or 
    required to be registered with the Commission or any state is 
    designed to ensure that the exemption is available only to start-up 
    advisers. This requirement must be met at the time the adviser 
    registers with the Commission. Rule 203A-2(d)(1) (17 CFR 275.203A-
    2(d)(1)). A newly formed adviser that registers with the Commission 
    in reliance on this exemption, however, subsequently may register 
    with a state or states during the 120-day period in anticipation of 
    failing to become eligible for Commission registration.
        \70\ Rule 203A-2(d)(3) (17 CFR 275.203A-2(d)(3)).
        \71\ Id. When registering with the Commission, an adviser 
    relying on this exemption must include on Schedule E to Form ADV an 
    undertaking to withdraw from registration if, at the end of the 120-
    day period, the adviser would be prohibited from registering with 
    the Commission. Rule 203A-2(d)(2) (17 CFR 275.203A-2(d)(2)). An 
    adviser required by rule 203A-2(d)(3) to withdraw from Commission 
    registration at the end of the 120-day period will not have 
    available the additional 90-day grace period provided by rule 203A-
    1(c) in which to effect the appropriate state registrations.
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    5. Advisers to ERISA Plans
        Many investment advisers provide advice to employee benefit plans 
    governed by the Employee Retirement Income Security Act of 1974 
    (``ERISA''). ERISA protects a plan's named fiduciary from liability for 
    the individual decisions of an investment manager appointed by the 
    fiduciary to manage the plan's assets.72 The term investment 
    manager is defined by ERISA to include certain investment advisers 
    registered under the Advisers Act, as well as certain banks and 
    insurance companies.73 Although the Coordination Act amended 
    ERISA to include state-
    
    [[Page 28119]]
    
     registered investment advisers as investment managers, that amendment 
    expires two years after enactment, on October 11, 1998.74
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        \72\ Section 405(d)(1) of ERISA (29 U.S.C. 1105(d)(1)). See 29 
    CFR 2509.75-8 (Department of Labor regulations providing 
    interpretative guidance on ability of plan fiduciaries to delegate 
    management and control of plan assets to other persons under ERISA).
        \73\ Section 3(38) of ERISA (29 U.S.C. 1002(38)). See 29 CFR 
    2509.75-5 (Department of Labor regulations providing interpretative 
    guidance on definition of ``investment manager'' under ERISA).
        \74\ Section 308(b) of the Coordination Act.
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        Several commenters urged the Commission to use its authority under 
    the Coordination Act to exempt advisers that manage accounts subject to 
    ERISA. These commenters expressed concern that unless they were 
    permitted to remain registered with the Commission, they effectively 
    would be denied the ability to manage ERISA accounts and would be 
    harmed competitively.
        Although the Commission shares these commenters' concerns, the 
    Commission believes such an exemption would be inconsistent with the 
    purposes of the Coordination Act and outside the scope of the 
    Commission's authority. As described above, the grant of exemptive 
    authority in section 203A(c) was designed to permit Commission 
    registration of advisers that are larger, national firms, but do not 
    have $25 million of assets under management. An exemptive rule 
    conditioned solely on the management of assets of accounts subject to 
    ERISA could exempt a large number of small, locally operated 
    advisers.75 In the Commission's view, in order for such a 
    rule not to be anti-competitive, the rule would have to exempt all 
    advisers that propose to serve clients regulated under ERISA. If not, 
    the rule would preclude advisers from entering that market. Thus, such 
    an exemption could result in most smaller advisers remaining registered 
    with the Commission--completely frustrating a principal purpose of the 
    Coordination Act.76
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        \75\ To reflect Congress' intent that the Commission regulate 
    only large, national advisers, the Commission's exemption for 
    pension consultants is conditioned on the pension consultant's 
    management of over $50 million of plan assets. See supra note 60.
        \76\ The Commission also believes its authority to exempt 
    advisers to ERISA plans is circumscribed by the express 
    Congressional determination that the amendment to ERISA provided in 
    the Coordination Act expire after two years.
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        On April 7, 1997, Chairman Levitt wrote to the leadership of the 
    Congressional committees with jurisdiction over ERISA, urging that 
    legislation be enacted eliminating the ``sunset'' provision in the 
    Coordination Act, thus making permanent the amendment of ERISA that 
    permits state-registered advisers to serve as investment 
    managers.77
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        \77\ Letters from Arthur Levitt, Chairman, SEC (Apr. 7, 1997) to 
    The Honorable James M. Jeffords, Chairman, Committee on Labor and 
    Human Resources, U.S. Senate, and The Honorable William F. Goodling, 
    Chairman, Committee on Education and the Work Force, U.S. House of 
    Representatives (available in SEC File No. S7-31-96).
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    E. Investment Advisers Not Regulated or Required To Be Regulated by 
    States
    
        Under section 203A(a)(1) of the Advisers Act, advisers that are not 
    regulated or required to be regulated as investment advisers in the 
    state in which they have their principal office and place of business 
    must register with the Commission regardless of the amount of assets 
    they have under management.78 This provision makes clear 
    that the Commission will retain regulatory responsibility for an 
    adviser with a principal office and place of business in a state that 
    has not enacted an investment adviser statute,79 and for 
    foreign advisers doing business in the United States. The Coordination 
    Act, however, does not provide an explanation of when an adviser is 
    ``regulated or required to be regulated'' as an investment adviser, nor 
    does it define ``principal office and place of business.''
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        \78\ 15 U.S.C. 80b-3A(a)(1). The term ``state'' is defined in 
    section 202(a)(19) of the Advisers Act (15 U.S.C. 80b-2(a)(19)) to 
    include the District of Columbia, Puerto Rico, the Virgin Islands, 
    and any other possession of the United States.
        \79\ As discussed supra note 7, Colorado, Iowa, Ohio, and 
    Wyoming currently do not have investment adviser statutes.
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    1. ``Regulated or Required To Be Regulated''
        Under the proposal, the Commission would have interpreted the 
    phrase ``regulated or required to be regulated'' in section 203A(a)(1) 
    to mean ``registered'' with a state.80 Under this 
    interpretation, an investment adviser exempt from registration with the 
    state in which it has its principal office and place of business would 
    be eligible for registration with the Commission, even if it has less 
    than $25 million of assets under management.
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        \80\ See Proposing Release at section II.E.1.
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        Most commenters that addressed this issue, including several state 
    commenters, supported the Commission's proposed interpretation. These 
    commenters expressed concern that an alternative interpretation under 
    which an adviser would be deemed ``regulated'' by a state if that state 
    has in effect an investment adviser statute would result in a 
    regulatory ``gap'' that leaves clients of advisers exempt from state 
    registration and below the threshold for Commission registration at 
    risk. Two commenters, however, objected to the proposed interpretation. 
    One of these commenters argued that the proposed interpretation would 
    be inconsistent with the goal of the Coordination Act, which was to 
    make the Commission primarily responsible for larger advisers with 
    national businesses and the state primarily responsible for smaller 
    advisers. This commenter also disagreed with the reading of the 
    legislative history of the Coordination Act reflected in the Proposing 
    Release. According to the commenter, the legislative history supports 
    the view that all advisers with a principal office in a state that has 
    enacted a statute regulating advisers are prohibited from registering 
    with the Commission if they do not meet the criteria for Commission 
    registration.
        These comments have caused the Commission to reconsider its 
    proposed interpretation. As discussed above, the legislative history of 
    the Coordination Act makes clear that Congress intended the 
    Coordination Act to result in the Commission regulating larger advisers 
    and the states regulating smaller advisers.81 The proposed 
    interpretation, however, would result in the Commission being 
    responsible for a large number of very small advisers that are not 
    registered under state law because they qualify for state de minimis 
    exemptions. It would be inconsistent with the purposes of the 
    Coordination Act for the Commission to retain responsibility for 
    advisers whose business activities states have determined are so 
    limited that they do not warrant their regulatory attention. The 
    proposed interpretation also would seem to frustrate the purpose of the 
    Coordination Act to limit significantly the number of advisers 
    registered with the Commission, since it would permit a substantial 
    number of very small advisers to remain registered with the 
    Commission.82
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        \81\ See supra notes 4 and 5 and accompanying text.
        \82\ One commenter stated that it believes that there are 600 
    such advisers in New York alone. The proposed interpretation also 
    seems inconsistent with the goal of the Coordination Act to reduce 
    regulatory burdens, since it could require a start-up adviser to 
    first register with the Commission, then move to state registration 
    as it outgrows the state de minimis exemption, and later, if it 
    continues to grow, return to Commission registration.
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        The Commission believes a better interpretation of section 
    203A(a)(1) is that an adviser is ``regulated or required to be 
    regulated'' in the state in which it has its principal office and place 
    of business if that state has enacted an investment adviser 
    statute.83 Such a state has asserted its interest in 
    regulating investment advisers. While a state may provide for 
    exemptions from its registration requirements or exceptions to its 
    definition of investment adviser, it does not thereby delegate 
    regulatory responsibility for
    
    [[Page 28120]]
    
    such advisers to the Commission.84 Upon reconsideration, the 
    Commission believes the Coordination Act's legislative history supports 
    this position.85
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        \83\ See supra note 7 and accompanying text.
        \84\ If a state repeals its investment adviser statute, the 
    Commission will assume regulatory responsibility for all investment 
    advisers with a principal office and place of business in that 
    state.
        \85\ The Senate Report explains that the Commission ``will 
    continue to supervise all advisers that are based in a state that 
    does not register investment advisers.'' Senate Report, supra note 
    4, at 4. The Proposing Release and a number of commenters cited this 
    sentence for the proposition that an adviser is regulated by a state 
    if it is registered with that state. See Proposing Release at note 
    59 and accompanying text. In context, however, it appears that the 
    sentence means that the Commission will retain regulatory 
    responsibility for small advisers in states that do not register any 
    advisers.
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        State commenters supporting the Commission's proposed 
    interpretation argued that Congress intended to eliminate regulatory 
    overlap, not to create a regulatory ``gap'' in which some advisers are 
    left unregulated. Even under the proposed interpretation, however, 
    advisers that qualify for registration exemptions under both federal 
    and state law would continue to be unregulated, and thus it is 
    difficult to draw any conclusions from the fact that some advisers will 
    not be registered. To the extent there is a ``gap,'' the Commission 
    believes that it is more consistent with the Coordination Act for the 
    gap to be closed by the states, which are given primary responsibility 
    for regulating advisers that are not eligible for Commission 
    registration.
    2. ``Principal Office and Place of Business''
        The Commission is adopting, as proposed, a new rule to define the 
    term ``principal office and place of business'' to mean the ``executive 
    office of the investment adviser from which the officers, partners, or 
    managers of the investment adviser direct, control, and coordinate the 
    activities of the investment adviser.'' 86
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        \86\ Rule 203A-3(c).
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     F. Persons Who Act on Behalf of Investment Advisers
    
        In addition to preempting state law with respect to investment 
    advisers registered with the Commission, the Coordination Act preempts 
    state law with respect to their ``supervised persons.'' 87 A 
    supervised person is defined as any ``partner, officer, director * * *, 
    or employee of an investment adviser, or other person who provides 
    investment advice on behalf of the investment adviser and is subject to 
    the supervision and control of the investment adviser.'' 88
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        \87\ Section 203A(b)(1)(A) of the Advisers Act [15 U.S.C. 80b-
    3A(b)(1)(A)].
        \88\ Section 202(a)(25) of the Advisers Act (15 U.S.C. 80b-
    2(a)(25)).
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        The Coordination Act preserves certain state laws with respect to 
    certain supervised persons of Commission-registered advisers by 
    providing that a ``State may license, register, or otherwise qualify 
    any investment adviser representative who has a place of business 
    located within that State.'' 89 The Coordination Act does 
    not define ``investment adviser representative,'' nor does it describe 
    what constitutes a ``place of business.'' In order to provide 
    clarification, the Commission is adopting definitions of these terms. 
    The Commission also is providing guidance as to the status of 
    solicitors for Commission-registered advisers.
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        \89\ Section 203A(b)(1)(A).
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    1. ``Investment Adviser Representative''
        Rule 203A-3(a), as adopted, defines the term ``investment adviser 
    representative'' to mean a supervised person more than ten percent of 
    whose clients are natural persons.90 Natural persons who 
    have at least $500,000 under management with the adviser 
    representative's investment advisory firm immediately after entering 
    into the advisory contract with the firm, or who the advisory firm 
    reasonably believes have a net worth in excess of $1 million (together 
    with assets held jointly with a spouse) immediately prior to entering 
    into the advisory contract, are not counted towards the ten percent 
    threshold.91 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, 
    are excluded from the definition of investment adviser 
    representative.92
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        \90\ 17 CFR 203A-3(a).
        \91\ Rule 203A-3(a)(3)(i) (17 CFR 275.203A-3(a)(3)(i)). See 
    infra notes 110-112 and accompanying text.
        \92\ Rule 203A-3(a)(2) (17 CFR 275.203A-3(a)(2)). See infra 
    section of this Release.
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        The Commission received extensive comment on the proposed 
    definition of investment adviser representative. Most investment 
    adviser commenters asserted that it was important for the Commission to 
    adopt a single definition of the term in order to effect the purpose of 
    Congress in creating a more uniform, rational system of adviser 
    regulation. NASAA and most of the states opposed the adoption of any 
    Commission definition, arguing that (i) the Commission has no authority 
    to define the term, (ii) Congress intended for the states to define the 
    term, and (iii) the states have already defined the term.
        There is no contemporaneous legislative history explaining what 
    Congress meant by the term investment adviser representative in section 
    203A(b)(1)(A).93 The definition of investment adviser 
    representative varies substantially from state to state.94 
    As a result, the incorporation of state law would conflict with one of 
    the primary goals of the Coordination Act, which is to promote 
    uniformity of regulation.95 Likewise, the incorporation of 
    state law would be at odds with Congress' determination to preempt 
    state laws regulating the offering of mutual fund shares,96 
    as state investment adviser representative definitions generally 
    encompass persons who provide
    
    [[Page 28121]]
    
    advisory services to mutual funds.97 Incorporation of state 
    law also would be inconsistent with Congress' intention to limit the 
    application of state law to at least some supervised persons. If a 
    state adopted a sufficiently broad definition of the term investment 
    adviser representative, the Coordination Act would have no preemptive 
    effect, since all supervised persons would be subject to state 
    licensing, registration, or qualification (hereinafter, ``state 
    qualification requirements.'') 98
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        \93\ The House bill, H.R. 3005, 104th Cong., 2d Sess. (1996), 
    did not, in its original form, address the regulation of investment 
    advisers. The Senate bill, which is the source of the Coordination 
    Act, preempted state qualification requirements with respect to 
    Commission-registered advisers and, as originally introduced, their 
    employees. See S. 1815, 104th Cong., 2d Sess. section 103 (1996). 
    The provision preserving state authority over investment adviser 
    representatives was added by the conference committee. The ``Joint 
    Explanatory Statement of the Committee of Conference,'' however, 
    states only that ``[t]he Managers agreed to include certain 
    amendments to the Investment Advisers Act of 1940 to eliminate 
    duplication, promote efficiency, and protect investors.'' H.R. Conf. 
    Rep. No. 864, 104th Cong., 2d Sess. 41 (1996), reprinted in 1996 
    U.S.C.C.A.N. 3920, 3922. The debates in Congress that preceded final 
    adoption of the bill reported by the conference committee note only 
    that the states were given authority under the bill to continue to 
    regulate ``investment adviser representatives.'' 142 Cong. Rec. 
    H12,047-01, H12,050 (daily ed. Sept. 28, 1996) (statement of Rep. 
    Markey) (``At the same time, we agreed that the States should 
    continue to have authority to license the individual representatives 
    of investment advisers.'').
        \94\ Although most states that require registration of 
    investment adviser representatives have patterned their definition 
    of investment adviser representative on the NASAA model definition, 
    see Unif. Sec. Act section 401(g) (1986), many have modified this 
    definition, both legislatively and administratively, to include, for 
    example, any person: who holds himself out as an investment adviser 
    (Md. Code Ann., Corps & Ass'ns section 11-101(g)(vii) (1993)); who 
    deals directly with clients of the investment adviser (Arkansas Blue 
    Sky Rule 102.01); or who prepares reports or analyses concerning 
    securities (Okla. Stat. Ann. tit. 71 section 2(l) (West Supp. 1997); 
    Va. Code Ann. section 13.1-501(A) (1993); Definitions and Procedures 
    for Investment Advisor Representatives and Branch Offices (Order of 
    Deputy Commissioner of Securities, West Virginia Securities 
    Division, May 25, 1993, amended eff. Oct. 11, 1995)).
        \95\ See Senate Report, supra note 4, at 4 (``Larger advisers, 
    with national businesses, should be * * * subject to national 
    rules.'').
        \96\ See 1996 Act section 102 (amending section 18(b)(2) of the 
    Securities Act of 1933 [(15 USC 77r(b)(2)] to preempt state laws 
    requiring registration of securities issued by investment companies 
    that are registered or that have filed a registration statement with 
    the Commission); Senate Report, supra note 4, at 6-7; H. Rep. No. 
    622, 104th Cong., 2d Sess. 30-31 (1996) [hereinafter House Report].
        \97\ The NASAA model definition of investment adviser 
    representative includes any employee (except clerical or ministerial 
    personnel) of an investment adviser who ``manages accounts or 
    portfolios of clients.'' See Unif. Sec. Act section 401(g)(2) 
    (1986). Most states that define investment adviser representative 
    include this provision in their definitions. See, e.g., Md. Code 
    Ann., Corps. & Ass'ns, section 11-101(g)(1)(v) (1993); Mass. Gen. 
    Laws Ann. ch. 110A, section 401(n) (West Supp. 1996); Nev. Rev. 
    Stat. section 90.278(1)(d) (Michie Supp. 1995).
        \98\ Thus, such a definition would have the effect of reading 
    out of the Coordination Act the provision in section 203A(b)(1)(A) 
    preempting state qualification requirements as to supervised persons 
    of Commission-registered advisers, violating the principle of 
    statutory interpretation that a statute is to be construed so as to 
    give effect to all of its language. See, e.g., United States v. 
    Menasche, 348 U.S. 528, 538-39 (1955).
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        The Coordination Act does not contain any direction to incorporate 
    state law. In light of the many provisions in the 1996 Act designed to 
    promote uniformity of regulation, the decision of Congress to preempt 
    state mutual fund regulation, and the preemptive language used by 
    Congress, the Commission does not believe that Congress intended the 
    definition of investment adviser representative to incorporate state 
    law. Rather, the Commission believes that Congress left the term 
    investment adviser representative undefined with the expectation that 
    the Commission would use its rulemaking authority to define the term.
        The Commission's authority to adopt a rule classifying certain 
    supervised persons as investment adviser representatives is 
    clear.99 The ambiguities created by Congress' use of the 
    undefined term investment adviser representative make it important that 
    the Commission, as the federal agency charged with administering the 
    Advisers Act, define the term so that the substantial uncertainties and 
    costly disputes likely to occur in the absence of such a definition may 
    be avoided.100 Only by adopting a uniform, national 
    definition of investment adviser representative can Congress' intent to 
    ``delineate more clearly the securities law responsibilities of federal 
    and state governments'' be achieved.101
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        \99\ Section 211(a) of the advisers Act (15 USC 80b-21(a)) 
    authorizes the Commission to adopt rules ``as are necessary or 
    appropriate to the exercise of the functions and powers conferred 
    upon the Commission'' in the Advisers Act and to ``classify persons 
    and matters within its jurisdiction and prescribe different 
    requirements for different classes of persons or matters.'' Section 
    202(a)(17) of the Advisers Act (15 U.S.C. 80b-2(a)(17)) authorizes 
    the Commission to adopt rules that ``classify, for the purposes of 
    any portion * * * of (the Advisers Act), persons, including 
    employees controlled by an investment adviser'' (emphasis added).
        \100\ Even if the Commission did not have the explicit grants of 
    rulemaking authority discussed supra in note 99, the Supreme Court 
    has recognized that regulatory agencies have authority to adopt 
    rules to fill any gap left, implicitly or explicitly, by Congress, 
    see Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 
    Inc., 467 U.S. 837, 843-44 (1984), and that agency rulemaking may 
    preempt state law, see City of New York v. Federal Communications 
    Commission, 486 U.S. 57, 63-64 (1988). The Commission notes that 
    Congress specifically anticipated that Commission rulemaking would 
    preempt state law. Section 203A(c) permits the Commission to exempt 
    advisers from the prohibition on Commission registration, thereby 
    preempting state law with respect to the exempted advisers.
        \101\ See Senate Report, supra note 4, at 2.
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        a. Retail clients. As discussed above, Congressional committee 
    reports provide no indication as to which persons providing investment 
    advice on behalf of Commission-registered advisers Congress intended 
    states to continue to register.102 Therefore, in developing 
    its proposed definition, the Commission examined testimony Congress 
    received in support of preserving state authority over investment 
    adviser representatives of Commission-registered 
    advisers.103 Testimony offered by NASAA urged Congress to 
    permit states to establish qualification standards for investment 
    adviser representatives to protect ``retail'' investors.104 
    The Commission assumed that this testimony persuaded Congress to 
    preserve state authority over such persons, and proposed to define the 
    term investment adviser representative in a manner consistent with the 
    policy concerns expressed in the testimony.105
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        \102\ See supra note 93.
        \103\ See Proposing Release at note 68 and accompanying text.
        \104\ See Senate Hearing, supra note 4, at 125 (testimony of Dee 
    R. Harris, President, NASAA). See also id. at 178 (statement of 
    Steven M.H. Wallman, Commissioner, SEC (``My concern is with the 
    treatment of associated persons of (investment adviser) firms who 
    provide advice to retail customers.'' (emphasis in original))).
        \105\ See Proposing Release at section II.F.1.
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        Under the proposed definition, investment adviser representative 
    would mean a supervised person of an investment adviser, if a 
    substantial portion of the business of the supervised person is 
    providing investment advice to clients who are natural persons. The 
    proposed definition thus drew a distinction between natural persons, 
    whom the Commission considered to be ``retail investors,'' and 
    investment companies, businesses, educational institutions, charitable 
    institutions, and other types of clients. Under the proposed 
    definition, most investment adviser representatives who provide advice 
    primarily to natural persons would be subject to state qualification 
    requirements.
        Commenters were divided over whether the definition should 
    distinguish between retail and other types of clients. Many state 
    commenters opposed this distinction, arguing there was no basis in the 
    Coordination Act or its legislative history for limiting state 
    oversight to adviser representatives that serve retail 
    clients.106 Many of these commenters referred to the example 
    of an adviser representative who provides advisory services to small 
    businesses as the type of supervised person that should be subject to 
    state qualification requirements. In contrast, many investment adviser 
    commenters supported the distinction, arguing that it was consistent 
    with the legislative history cited by the Commission in the Proposing 
    Release. Several of these commenters also urged the Commission to treat 
    certain ``high net worth'' clients as institutional clients.
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        \106\ Some of these commenters asserted that the Commission 
    mischaracterized the intent of NASAA in referring to ``retail'' 
    investors in its testimony. The Commission, however, did not base 
    the proposed rule on the intent of NASAA in giving its testimony, 
    but rather, on what the members of the Senate committee receiving 
    NASAA's testimony (and the other members of Congress reviewing the 
    legislative record) are reasonably likely to have believed NASAA's 
    position was at the time of its testimony.
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        The Commission continues to believe that it is consistent with the 
    intent of Congress as reflected in the structure and purpose of the 
    Coordination Act to distinguish between retail and other clients in 
    defining the term investment adviser representative. While there are 
    other possible criteria for distinguishing retail clients from other 
    clients,107 the Commission believes that treating natural 
    persons as retail clients is consistent with the Coordination Act and 
    has the advantage of simplicity and ease of 
    administration.108
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        \107\ Dictionaries typically define ``retail'' as the sale in 
    small quantities to consumers. See, e.g., Webster's II New Riverside 
    University Dictionary 1003 (1994). Such a definition is not helpful 
    in this context because, depending on who is viewed as the 
    ``consumer'' of the advice, it leads to a conclusion either that all 
    businesses are retail clients (because they are obtaining advice for 
    their own portfolios), or that no businesses are retail clients 
    (because the ultimate beneficiaries of the advice are the owners of 
    the businesses).
        \108\ Requiring adviser representatives to determine whether a 
    client is a ``small business'' would complicate the definition and 
    create uncertainty as to the applicability of state qualification 
    requirements. If small businesses were treated as retail persons, 
    adviser representatives presumably would have to obtain income 
    statements and/or balance sheets from their small business clients, 
    and might be required to determine whether the income or assets of a 
    small business client should be aggregated with the client's parent 
    or affiliate in order to determine whether state qualification 
    requirements apply.
    
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    [[Page 28122]]
    
        Although small businesses may not be familiar with investing, they 
    must be familiar with selecting qualified service providers, suppliers, 
    and other parties with which they contract as a part of their 
    businesses. Small businesses will receive a brochure setting forth the 
    business and educational background of prospective advisers and will 
    have the opportunity to make an informed decision whether the advisers 
    are qualified.109 Because adviser representatives providing 
    advice to small businesses also typically provide advice to individual 
    investors, it is unlikely that the Commission's decision to treat only 
    natural persons as retail clients will have a significant effect on the 
    number of adviser representatives subject to state qualification 
    requirements.
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        \109\ Rule 204-3 requires Commission-registered investment 
    advisers to provide existing and prospective clients with a written 
    disclosure statement describing the adviser's services and fees, 
    investment methods and strategies, and education and business 
    background, as well as other information. See Part II of Form ADV.
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        As suggested by several commenters, the Commission is modifying the 
    rule to permit adviser representatives to exclude certain ``high net 
    worth'' individuals from treatment as natural persons. Under the rule, 
    high net worth individuals are those with whom the Commission permits 
    advisers to enter into a ``performance fee contract.'' 110 
    Because of their wealth, financial knowledge, and experience, the 
    Commission has presumed that these individuals are less dependent on 
    the protections of the provisions of the Advisers Act that prohibit 
    such fee arrangements.111 The Commission believes that such 
    individuals similarly do not need the protections of state 
    qualification requirements. Because of the historical treatment of 
    wealthy and sophisticated individuals under the federal securities 
    laws, Congress reasonably could have expected these persons not to be 
    considered retail investors.112
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        \110\ See rule 205-3 (17 CFR 275.205-3).
        \111\ See Investment Advisers Act Rel. No. 966 (Nov. 14, 1985) 
    (50 FR 48556 (Nov. 26, 1985)) (adopting rule 205-3). Rule 205-3 
    permits a registered investment adviser to be compensated on the 
    basis of a share of the capital gains on or capital appreciation of 
    client assets. See infra section II.I.3 of this Release. 
    Compensation of this type is prohibited by section 205(a)(1) of the 
    Advisers Act (15 U.S.C. 80b-5(a)(1)) with certain limited 
    exceptions.
        \112\ This conclusion is supported by the determination by 
    Congress in section 205(e) of the Advisers Act (15 U.S.C. 80b-5(e)) 
    to broaden the authority of the Commission to permit advisers to 
    enter into performance fee contracts with these persons.
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        b. Accommodation clients. The Commission proposed to include in the 
    definition of investment adviser representative only those supervised 
    persons a ``substantial portion'' of whose business is providing advice 
    to natural persons.113 A substantial portion of a supervised 
    person's business would be providing advice to natural persons if, 
    during the preceding twelve months, more than ten percent of the 
    supervised person's clients consisted of natural persons, or more than 
    ten percent of the assets under management by the adviser attributable 
    to the supervised person were assets of clients who are natural persons 
    (the ``ten percent allowance'').
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        \113\ See Proposing Release at section II.F.1.
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        Most commenters that addressed the proposed ten percent allowance 
    supported it. Some investment adviser commenters urged the Commission 
    to increase the allowance to 25 percent. The Commission is adopting the 
    ten percent allowance substantially as proposed. The Commission 
    believes that increasing the allowance to 25 percent could result in 
    supervised persons accepting natural person clients on more than just 
    an accommodation basis. The Commission notes, however, that the 
    exclusion of certain high net worth individuals from the ten percent 
    allowance likely will have the effect of expanding the number of 
    accommodation clients an adviser representative may 
    accept.114
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        \114\ See supra notes 110-112 and accompanying text.
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        Under the proposed rule, the ten percent allowance would have been 
    measured either by reference to assets under management attributable to 
    the supervised person (``asset test'') or by reference to clients of 
    the supervised person (``client test''). Commenters believed that these 
    tests were too complicated and that the client test alone was 
    sufficient. No commenters came forth, as the Commission had requested, 
    with suggestions for making the asset test workable.115 The 
    Commission is not adopting the asset test, but is concerned that, as a 
    result, an adviser representative who works on one or a few 
    institutional or business client accounts may not be able to accept any 
    accommodation clients because, if she did, more than 10 percent of her 
    clients would consist of natural persons. The Commission directs the 
    staff to work with investment advisers whose adviser representatives 
    may be so affected. If a workable method of addressing this concern is 
    developed, the Commission will revise the definition of investment 
    adviser representative.
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        \115\ For example, an asset test would have to provide guidance 
    on how to attribute assets managed by the adviser to a particular 
    supervised person.
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        The Commission also has revised the method of measuring the ten 
    percent allowance. As proposed, the allowance would have been measured 
    over the previous twelve month period. The Commission believes that the 
    proposed approach is too complicated and would inappropriately delay 
    the applicability of state qualification requirements.116 As 
    adopted, therefore, the rule requires a supervised person to determine 
    compliance with the ten percent allowance at all times, with respect to 
    current clients.117
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        \116\ For example, a supervised person who previously provided 
    advisory services exclusively to institutional clients and who is 
    reassigned to retail clients could not have been required, under the 
    proposed rule, to comply with state qualification requirements for 
    up to a year after being reassigned to retail clients, because the 
    supervised person would not have been deemed to be an investment 
    adviser representative until retail clients represented 10 percent 
    of his clientele over a 12 month period. Conversely, an investment 
    adviser representative who previously provided advice to retail 
    clients and who is reassigned to institutional clients could have 
    been required to continue to meet state qualification requirements 
    even though she no longer had retail clients, because under the 
    proposed rule, she would have continued to be an investment adviser 
    representative until retail clients represented less than 10 percent 
    of her clientele over a 12 month period.
        \117\ Rule 203A-3(a)(1) (17 CFR 275.203A-3(a)(1)). The client 
    test is measured with respect to all of an adviser representative's 
    clients nationwide. Supervised persons may rely on the definition of 
    ``client'' in rule 203(b)(3)-1 (17 CFR 275.203(b)(3)-1) for the 
    purpose of counting clients, except that supervised persons need not 
    count clients that are not U.S. residents. Rule 203A-3(a)(4) (17 CFR 
    275.203A-3(a)(4)).
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        The Commission recognizes that some advisory firms consider each 
    person to whom the firm provides advisory services to be a client only 
    of the firm and not of any individual supervised person. The Commission 
    believes that such an approach would be inconsistent with the 
    Coordination Act, and thus a client also should be treated as a client 
    of a supervised person if the supervised person has substantial 
    responsibilities with respect to the client's account or communicates 
    advice to the client. If more than one supervised person provides 
    advice to a client, the client should be attributed to each supervised 
    person.
        c. Supervised persons providing indirect or impersonal advice. The
    
    [[Page 28123]]
    
    Commission also is adopting an exception from the definition of 
    investment adviser representative for supervised persons who provide 
    advice to natural persons, but who do not ``on a regular basis solicit, 
    meet with, or otherwise communicate with clients.'' 118 This 
    exception excludes from state qualification requirements personnel of 
    an adviser who may be involved in the formulation of investment advice 
    given to natural persons, but who are not directly involved in 
    providing advice to (or soliciting) clients. In addition, the 
    Commission is excepting supervised persons who give only impersonal 
    investment advice.119 This provision excludes personnel who 
    may be involved, for example, in preparing a newsletter, providing 
    general market timing advice, or preparing a list of recommended 
    purchases for inclusion on a web site. No commenters specifically 
    addressed these provisions, which are being adopted substantially as 
    proposed.
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        \118\ Rule 203A-3(a)(2)(i) (17 CFR 275.203A-3(a)(2)(i)).
        \119\ Rule 203A-3(a)(2)(ii) (17 CFR 275.203A-3(a)(2)(ii)).
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        d. Dually registered investment adviser representatives. The 
    Proposing Release requested comment whether an investment adviser 
    representative that is dually registered as a broker-dealer agent in a 
    state should be excepted from the definition of investment adviser 
    representative.120 A number of investment adviser commenters 
    expressed support for such an exception, arguing that state investment 
    adviser representative registration of registered broker-dealer agents 
    is redundant. Many state and other commenters strongly opposed such an 
    exception, asserting that it would be inappropriate to treat investment 
    adviser representatives and broker-dealer agents the same since they 
    perform different functions, are subject to different state examination 
    requirements,121 and are governed by different regulations 
    and fiduciary standards. The Commission agrees, and the rule, as 
    adopted, provides no exception for dually registered broker-dealer 
    agents.
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        \120\ See Proposing Release at section II.F.1.
        \121\ The Commission notes, however, that many states accept a 
    person's receiving a passing grade on a broker-dealer agent 
    examination in lieu of an investment adviser representative 
    examination to satisfy state investment adviser representative 
    qualification requirements. For example, many states accept passage 
    of Series 63 (NASAA Uniform State Law Exam) and Series 7 (General 
    Securities Representative Exam) in lieu of investment adviser 
    representative examinations. See, e.g., Ala. Admin. Code r. 830-X-
    3-.08(4); Or. Admin. R. 441-175-120(4) (1994).
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        e. Solicitors. In the Proposing Release, the Coordination Act was 
    interpreted as not generally preempting state regulation of solicitors 
    for Commission-registered advisers.122 Several commenters 
    disagreed with this interpretation and asserted that if a solicitor is 
    an employee of the adviser for which he or she solicits, the 
    Coordination Act preempts state law unless the solicitor is an 
    investment adviser representative. The Commission agrees, and is 
    revising this interpretation.
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        \122\ See Proposing Release at section II.F.3. For a description 
    of solicitors' activities, see Investment Advisers Act Rel. No. 688 
    (July 12, 1979) (44 FR 42126 (July 18, 1979)) (adopting rule 206(4)-
    3 (17 CFR 275.206(4)-3), the cash solicitation rule).
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        Section 203A(b) preempts state regulation of ``supervised persons'' 
    of Commission-registered advisers, except those who are investment 
    adviser representatives. Whether a solicitor for a Commission-
    registered adviser is subject to state qualification requirements thus 
    turns, first, on whether the solicitor is a supervised person, and 
    second, on whether he or she is an investment adviser representative. A 
    supervised person is defined in section 202(a)(25) to be (i) any 
    partner, officer, director (or other person occupying a similar status 
    or performing similar functions), or employee of an investment adviser, 
    or (ii) any other person who provides investment advice on behalf of 
    the investment adviser and is subject to the supervision and control of 
    the investment adviser. Because solicitation of clients may not involve 
    providing investment advice on behalf of the adviser, the status of a 
    solicitor as a supervised person will depend on the whether the 
    solicitor is a ``partner, officer, director, or employee'' of the 
    adviser, or an ``other person.'' 123
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        \123\ In the Proposing Release, the Commission interpreted the 
    ``provides investment advice on behalf of'' limitation in section 
    202(a)(25) as applying to all categories of persons in the 
    definition of supervised persons. Upon reconsideration, the 
    Commission believes that this limitation should be applied only to 
    ``other persons,'' and not to persons who are ``partners, officers, 
    directors, or employees.'' As one commenter pointed out, in a draft 
    of the Coordination Act that preceded the one in which the 
    definition of ``supervised person'' was added, state investment 
    adviser regulations would have been preempted as to all employees of 
    a Commission-registered adviser. The definition of ``supervised 
    person'' and the ``other persons who provide investment advice'' 
    language were added not to limit the types of employees of 
    Commission-registered advisers exempted from state qualification 
    requirements, but to include persons who may not be employees but 
    assume a similar function (e.g., independent contractors). See 
    Senate Report, supra note 4, at 4.
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        A solicitor who is a partner, officer, director, or employee of a 
    Commission-registered adviser is a supervised person, and is subject to 
    state qualification requirements only if the solicitor is an investment 
    adviser representative under rule 203A-3(a). A third-party solicitor 
    for a Commission-registered adviser (i.e., a solicitor who is not a 
    partner, officer, director, or employee of the adviser) is not a 
    supervised person unless the solicitor provides investment advice on 
    behalf of the investment adviser and is subject to the supervision and 
    control of the adviser. 124 Thus, a third-party solicitor 
    will be subject to state qualification requirements to the extent state 
    investment adviser statutes apply to solicitors. 125 In some 
    cases, a solicitor may solicit on behalf of both a state-registered 
    adviser and a Commission-registered adviser. The Commission believes 
    that the Coordination Act does not preempt states from subjecting such 
    a solicitor to state qualification requirements.
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        \124\ Regardless of whether a solicitor is a ``supervised 
    person,'' a solicitor is a ``person associated with an investment 
    adviser'' with respect to the adviser for which he or she solicits. 
    See section 202(a)(17). The adviser, therefore, has an obligation to 
    supervise its solicitors with respect to activities performed on its 
    behalf. See Investment Advisers Act Rel. No. 688, supra note . A 
    solicitor for an adviser providing solely impersonal advice is not 
    necessarily a ``person associated with an investment adviser.'' See 
    Investment Advisers Act Rel. No. 688, supra note 122, at note 20.
        \125\ See, e.g., Ala. Code section 8-6-2(19)(d) (1975); Idaho 
    Code section 30-1402(14)(d) (Michie Supp. 1995) (defining investment 
    adviser representative to include certain persons associated with an 
    investment adviser that solicit for the sale of investment advisory 
    services). Rule 206(4)-3 will continue to govern cash payments by a 
    Commission-registered adviser to a solicitor who is subject to state 
    qualification requirements.
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    2. ``Place of Business''
        While section 203A(b)(1)(A) preserves the ability of a state to 
    license, register, or otherwise qualify investment adviser 
    representatives of Commission-registered advisers, the section limits a 
    state's authority to only those investment adviser representatives who 
    have a ``place of business'' within the state. The Commission proposed 
    to clarify that, for purposes of section 203A(b)(1)(A), a place of 
    business is any place or office from which the investment adviser 
    representative regularly provides advisory services or otherwise 
    solicits, meets with, or communicates to clients.126
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        \126\ See Proposing Release at section II.F.2.
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        Most commenters, while supporting the adoption of a Commission rule 
    clarifying the term place of business, criticized the proposed 
    definition as too vague. Investment adviser commenters
    
    [[Page 28124]]
    
    were concerned with the uncertainty the use of the term ``regularly'' 
    would create. They also were concerned that, as a result of the 
    uncertainty, they would find it difficult to ensure compliance by their 
    supervised persons with state qualification requirements. State 
    commenters were concerned that they would find it difficult to enforce 
    state qualification requirements because states would be required to 
    prove that advice had been given on a regular basis at a particular 
    place. The Commission has revised the definition of place of business 
    to address these concerns.
        As adopted, rule 203A-3(b) defines a place of business of an 
    investment adviser representative to mean (i) an office at which the 
    investment adviser representative regularly provides investment 
    advisory services, solicits, meets with, or otherwise communicates with 
    clients, and (ii) any other location that is held out to the general 
    public as a location at which the investment adviser representative 
    provides investment advisory services, solicits, meets with, or 
    otherwise communicates with clients.127 For the purposes of 
    rule 203A-3(b), an adviser representative would be considered to hold 
    himself out to the general public as having a location at which he 
    conducts advisory business by, for example, publishing information in a 
    professional directory or a telephone listing, or distributing 
    advertisements, business cards, stationery, or similar communications 
    that identify the location as one at which the adviser representative 
    is or will be available to meet or communicate with 
    clients.128
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        \127\ 17 CFR 275.203A-3(b). In response to a number of comments, 
    the Commission is not adopting the ``itinerant representative'' 
    provision contained in the proposed definition that would have 
    deemed the residence of each client to be the place of business of 
    an adviser representative that did not regularly provide advisory 
    services in any location. That provision is unnecessary under the 
    revised rule.
        \128\ An adviser representative who sends a letter to certain 
    existing clients indicating, for example, that she will be in their 
    area and available for a meeting would not have held out the 
    location of the proposed meeting to the general public for purposes 
    of rule 203A-3(b)(2) (17 CFR 275.203A-3(b)(2)). Similarly, an 
    adviser representative that communicates to a defined group under 
    the terms of an advisory contract the location at which she will be 
    available would not be holding herself out to the general public for 
    purposes of rule 203A-3(b)(2). For example, in the case of a 
    national organization that engages an adviser to provide advisory 
    services to its members, an adviser representative who communicates 
    its availability at a certain location to the members (even though 
    those individuals may not yet be clients) would not be holding 
    himself out to the general public.
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        The definition encompasses permanent and temporary offices as well 
    as other locations at which an adviser representative may provide 
    advisory services, such as a hotel or auditorium.129 Whether 
    an adviser representative will be subject to the qualification 
    requirements of a state in which the hotel or auditorium is located 
    will turn on whether the adviser representative has let it generally be 
    known that he or she will conduct advisory business at the location, 
    rather than on the frequency with which the adviser representative 
    conducts advisory business there. This definition should provide a 
    clearer and more enforceable standard for determining when state 
    qualification requirements are triggered.
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        \129\ The following example discusses the application of the 
    rule to an investment adviser representative who provides investment 
    advisory services through an Internet web site to clients in many 
    states: An adviser representative uses a computer at his home or an 
    office in State W where he prepares material to be placed on the web 
    site or distributed over the Internet (but where he does not 
    ``regularly provide investment advisory services, solicit, meet 
    with, or otherwise communicate with clients''). He also maintains an 
    office in State X where he evaluates the information provided by 
    clients and provides information in response to clients. The adviser 
    representative's web site advertises the representative's physical 
    office in State Y where the representative meets clients. The 
    adviser representative e-mails its materials to a web server in 
    State Z for posting on the web and has a post office box or an agent 
    in State B to whom clients are instructed to mail checks. Under the 
    rule, the adviser representative would have places of business in 
    State X (the state in which he has an office for purposes of the 
    rule) and State Y (the state in which he holds himself out as 
    conducting his advisory business), but not in any other state.
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    G. National De Minimis Standard
    
        The Coordination Act amends the Advisers Act to add new section 
    222(d), which makes state investment adviser statutes inapplicable to 
    advisers that do not have a place of business in the state and have 
    fewer than six clients who are residents of that state (the ``national 
    de minimis standard'').130 The Commission proposed a new 
    rule to define the term ``client'' for purposes of section 
    222(d).131
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        \130\ 15 U.S.C. 80b-18a(d).
        \131\ See Proposing Release at section II.G.
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        The proposed rule would treat as a single client a natural person 
    and (i) any relative, spouse, or relative of the spouse of the natural 
    person sharing the same principal residence, and (ii) all accounts of 
    which the natural person and such persons are the sole primary 
    beneficiaries. The proposed rule also would treat as a single client a 
    corporation, general partnership, limited liability company, trust, or 
    other legal organization (other than a limited partnership) that 
    receives investment advice based on its investment objectives rather 
    than the objectives of its shareholders, partners, members, or 
    beneficial owners. Under the proposal, a limited partnership would be 
    counted as a single client if it would be counted as a single client 
    under rule 203(b)(3)-1.132
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        \132\ At the time of the Proposing Release, rule 203(b)(3)-1 
    provided a safe harbor to count a limited partnership, as opposed to 
    each limited partner, as a client for purposes of section 203(b)(3) 
    of the Advisers Act (15 U.S.C. 80b-3(b)(3)). As discussed infra, the 
    Commission is amending rule 203(b)(3)-1 to address additional client 
    relationships.
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        Commenters stated the Commission's definition of the term 
    ``client'' would provide needed uniformity under the national de 
    minimis standard. The Commission is adopting a rule defining the term 
    client, but is making several modifications from the 
    proposal.133 As suggested by commenters, the final rule also 
    treats as a single client a natural person and (i) that person's minor 
    children (whether or not they share the natural person's principal 
    residence), and (ii) all trusts of which the natural person and/or any 
    relative or spouse of that person sharing the same principal residence 
    (or any minor children of that person) are the only primary 
    beneficiaries. The rule also treats as a single client two or more 
    corporations, partnerships, or other legal organizations that each 
    receive investment advice based on the organization's investment 
    objectives and have identical shareholders, partners, or 
    beneficiaries.134 Under the rule, any person for whom an 
    investment adviser provides investment advisory services without 
    compensation is not deemed to be a client.135
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        \133\ See rule 203(b)(3)-1. The Commission also is adopting rule 
    222-1 (17 CFR 275.222-1), which defines other terms used in section 
    222. Rule 222-1(a) (17 CFR 275.222-1(a)) defines place of business 
    in the same manner as rule 203A-3(b), except that the term is 
    applied to investment advisers rather than investment adviser 
    representatives. Rule 222-1(b) (17 CFR 275.222-1(b)) defines 
    principal place of business in the same manner that rule 203A-3(c) 
    defines principal office and place of business. See supra sections 
    II.F.2 and II.E.2 of this Release.
        \134\ This provision codifies the Division's interpretative 
    position that trusts with identical beneficiaries could be treated 
    as a single client. See OSIRIS Management, Inc. (pub. avail. Feb. 
    17, 1984). The final rule does not require that the beneficial 
    owners have identical ownership interests in each legal 
    organization. An adviser could not avoid registration, however, by 
    arranging nominal common ownership. See section 208(d) (15 U.S.C. 
    80b-8(d)) (which makes it unlawful generally for any person to do 
    indirectly any act which it would be unlawful for that person to do 
    directly under the Advisers Act or rules thereunder).
        \135\ The adviser, however, has all of the fiduciary obligations 
    with respect to such a client that it has with respect to a paying 
    client. In addition, if the assets of such an account are held in a 
    securities portfolio with respect to which the adviser provides 
    continuous and regular supervisory or management services, those 
    assets must be included in the determination of the adviser's assets 
    under management. See infra section II.B.1 of this Release. The 
    Commission intends that the term ``compensation,'' as used in the 
    rule, have the same meaning as the term used in section 202(a)(11) 
    of the Advisers Act (15 U.S.C. 80b-2(a)(11)). See Applicability of 
    the Investment Advisers Act to Financial Planners, Pension 
    Consultants, and Other Persons Who Provide Investment Advisory 
    Services as a Component of Other Services, Investment Advisers Act 
    Rel. No. 1092 (Oct. 8, 1987) (52 FR 38400 (Oct. 16, 1987)), in which 
    the Division explained that ``compensation'' includes any economic 
    benefit, whether or not in the form of an advisory fee, and that it 
    need not be paid directly, but can be provided by a third party.
    
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    [[Page 28125]]
    
        Section 203(b)(3), the federal de minimis provision, exempts from 
    registration with the Commission certain advisers having fewer than 
    fifteen clients during the preceding twelve months. Rule 203(b)(3)-1 
    provides a safe harbor permitting the general partner or other 
    investment adviser to a limited partnership to count the partnership, 
    rather than each limited partner, as the client for purposes of section 
    203(b)(3). The Proposing Release requested comment whether the 
    Commission should adopt one definition of ``client'' for purposes of 
    both section 222 and section 203(b)(3) and if so, whether certain 
    provisions of rule 203(b)(3)-1 should be revised.136 
    Commenters favored the adoption of one definition of ``client'' to 
    resolve open questions and provide consistency under both sections.
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        \136\ See Proposing Release at note 96 and accompanying text.
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        The Commission agrees that one definition has advantages and 
    therefore is amending rule 203(b)(3)-1 to create one definition of the 
    term ``client'' for purposes of sections 203(b)(3) and 
    222(d).137 In taking this action, the Commission has 
    modified certain provisions of rule 203(b)(3)-1 that were not 
    consistent with proposed rule 222-2's treatment of other legal 
    organizations.138 The Commission does not expect these 
    changes to affect the scope of the relief that has been provided by 
    rule 203(b)(3)-1. The Commission also has modified the proposed rule to 
    incorporate the safe harbor approach of rule 203(b)(3)-1. As a safe 
    harbor, the final rule is not intended to specify the exclusive method 
    for determining who may be treated as a single client for purposes of 
    sections 203(b)(3) and 222(d).139 In addition, the final 
    rule clarifies the treatment of foreign clients for purposes of section 
    203(b)(3).140
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        \137\ Rule 222-2 (17 CFR 275.222-2), as adopted, provides that 
    for purposes of section 222(d)(2) of the Act, an adviser may rely 
    upon the definition of client provided by rule 203(b)(3)-1.
        \138\ Rule 203(b)(3)-1, as amended, no longer contains a 
    requirement that the limited partnership interests be securities.
        \139\ Where a client relationship involving multiple persons 
    does not come within the rule, the question of whether it may 
    appropriately be treated as a single client must be determined on 
    the basis of the facts and circumstances involved. In light of the 
    inherently factual nature of such determinations, the Commission and 
    its staff generally will not entertain requests for interpretive 
    advice with respect to client relationships that do not come within 
    rule 203(b)(3)-1.
        \140\ 17 CFR 275.203(b)(3)-1(b)(5). The rule provides that, for 
    purposes of section 203(b)(3), an adviser with its principal office 
    and place of business outside the United States must count only 
    clients that are United States residents. An adviser with its 
    principal office and place of business in the United States must 
    count all clients, regardless of their place of residence. See 
    generally Vocor International Holding S.A. (pub. avail. Apr. 9, 
    1990). Clients that are not United States residents need not be 
    counted for purposes of section 222(d), since the availability of 
    the national de minimis standard turns on the number of clients who 
    are residents of the state in question.
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        Finally, the Commission wishes to emphasize that rules 203(b)(3)-1 
    and 222-2define the term ``client'' only for purposes of counting 
    clients under sections 203(b)(3) and 222(d). Persons that are grouped 
    together for purposes of those sections may be required to be treated 
    as separate clients for other purposes under the Advisers Act (and 
    state investment adviser statutes).
    
    H. Scope of State Authority Over Commission-Registered Investment 
    Advisers
    
    1. Preemption of State Regulatory Authority
        The Coordination Act gives the Commission primary responsibility to 
    regulate advisers that remain registered with the Commission by 
    preempting state regulation of those advisers. New section 203A(b)(1) 
    of the Advisers Act provides that ``(n)o law of any State * * * 
    requiring the registration, licensing, or qualification as an 
    investment adviser shall apply to any [adviser registered with the 
    Commission]. * * * '' 141 States retain authority over 
    Commission-registered advisers under state investment adviser statutes 
    to investigate and bring enforcement actions with respect to fraud or 
    deceit against an investment adviser or a person associated with an 
    investment adviser; to require filings, for notice purposes only, of 
    documents filed with the Commission; and to require payment of state 
    filing, registration, and licensing fees.142
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        \141\ 15 U.S.C. 80b-3A(b)(1).
        \142\ See section 203A(b)(2) of the Advisers Act (15 U.S.C. 80b-
    3A(b)(2)); section 307(a), (b) of the Coordination Act.
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        The Proposing Release stated the Commission's view that section 
    203A(b) preempts not only a state's specific registration, licensing, 
    or qualification requirements, but all regulatory requirements imposed 
    by state law on Commission-registered advisers relating to their 
    advisory activities or services, except those provisions that are 
    specifically preserved by the Coordination Act.143 As a 
    result, the Commission concluded that state regulatory provisions, such 
    as those that establish recordkeeping, disclosure, and capital 
    requirements, will no longer apply to advisers registered with the 
    Commission.144
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        \143\ See Proposing Release at note 20 and accompanying text.
        \144\ See Proposing Release at note 21 and accompanying text.
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        The Commission received extensive comment on its interpretation of 
    the scope of state preemption. Investment adviser commenters strongly 
    favored the interpretation, while NASAA and many of the state 
    commenters argued that the interpretation should be narrowed 
    substantially. NASAA asserted that because the Coordination Act 
    preempts only state registration requirements, only state regulatory 
    requirements that ``flow from'' state registration are 
    preempted.145
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        \145\ Several state commenters asserted that, under the 
    Commission's interpretation of the preemption provision, the 
    Coordination Act would violate the Tenth Amendment's command that 
    powers not delegated to the federal government by the Constitution 
    are reserved to the states. This argument appears to confuse the 
    scope of preemption (about which some of the commenters and the 
    Commission disagree) with the constitutional authority of Congress 
    (and the delegated authority of the Commission) to exclusively 
    regulate investment advisers registered with the Commission. Section 
    203A(b) does nothing more than preempt certain state laws regulating 
    Commission-registered advisers. The Supreme Court has made clear 
    that the displacement of state law under a federal regulatory scheme 
    does not violate the Tenth Amendment, provided that it is based on a 
    valid exercise of Congress' constitutional powers such as those 
    arising under the Commerce Clause. ``(T)he Federal Government may 
    displace state regulation even though this serves to `curtail or 
    prohibit the States' prerogatives to make legislative choices 
    respecting subjects the States may consider important.'' Federal 
    Energy Regulatory Commission v. Mississippi, 456 U.S. 742, 759 
    (1982) (quoting Hodel v. Virginia Surface Mining & Reclamation 
    Ass'n, Inc., 452 U.S. 264, 290 (1981)). No commenter suggested that 
    Congress exceeded its Commerce Clause authority in passing the 
    Coordination Act. See, e.g., section 201 of the Advisers Act (15 
    U.S.C. 80b-1) (express findings of the effects of investment 
    advisory activities on interstate commerce).
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        The Commission continues to believe that the Coordination Act 
    broadly preempts state investment adviser statutes with respect to 
    Commission-registered advisers. While the language of section 
    203A(b)(1) is not necessarily clear on its face and is susceptible to 
    different readings,146 in the
    
    [[Page 28126]]
    
    Commission's judgment the legislative history of the Coordination Act 
    strongly supports broad preemption. Congress intended that Commission-
    registered advisers no longer be subject to ``overlapping'' state and 
    federal regulation,147 but instead be subject to uniform 
    ``national rules.''148 Under NASAA's narrower 
    interpretation, however, multiple, non-uniform state regulation of 
    Commission-registered advisers would be preserved. Moreover, the effect 
    of the preemption provisions of the Coordination Act could be severely 
    weakened, if not nullified, if a state were to impose regulatory 
    requirements on advisers not subject to state registration, but who may 
    be transacting business in the state.149
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        \146\ NASAA interprets the language ``[n]o law of any State * * 
    * requiring the registration, licensing, or qualification'' as 
    restrictive (i.e., meaning ``no state law that requires * * *''), 
    while the Commission interprets the same language as descriptive 
    (i.e., ``no state law, which requires * * *'').
        \147\ Senate Report, supra note 4, at 3-4.
        \148\ Id. at 4.
        \149\ This process could lead to Commission-registered advisers 
    being subject to a less uniform scheme of regulation than state 
    advisers, since states are expressly precluded by section 222 (b) 
    and (c) of the Advisers Act (15 U.S.C. 80b-18a (b), (c)) from 
    enforcing non-uniform books and records and financial responsibility 
    rules with respect to state-registered advisers, but not with 
    respect to Commission-registered advisers.
        In its comment letter, NASAA cited Cipollone v. Liggett Group, 
    Inc., 505 U.S. 504 (1992) for the proposition that the historic 
    police powers of the states are not to be superseded by a federal 
    statute unless that is the clear and manifest purpose of Congress. 
    As discussed in the text above, the Commission believes that such 
    clear and manifest purpose is demonstrated by the language of the 
    Coordination Act and the intent of Congress as expressed in the 
    Coordination Act's legislative history.
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        The structure and design of section 203A suggest Congress intended 
    to broadly preempt state investment adviser law. If Congress simply 
    preempted all state law with respect to Commission-registered advisers, 
    such a provision would have been over inclusive.150 If 
    Congress preempted state investment adviser law by itemizing specific 
    regulations to be preempted, such a provision would have been under 
    inclusive and would have led to confusion whether a particular state 
    regulation was included within a preempted category. Thus, the 
    Commission believes that section 203A(b)(1) was drafted to describe 
    what state investment adviser statutes typically require--registration, 
    licensing, and qualification--in order to preempt statutes containing 
    these requirements with respect to Commission-registered advisers. This 
    view of section 203A(b)(1) comports with the express intent of Congress 
    to subject larger advisers to a uniform, national regulatory regime. It 
    also explains why Congress believed it was necessary to preserve 
    certain state authority. If section 203A(b)(1) preempts only the 
    specific registration, licensing, and qualification requirements of 
    state investment adviser statutes, Congress would not have had to 
    preserve the authority of states to investigate and enforce 
    fraud.151
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        \150\ Such a provision, for example, would preempt areas of 
    state law such as labor and employment laws, commercial codes, and 
    even criminal law as it applies to Commission-registered advisers.
        \151\ See supra note 142 and accompanying text.
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    2. Preservation of State Anti-Fraud Authority
        Section 203A(b)(2) preserves state authority to investigate and 
    bring enforcement actions with respect to fraud or deceit against a 
    Commission-registered adviser or a person associated with a Commission-
    registered adviser. In the Proposing Release, the Commission 
    interpreted section 203A(b)(2) as precluding a state from indirectly 
    regulating the activities of Commission-registered advisers by applying 
    state requirements that define ``dishonest'' or ``unethical'' business 
    practices unless the prohibited practices would be fraudulent or 
    deceptive absent the requirements.152
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        \152\ See Proposing Release at notes 23 and 24 and accompanying 
    text. The Commission, however, does not view section 203A(b)(2) as 
    preempting state private civil liability laws or the authority of a 
    state to bring an action against a Commission-registered adviser for 
    failure to make notice filings or pay fees.
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        NASAA and state commenters took strong exception to this 
    interpretation. Some argued states could continue to enforce business 
    practice rules as a means of enforcing anti-fraud rules. The Commission 
    does not believe that the Coordination Act can be read to preserve such 
    state regulatory authority over Commission-registered advisers. Under 
    the design of the Coordination Act, Congress gave the responsibility of 
    adopting and enforcing prophylactic rules with respect to state-
    registered advisers to states, and with respect to Commission-
    registered advisers to the Commission.\153\ Both the states and the 
    Commission, however, retain anti-fraud authority with respect to all 
    advisers.154 On its face, section 203A(b)(2) preserves only 
    a state's authority to investigate and bring enforcement actions under 
    its anti-fraud laws with respect to Commission-registered 
    advisers.155 The Coordination Act does not limit state 
    enforcement of laws prohibiting fraud. Rather, states are denied the 
    ability to reinstitute the system of overlapping and duplicative 
    regulation of investment advisers that Congress sought to 
    end.156
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        \153\ Senate Report, supra note 4, at 4 (``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.'' 
    (emphasis added)).
        \154\ Id. (``Both the Commission and the states will be able to 
    continue bringing anti-fraud actions against investment advisers 
    regardless of whether the investment adviser is registered with the 
    state or the SEC.'')
        \155\ While there is no legislative history addressing the scope 
    of section 203A(b)(2), Congress used similar language to preserve 
    state anti-fraud laws when it preempted state regulation of 
    securities offerings in Title I of the 1996 Act. See section 
    18(c)(1) of the Securities Act of 1933 (15 USC 77r(c)(1)) (``the 
    (state) securities commission(s) * * * shall retain jurisdiction 
    under the laws of such State(s) to investigate and bring enforcement 
    actions with respect to fraud or deceit. * * *'' (emphasis added)). 
    The House report discussing that section explained that ``(i)n 
    preserving State laws against fraud and deceit * * * the Committee 
    intends to prevent the States from indirectly doing what they have 
    been prohibited from doing directly. * * * The legislation preempts 
    authority that would allow the States to employ the regulatory 
    authority they retain to reconstruct in a different form the 
    regulatory regime * * * that section 18 has preempted.'' House 
    Report, supra note 96, at 34. The Senate Report discusses a similar 
    section in the Senate bill, stating that ``(t)he Committee clearly 
    does not intend for the ``policing'' authority to provide states 
    with a means to undo the state registration preemptions.'' Senate 
    Report, supra note 4, at 15.
        \156\ Although the Commission is subject to no similar 
    prohibition with regard to the application of its prophylactic rules 
    to state-registered advisers, the Commission is making such rules 
    inapplicable to state-registered advisers in recognition of the 
    clearly stated purposes of Congress in passing the Coordination Act. 
    See infra section II.I of this Release.
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    I. Other Amendments to Advisers Act Rules
    
        The Commission proposed to amend several rules under the Advisers 
    Act to reflect changes made by the Coordination Act.157 The 
    few commenters that addressed these proposed amendments generally 
    supported them, and the Commission is adopting the amendments as 
    proposed.
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        \157\ See generally Proposing Release at section II.H.
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    1. Amendments to Form ADV; Elimination of Form ADV-S
        As proposed, the Commission is amending Form ADV to add a new 
    Schedule I, which is substantially the same as Form ADV-
    T.158 Schedule I will be used by the Commission to screen 
    applicants as to eligibility for Commission registration. Schedule I is 
    required to be included with all new registrations filed on or after 
    July 8, 1997. Additionally, the Commission is adopting amendments to 
    rule 204-1 to require an adviser to file an amended Schedule I annually 
    within 90 days of the end of the adviser's fiscal year.159
    
    [[Page 28127]]
    
    The Commission also is amending Items 18 and 19 to Part I of Form ADV 
    to require advisers to determine discretionary and non-discretionary 
    assets under management in the same manner as required by Instruction 7 
    of Schedule I.
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        \158\ See supra section II.C.1.a of this Release. Schedule I is 
    attached to this Release as Appendix B.
        \159\ 17 CFR 275.204-1(a)(1).
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        Like Form ADV-T, Schedule I requires an adviser to indicate whether 
    it remains eligible for Commission registration. Unlike Form ADV-T, 
    however, Schedule I does not operate as a request for withdrawal of the 
    adviser's registration from the Commission; rather, an adviser that 
    indicates that it is not eligible for Commission registration on 
    Schedule I is required to withdraw from Commission registration by 
    filing Form ADV-W.160
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        \160\ Instruction 6 to Schedule I. A separate Form ADV-W 
    continues to be required in order to assure that the Commission 
    staff is able to act promptly on the withdrawal from registration. 
    Subject to the grace period under rule 203A-1(c), failure to file 
    the completed Form ADV-W will subject an adviser to the commencement 
    of proceedings to cancel its registration.
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        The Commission no longer has any regulatory need for advisers to 
    file Form ADV-S, the annual report for advisers registered under the 
    Advisers Act, and therefore is eliminating the requirement to file Form 
    ADV-S, amending rule 204-1 to delete references to Form ADV-S, and 
    amending rule 279.3 to refer to Form ADV-T.
    2. Rule 204-2--Books and Records
        In light of the Congressional determination not to subject advisers 
    registered with the states to substantive federal regulatory 
    requirements after July 8, 1997, the Commission is amending rule 204-2 
    to make the recordkeeping requirements of that rule applicable only to 
    advisers registered with the Commission.161 Additionally, 
    the Commission is amending rule 204-2 to require advisers that register 
    with the Commission after July 8, 1997 to preserve any books and 
    records the adviser was previously required to maintain under state 
    law.162 These books and records are required to be 
    maintained in the same manner and for the same period of time as the 
    other books and records required to be maintained under rule 204-
    2(a).163
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        \161\ Rule 204-2(a) (17 CFR 275.204-2(a)).
        \162\ Rule 204-2(k) (17 CFR 275.204-2(k)).
        \163\ Under rule 204-2(k), an adviser changing from state to 
    federal registration will count the period during which the books 
    and records were maintained under state law toward compliance with 
    the Commission's recordkeeping requirement. For example, an adviser 
    that was state-registered for one year prior to registering with the 
    Commission will be required to maintain the books and records 
    required under state law for an additional four years to fulfill the 
    requirement of rule 204-2(e) (17 CFR 275.204-2(e)) that books and 
    records be maintained for five years.
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    3. Rule 205-3--Performance Fee Arrangements
        By its terms, section 205 prohibits all advisers, except those 
    exempt from registration under section 203(b), from entering into 
    advisory contracts in which the adviser would be compensated on the 
    basis of performance of client accounts.164 Therefore, 
    advisers prohibited from registering with the Commission after July 8, 
    1997 will continue to be subject to the limitations of section 
    205.165 Rule 205-3 provides an exemption from these 
    limitations, but the rule applies only to advisers registered with the 
    Commission. The Commission is amending rule 205-3 to make this 
    exemption available to all advisers, including those registered only 
    under state law after July 8, 1997.166
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        \164\ Section 205(a)(1) (15 U.S.C. 80b-5(a)(1)). Section 
    205(a)(1) provides that ``[n]o investment adviser, unless exempt 
    from registration pursuant to section 203(b)'' may enter into, 
    extend, or renew any investment advisory contract that provides for 
    performance-based compensation.
        \165\ State-registered advisers generally would not be exempted 
    from registration under section 203(b), but rather, would be 
    prohibited from registration under section 203A(a).
        \166\ The extension of rule 205-3's safe harbor to state-
    registered advisers does not preclude a state from further 
    restricting performance fee arrangements.
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    4. Rule 206(3)-2--Agency Cross Transactions
        By its terms, section 206(3) of the Advisers Act prohibits all 
    advisers from engaging in agency cross transactions.167 Rule 
    206(3)-2 provides a non-exclusive safe harbor from this prohibition, 
    but applies only to certain advisers and broker-dealers registered with 
    the Commission.168 Therefore, advisers prohibited from 
    registering with the Commission after July 8, 1997 will continue to be 
    subject to the limitations of section 206(3). The Commission is 
    amending rule 206(3)-2 to make this safe harbor available to all 
    advisers, including those registered only under state law after July 8, 
    1997.169
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        \167\ Section 206(3) (15 U.S.C. 80b-6(3)). Section 206(3) makes 
    it unlawful for any investment adviser acting as principal for its 
    own account to knowingly sell any security to, or purchase any 
    security from, a client, without disclosing to the client in writing 
    before the completion of the transaction the capacity in which the 
    adviser is acting and obtaining the client's consent. This 
    limitation also applies if the adviser is acting as a broker for a 
    person other than the client in effecting such a transaction.
        \168\ 17 CFR 275.206(3)-2.
        \169\ The amendment to rule 206(3)-2 was not proposed in the 
    Proposing Release, but the Commission believes that good cause 
    exists to adopt the amendment without the notice and comment period 
    required under section 553(b)(B) of the Administrative Procedure Act 
    (5 U.S.C. 553(b)(B)). In the Proposing Release, the Commission 
    proposed to amend several rules under the Advisers Act to reflect 
    changes made by the Coordination Act by exempting state-registered 
    advisers from Commission regulation. In most cases, these amendments 
    involved modifying the scope of the rules to apply only to 
    Commission-registered advisers. See amendments to rules 204-2, 
    206(4)-1, 206(4)-2, and 206(4)-4 (discussed in sections II.H.2 and 
    II.H.4 of the Proposing Release and sections II.I.2 and II.I.5 of 
    this Release). In another case, however, a rule was proposed to be 
    broadened in order to make an existing exemption available to all 
    advisers, including state-registered advisers. See amendments to 
    rule 205-3 (discussed in section II.H.3 of the Proposing Release and 
    section II.I.3 of this Release). In preparing the Proposing Release, 
    the Commission staff surveyed the rules under the Advisers Act to 
    determine which rules needed to be amended. The need to amend rule 
    206(3)-2, however, was brought to the attention of the Commission 
    staff after the publication of the Proposing Release in the Federal 
    Register. The Commission believes good cause exists to amend rule 
    206(3)-2 without notice and comment. The decision to amend rule 
    206(3)-2 does not reflect a specific policy decision, but rather, is 
    part of the technical amendment of all the rules under the Advisers 
    Act to reflect the changes of the Coordination Act. The public 
    effectively was on notice that the Commission was undertaking such a 
    technical revision to the Advisers Act rules. See Proposing Release 
    at section II.H.1. (``The Commission is proposing amendments to 
    several rules under the Advisers Act to reflect changes made by the 
    Coordination Act.'').
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    5. Rules 206(4)-1, 206(4)-2, and 206(4)-4--Anti-Fraud Rules
        The Commission has adopted four rules pursuant to its authority 
    under section 206(4) to ``define, and prescribe means reasonably 
    designed to prevent * * * acts, practices, and courses of business 
    [that] are fraudulent, deceptive, or manipulative.'' 170 
    These rules prohibit certain abusive advertising practices, govern an 
    adviser's custody of client funds and securities, address the payment 
    of cash to persons soliciting on behalf of an adviser, and require 
    certain disclosure to clients regarding an adviser's financial 
    condition and disciplinary history.171 Each of these rules, 
    other than the cash solicitation rule, applies to all advisers, 
    regardless of whether they are registered with the Commission. The 
    Commission is amending these rules to make them applicable only to 
    advisers registered (or required to be registered) with the Commission. 
    By excluding advisers not registered with the Commission from these 
    rules, the Commission is not suggesting that the practices prohibited 
    by these rules would not be prohibited by section 206.172 
    Rather, the Commission recognizes that these rules contain prophylactic 
    provisions, and
    
    [[Page 28128]]
    
    that after the effective date of the Coordination Act, the application 
    of these provisions to state-registered advisers is more appropriately 
    a matter for state law.173
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        \170\ 15 U.S.C. 80b-6(4).
        \171\ See rules 206(4)-1 to -4 [17 CFR 275.206(4)-1 to -4].
        \172\ The anti-fraud provisions of the Advisers Act will 
    continue to apply to state-registered advisers after July 8, 1997. 
    See Proposing Release at note 108 and accompanying text.
        \173\ The Commission also is amending rule 206(4)-3, the cash 
    solicitation rule, to correct cross-references that were made 
    incorrect by changes made to the Advisers Act by the Coordination 
    Act.
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    III. Effective Dates
    
        The effective date of the Coordination Act is July 8, 1997. With 
    the exception of rule 203A-2, the rules and rule amendments adopted in 
    this Release will take effect on that same date, July 8, 1997.
        Rule 203A-2, which provides four exemptions from the prohibition on 
    Commission registration,174 will become effective July 21, 
    1997. The Office of Management and Budget has determined that rule 
    203A-2 is a ``major rule'' under Chapter 8 of the Administrative 
    Procedure Act,175 which was added by the Small Business 
    Regulatory Enforcement Fairness Act of 1996 (``SBREFA'').176 
    SBREFA requires all final agency rules to be submitted to Congress for 
    review and requires generally that the effective date of a major rule 
    be delayed for 60 days pending Congressional review. A major rule may 
    become effective at the end of the 60-day review period, unless 
    Congress passes a joint resolution disapproving the rule.177
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        \174\ See supra section II.D of this Release.
        \175\ 5 U.S.C. 801.
        \176\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). Under 
    SBREFA, a rule is ``major'' if the rule is likely to result in (i) 
    an annual effect on the economy of $100 million or more, (ii) a 
    major increase in costs or prices for consumers or individual 
    industries, or (iii) significant adverse effects on competition, 
    investment, or innovation. 5 U.S.C. 804(2).
        \177\ 5 U.S.C. 801(a)(3).
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        As discussed above, all investment advisers registered with the 
    Commission on July 8, 1997 are required to file a completed Form ADV-T 
    with the Commission no later than that date.178 Advisers 
    that are eligible for an exemption from the prohibition on Commission 
    registration provided by rule 203A-2 must indicate that eligibility by 
    checking the appropriate box on Form ADV-T. Although the exemptive rule 
    will not become effective until July 21, 1997, the instructions to Form 
    ADV-T require an investment adviser to indicate eligibility for an 
    exemption assuming that rule 203A-2 will become 
    effective.179 Advisers that will be eligible for an 
    exemption under rule 203A-2 will remain registered with the Commission 
    between July 8, 1997 and the rule 203A-2 effective date, although the 
    exemptive rule will not be effective during that period. If Congress 
    were to pass a joint resolution during that time period disapproving 
    rule 203A-2, the Commission would notify all such advisers that those 
    exemptions are not available.
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        \178\ See supra section II.A of this Release.
        \179\ See Instruction 5(a) to Form ADV-T. Likewise, investment 
    advisers registering with the Commission on or after July 8, 1997, 
    but before July 21, 1997, should indicate eligibility for an 
    exemption on Schedule I assuming that rule 203A-2 will become 
    effective.
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    IV. Paperwork Reduction Act
    
        Certain provisions of the rules and rule amendments contain 
    ``collection of information'' requirements within the meaning of the 
    Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The 
    Commission submitted them to the Office of Management and Budget 
    (``OMB'') for review and OMB has approved them in accordance with 44 
    U.S.C. 3507(d). The title for the collections of information and their 
    OMB control numbers are: ``Form ADV''--3235-0049, ``Schedule I''--3235-
    0490, ``Rule 203A-5 and Form ADV-T''--3235-0483, and ``Rule 204-2''--
    3235-0278, all under the Advisers Act. The Commission did not receive 
    any comments from the public in response to its request for comments in 
    the Paperwork Reduction Act section of the Proposing Release. The final 
    rules as adopted do not include any changes that materially affect the 
    collections of information, including their requirements, purpose, use, 
    or necessity. In response to comments from OMB, the Commission revised 
    part of its Paperwork Reduction Act submission to OMB to reflect one 
    collection of information on Form ADV, as amended, and another 
    collection of information on new Schedule I to Form ADV. As described 
    below, this revision, as well as an updated estimate regarding the 
    number of respondents to the collections of information, has resulted 
    in a change to the burden estimates for Form ADV and Schedule I. The 
    collections of information imposed by Form ADV, Schedule I, rule 203A-5 
    and Form ADV-T, and rule 204-2 are in accordance with 44 U.S.C. 
    3507(d). An agency may not conduct or sponsor, and a person is not 
    required to respond to, a collection of information unless it displays 
    a currently valid OMB control number.
    
    Form ADV
    
        Form ADV is required by rule 203-1 (17 CFR 275.203-1) to be filed 
    by every applicant 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 amended Form ADV. Registrants 
    must file an amended Form ADV only when information on the initial Form 
    ADV filing has changed, either at the end of the fiscal year or 
    ``promptly'' for certain material changes. The Commission amended rule 
    204-1 to require an adviser additionally to file the cover page of Form 
    ADV annually within 90 days after the end of the adviser's fiscal year 
    (along with a new Schedule I, discussed below), regardless of whether 
    other changes have taken place during the year.
        The Commission has revised its estimate of the overall burden hours 
    required by Form ADV as a result of a change in the number of estimated 
    respondents. The likely respondents to this collection of information 
    are all applicants for registration with the Commission after July 8, 
    1997 as well as all currently-registered advisers who will remain 
    registered after July 8, 1997. The number of currently-registered 
    advisers is 23,350, and the Commission estimates that approximately 28 
    percent of these advisers (6,538) will remain registered after July 8, 
    1997. The Commission estimates that it will take currently-registered 
    advisers 1.0672 hours, on average, to fill out and file an amended Form 
    ADV, and that currently-registered advisers will, on average, file Form 
    ADV 1.5 times per year. The Commission also estimates that it will take 
    new applicants 9.0063 hours, on average, to fill out and file their 
    first Form ADV. The Commission estimates that approximately 750 new 
    applicants will register with the Commission per year. Of the 750 new 
    applicants per year, 650 will amend Form ADV an average of 1 time 
    annually. The estimated 100 newly-formed investment advisers that will 
    rely on the exemption provided by 203A-2(d) will amend Form ADV an 
    average of 2 times annually (for purposes of updating their Schedule I 
    120 days after initial registration). Accordingly, the revised annual 
    burden estimate is 18,128 total hours in the aggregate for all 
    respondents to Form ADV.
        The collection of information required by Form ADV is mandatory, 
    and responses are not kept confidential. The amendments to the 
    instructions to Form ADV and rule 204-1 do not affect the burden of 
    filing Form ADV itself. The additional burden of filing the Schedule I 
    is included in the analysis of Schedule I (below).
    
    Schedule I
    
        Schedule I is a new schedule to Form ADV. Schedule I requires an 
    adviser to declare whether it is eligible for Commission registration. 
    Schedule I, as
    
    [[Page 28129]]
    
    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. The 
    Commission has not amended rule 203-1 or rule 279.1. Rule 204-1 (17 CFR 
    275.204-1) sets forth the circumstances requiring the filing of an 
    amended Form ADV. The Commission amended rule 204-1 to require an 
    adviser to file an amended Schedule I annually within 90 days after the 
    end of the adviser's fiscal year. In addition, an investment adviser 
    relying on the ``reasonable expectation'' exemption from the 
    prohibition on Commission registration provided by rule 203A-2(d) is 
    required to file an amended Schedule I to Form ADV at the end of 120 
    days after its initial registration with the Commission. If the adviser 
    indicates on the amended Schedule I that it has not become eligible to 
    register with the Commission, the adviser is required to file a Form 
    ADV-W concurrently with the Schedule I, thereby withdrawing its 
    registration with the Commission.180 The collection of the 
    information required by Schedule I is mandatory and responses will not 
    be kept confidential.
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        \180\ Such an adviser also is required to file a short written 
    undertaking on Schedule E to Form ADV, simply stating that the 
    adviser ``will withdraw from registration'' if on the 120th day 
    after registering with the Commission the adviser does not meet the 
    eligibility requirements for registration under section 203A of the 
    Advisers Act and rules thereunder. This requirement imposes only a 
    nominal burden, subsumed under the burden attributed to the Form 
    ADV.
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        The Commission has revised its estimate of the overall burden hours 
    required by Schedule I as a result of a change in the number of 
    estimated respondents and by considering Schedule I as a separate 
    collection of information from Form ADV. The likely respondents to this 
    collection of information are all applicants for registration with the 
    Commission after July 8, 1997 as well as all currently-registered 
    advisers who will remain registered after July 8, 1997. As noted above, 
    the Commission estimates that approximately 6,538 advisers will remain 
    registered with the Commission after July 8, 1997. These currently-
    registered advisers will file Schedule I once per year. Of the 750 new 
    applicants per year, 650 will file Schedule I once per year. The 
    Commission estimates that approximately 100 newly registered advisers 
    each year will rely on the ``reasonable expectation'' exemption 
    provided by rule 203A-2(d), and that these advisers will file Schedule 
    I twice per year. The Commission estimates that it will take all 
    advisers, whether currently-registered or new applicants, 52.13 
    minutes, on average, to fill out and file Schedule I. Accordingly, the 
    revised annual burden estimate is 6,419 total hours in the aggregate 
    for all respondents to Schedule I.
    
    Rule 203A-5 and Form ADV-T
    
        Providing the information required by Form ADV-T is mandatory, and 
    responses will not be kept confidential. Rule 203A-5 and Form ADV-T are 
    being adopted substantially as proposed, and the burden estimate has 
    not changed.
    
    Rule 204-2
    
        Providing the information and keeping the books and records 
    required by rule 204-2 is mandatory, and responses generally are kept 
    confidential. The amendments to rule 204-2 were adopted substantially 
    as proposed, and the burden estimate has not changed.
    
    V. Cost/Benefit Analysis
    
        In adopting these rules the Commission has given consideration to 
    their benefits as well as their costs. Certain of the new rules and 
    rule amendments, as well as Form ADV-T and new Schedule I to Form ADV, 
    are necessary to implement the Coordination Act, both initially and on 
    an on-going basis.181 They will establish the process by 
    which the Commission will identify those larger advisers that will 
    remain registered with the Commission and those smaller advisers that 
    are not eligible for Commission registration. This process will 
    implement Congress' determination that only larger advisers be 
    regulated by the Commission. In addition, by identifying smaller 
    advisers whose registration will be withdrawn, these rules will work to 
    prevent the preemption of state laws regulating those small advisers 
    that Congress intended to be regulated solely by the states. Although 
    both of these benefits are substantial, neither is quantifiable. These 
    rules impose some incidental preparation costs on investment advisers 
    required to file Form ADV-T and on those advisers that will, on an 
    ongoing basis, be required to file Schedule I. Without implementing 
    rules, however, the goals of the Coordination Act would not be 
    achieved.
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        \181\ See rules 203A-5 and 204-1.
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        Other rules related to the eligibility for and process of 
    Commission registration and de-registration are designed to reduce 
    costs on investment advisers.182 These rules (i) relieve 
    advisers from the regulatory burden of frequently having to register 
    and then de-register with the Commission as a result of changes in the 
    amount of their assets under management, (ii) provide guidance on how 
    an adviser should determine its assets under management, and (iii) 
    provide a safe harbor for advisers that register with state securities 
    authorities based on a reasonable belief that they are prohibited from 
    registering with the Commission because they have insufficient assets 
    under management. These rules are expected to provide investment 
    advisers with substantial benefits, and are not expected to impose any 
    significant costs on investment advisers or investors.
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        \182\ See rule 203A-1, Instruction 8 to Form ADV-T, and rule 
    203A-4.
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        One rule exempts certain classes of advisers from the prohibition 
    on Commission registration, based on a finding by the Commission that 
    the prohibition on Commission registration would be unfair, a burden on 
    interstate commerce, or inconsistent with the purposes of the 
    Coordination Act.183 This rule should reduce regulatory 
    burdens on investment advisers, without significantly affecting 
    compliance costs or imposing other significant costs on investment 
    advisers or the investing public. Although the Commission will incur 
    the incidental additional costs associated with regulating the advisers 
    that qualify for these exemptive rules, the Commission has concluded 
    that these costs are appropriate in light of the purposes of the 
    Coordination Act and the exemptive authority provided to the Commission 
    therein.
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        \183\ See rule 203A-2.
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        The Commission is also adopting several definitional rules to fill 
    gaps left open by the Coordination Act. These rules are intended to 
    permit investment advisers to more readily ascertain their regulatory 
    status and that of their supervised persons. Investment advisers 
    generally are expected to benefit as a result of this increased 
    certainty. In particular, Commission-registered advisers and their 
    supervised persons may incur substantial benefits as a result of the 
    definitions of investment adviser representative and place of business 
    to the extent that the failure of the Commission to define these terms 
    could lead to the application of significantly broader and non-uniform 
    definitions by the states. Broader state definitions would subject a 
    greater number of supervised persons to state qualification 
    requirements than the
    
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    Commission believes Congress intended.184 The Commission 
    believes that institutional and other non-retail clients do not need 
    the protections of state qualification requirements. The Commission has 
    concluded, therefore, that there are no substantial costs associated 
    with the narrower definitions the Commission is adopting.
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        \184\ See supra section II.F.
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        Finally, amendments to several existing rules under the Advisers 
    Act reflect the Coordination Act's reallocation of regulatory 
    responsibilities over investment advisers. These amendments are not 
    expected to provide substantial savings to investment advisers or to 
    impose significant costs on investment advisers or the investing 
    public. They will, however, have important regulatory benefits, because 
    in each case the rules will either work to implement the Coordination 
    Act's goal of reallocating regulatory responsibility for advisers 
    between the Commission and the securities authorities of the states, or 
    to ensure that smaller, state-registered advisers are not unfairly 
    disadvantaged.
        A complete cost-benefit analysis (including supporting data) 
    prepared by the Commission staff is available for public inspection in 
    File No. S7-31-96, and a copy may be obtained by contacting Cynthia G. 
    Pugh, Securities and Exchange Commission, 450 5th Street, NW., Stop 10-
    2, Washington, DC 20549.
    
    VI. Summary of Regulatory Flexibility Analysis
    
        The Commission has prepared a Final Regulatory Flexibility Analysis 
    (``FRFA'') in accordance with the provisions of the Regulatory 
    Flexibility Act (``Reg. Flex. Act'') (5 U.S.C. 604) in connection with 
    the adoption of rule and form amendments described in this Release. An 
    Initial Regulatory Flexibility Analysis (``IRFA'') was prepared in 
    accordance with 5 U.S.C. 603 in conjunction with the Proposing Release 
    and was made available to the public. A summary of the IRFA was 
    published in Investment Advisers Act Release No. 1601 (Dec. 20, 1996) 
    (61 FR 68480, 68491-92 (Dec. 27, 1996)). As discussed further below, 
    one comment was received on the IRFA.
        The FRFA explains both the need for, and the objectives of, the 
    rules adopted by the Commission. As set forth in greater detail in the 
    FRFA, the Coordination Act makes several amendments to the Advisers 
    Act, the most significant of which reallocates federal and state 
    responsibilities for the regulation of investment advisers currently 
    registered with the Commission by limiting the application of federal 
    law and preempting certain state laws. The adopted rules and rule 
    amendments implement provisions of the Coordination Act that reallocate 
    regulatory responsibilities for investment advisers between the 
    Commission and the securities regulatory authorities of the states. The 
    adopted rules establish the process by which all investment advisers 
    that are currently registered with the Commission will determine their 
    eligibility for Commission registration as of July 8, 1997, the 
    effective date of the Coordination Act. The adopted amendments to 
    several rules under the Advisers Act generally reflect the changes made 
    by the Coordination Act.
        The FRFA also (i) summarizes the significant issues raised by 
    public comments in response to the IRFA, (ii) summarizes the 
    Commission's assessment of such issues, and (iii) states any changes 
    made in the proposed rules as a result of such comments. The Commission 
    received one comment on the IRFA,185 which noted that the 
    IRFA did not consider the potential impact of the proposed rules on 
    small advisers that manage funds regulated under ERISA.186 
    According to the commenter, by failing to discuss such an exemption or 
    other potential alternatives that could minimize this impact on small 
    ERISA advisers,187 the Commission overlooked an important 
    effect of the proposed rules. The Regulatory Flexibility Act requires 
    that an agency describe in the IRFA those significant alternatives to 
    the proposed rule that would further the stated objectives of the 
    applicable statutes and that would minimize the significant economic 
    impact of the proposed rule on small entities.188 In 
    response to this comment, the FRFA discusses the possibility of 
    exempting these small advisers from the prohibition on Commission 
    registration, and explains the Commission's conclusion that such an 
    exemption would not be consistent with the objectives of the 
    Coordination Act.
    ---------------------------------------------------------------------------
    
        \185\ See Letter from The Honorable Christopher S. Bond, 
    Chairman of the Senate Committee on Small Business (Feb. 25, 1997) 
    to Arthur Levitt, Chairman, SEC (available in SEC File No. S7-31-
    96).
        \186\ See generally section II.D.5 of this Release. As discussed 
    in that section, ERISA protects a plan's named fiduciary from 
    liability for the individual decisions of an investment manager 
    appointed by the fiduciary to manage the plan's assets. The term 
    investment manager is defined by ERISA to include certain investment 
    advisers that are registered under the Advisers Act, as well as 
    certain banks and insurance companies. Although the Coordination Act 
    amended ERISA to include state-registered investment advisers as 
    investment managers, that amendment expires two years after 
    enactment, on October 11, 1998.
        \187\ 5 U.S.C. 603(c).
        \188\ See id.
    ---------------------------------------------------------------------------
    
        The FRFA also provides a description of and an estimate of the 
    number of small entities to which the rules will apply. For purposes of 
    the Advisers Act and the Reg. Flex. Act, an investment adviser 
    generally is a small entity (i) if it manages assets of $50 million or 
    less, in discretionary or non-discretionary accounts, as of the end of 
    its most recent fiscal year and (ii) if it renders other advisory 
    services, has $50,000 or less in assets related to its advisory 
    business. 189 The Commission estimates that up to 17,650 of 
    approximately 23,350 investment advisers currently registered with the 
    Commission are small entities. The Commission estimates that, after 
    July 8, 1997, approximately 850 of these small-entity advisers will 
    remain eligible for registration with the Commission. 190
    ---------------------------------------------------------------------------
    
        \189\ See rule 275.0-7 (17 CFR 275.0-7).
        \190\ The Commission estimates that approximately 16,800 (72 
    percent) of the 23,350 advisers currently registered with the 
    Commission will be ineligible for Commission registration after July 
    8, 1997. Most of those 16,800 advisers will be small entities. 
    Certain small entity advisers, however, will remain eligible for 
    Commission registration, including, for example, small entity 
    advisers in the four states that do not currently regulate 
    investment advisers. The IRFA estimated that roughly 800 small 
    entity advisers will remain eligible for Commission registration 
    after the effective date of the Coordination Act. The estimate 
    presented in the IRFA has been increased to reflect the additional 
    advisers that have registered with the Commission.
    ---------------------------------------------------------------------------
    
        As required by the Reg. Flex. Act, the FRFA describes the projected 
    reporting, recordkeeping and other compliance requirements of the 
    rules, and includes an estimate of the classes of small entities that 
    will be subject to the requirements and the type of professional skills 
    necessary for preparation of the reports or records. Rule 203A-5 
    requires all investment advisers registered with the Commission on July 
    8, 1997, to file new Form ADV-T no later than that date. The FRFA 
    notes, however, that the Commission anticipates that as a consequence 
    of this one-time filing, approximately 72 percent of the investment 
    advisers currently registered with the Commission will no longer be 
    subject to federal investment adviser regulatory requirements, 
    including reporting and recordkeeping requirements. The incidental 
    burden imposed by this one-time filing requirement is necessary in 
    order to implement the Coordination Act. The FRFA explains that the 
    Commission devised Form ADV-T so that an individual familiar with the 
    adviser's services and operations may complete the form without legal 
    or other professional assistance, although in
    
    [[Page 28131]]
    
    some cases an adviser may need to seek outside assistance in connection 
    with the calculation of its assets under management.
        The adopted amendments to Form ADV add new Schedule I, which must 
    be completed by every adviser registering with the Commission after 
    July 8, 1997, and revise Items 18 and 19 to Part I of Form ADV to 
    direct advisers to determine discretionary and non-discretionary assets 
    under management in the same manner as required by Schedule I. Schedule 
    I requires advisers to report information similar to that required by 
    Form ADV-T. The Commission believes that the burden this new schedule 
    imposes on advisers is necessary in order to accomplish, on an ongoing 
    basis, the Coordination Act's reallocation of regulatory responsibility 
    for investment advisers. The FRFA notes that like Form ADV-T, the 
    Commission has designed Schedule I so that an individual familiar with 
    the adviser's services and operations can complete this schedule 
    without legal or other professional assistance, although in some cases, 
    an adviser may need to seek outside assistance in connection with the 
    calculation of its assets under management. The FRFA explains that the 
    annual burden imposed on small entity advisers by the amendments to 
    Items 18 and 19 of Form ADV is expected to be negligible.
        Rule 203A-2(d) permits a newly formed investment adviser with a 
    reasonable expectation that it will be eligible for Commission 
    registration within 120 days after such registration becomes effective, 
    to register with the Commission. The rule requires the newly formed 
    adviser (i) to include on Schedule E to its Form ADV an undertaking to 
    withdraw from Commission registration if, on the 120th day after 
    registering with the Commission, it has not become eligible for 
    Commission registration, and (ii) to file an amended Schedule I to Form 
    ADV at the end of the 120-day period. If the amended Schedule I 
    indicates that the adviser has not become eligible for Commission 
    registration, the rule requires the adviser to file concurrently a Form 
    ADV-W, thereby withdrawing its Commission registration. The FRFA notes 
    that this burden on newly formed advisers that choose to rely on this 
    rule will be outweighed by the cost savings and benefits provided by 
    the rule.
        The adopted amendments to rule 204-1 require all Commission-
    registered investment advisers to update new Schedule I annually. The 
    FRFA explains that because the Commission has eliminated the 
    requirement that Commission-registered advisers annually file Form ADV-
    S, this new annual reporting requirement should not be a significant 
    additional burden on the small-entity investment advisers that remain 
    eligible for Commission registration after July 8, 1997.
        The adopted amendments to rule 204-2 make the books and 
    recordkeeping requirements of that rule applicable only to advisers 
    registered with the Commission, and so eliminate these recordkeeping 
    requirements with respect to small entities and other advisers that are 
    not eligible for Commission registration after July 8, 1997. The 
    amendments to this rule also require advisers that register with the 
    Commission after July 8, 1997, to preserve any books and records the 
    adviser was previously required to maintain under state law, but this 
    requirement is not expected to be a significant additional burden on 
    advisers that register with the Commission after July 8, 1997. The FRFA 
    notes that the adopted amendment does not have any impact on the type 
    of professional skills necessary for compliance with rule 204-2.
        The FRFA also describes the steps the Commission has taken to 
    minimize the significant economic impact on small entities consistent 
    with the stated objectives of applicable statutes.
        As discussed further in the FRFA, in connection with the adopted 
    rules, the Commission considered the following alternatives to minimize 
    the impact on small entities: (a) The establishment of differing 
    compliance or reporting requirements or timetables that take into 
    account the 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) exemption from 
    coverage of the rule, or any part thereof, for small 
    entities.191 The Commission is easing the impact on small 
    entities by increasing the threshold for Commission registration from 
    $25 to $30 million of assets under management, and by providing an 
    optional exemption from Commission registration for advisers with 
    assets under management of between $25 and $30 million. The exemption 
    gives such advisers, including many small entities, the flexibility to 
    decide when it is best for them to transition from state to Commission 
    registration if their assets under management increase to $25 million 
    or more, and to transition from Commission to state registration if 
    their assets decrease to $30 million or less, and so should enable 
    these advisers to avoid the unnecessary costs and burdens associated 
    with frequent transitions between regulators. The Commission is also 
    adopting a second exemption from the prohibition on Commission 
    registration that permits Commission registration by newly formed 
    advisers that have a reasonable expectation of becoming eligible for 
    Commission registration within 120 days. This exemption will help to 
    ensure that newly formed advisers, including small entity advisers, 
    will not be required to register with numerous states, only to de-
    register and re-register with the Commission shortly thereafter once 
    their assets under management increase to $25 million.
    ---------------------------------------------------------------------------
    
        \191\ The Commission also considered these alternatives in 
    connection with the proposed rules. See IRFA; Investment Advisers 
    Act Rel. No. 1601 (Dec. 20, 1996) (61 FR 68480, 68491-92 (Dec. 27, 
    1996)) (summary of IRFA).
    ---------------------------------------------------------------------------
    
        The FRFA explains that in the proposing release, the Commission 
    also sought comment on other possible alternatives that could meet the 
    need for flexibility for small entities, including whether the 
    transition from state to Commission registration should include a grace 
    period, or whether a state-registered adviser should only have to 
    determine once annually whether it is required to register with the 
    Commission due to an increase in its assets under management. In light 
    of the comments on these issues, the Commission is adopting rule 203A-
    1(d), which permits (but does not require) a state-registered adviser 
    whose assets under management increase to $30 million to postpone 
    registering with the Commission until 90 days after it has reported the 
    increase in its assets under management in its annual filing with its 
    state regulator. This rule will provide advisers, including small 
    entity advisers, that have assets under management of close to $30 
    million, additional flexibility in determining if and when to transfer 
    to Commission registration.
        The FRFA also discusses the general concern expressed by some 
    commenters that the requirement that small advisers withdraw from 
    Commission registration by filing Form ADV-T will have an adverse 
    competitive effect on small advisers. The FRFA explains that the 
    Commission believes that this concern is too speculative to be 
    considered a significant economic impact on small advisers. Although 
    there is some evidence that smaller advisers believe that holding 
    themselves out as SEC-registered has marketing advantages, the 
    Commission is not aware of evidence that shows the loss of such status 
    would result in the loss of clients of inhibit an
    
    [[Page 28132]]
    
    adviser's ability to market itself to new clients. Moreover, as 
    detailed in the FRFA, the Commission believes that an exemption from 
    the prohibition on Commission registration for small advisers that 
    believe they would be put to a competitive disadvantage if required to 
    de-register would be inconsistent with the purposes of the Coordination 
    Act.
        As detailed in the FRFA, the Commission considered exempting small 
    advisers that manage accounts subject to ERISA from the prohibition on 
    Commission registration. Several commenters expressed concern that 
    unless they were permitted to remain registered with the Commission, 
    they effectively would be denied the ability to manage ERISA accounts 
    and would be harmed competitively. The FRFA explains that, although the 
    Commission shares these commenters' concerns,192 the 
    Commission believes such an exemption would be inconsistent with the 
    purposes of the Coordination Act and outside the scope of the 
    Commission's authority. The grant of exemptive authority in section 
    203A(c) was designed to permit Commission registration for advisers 
    that are larger, national firms, but do not have $25 million under 
    management. On April 7, 1997, however, Chairman Levitt wrote to the 
    leadership of the Congressional committees with jurisdiction over 
    ERISA, urging that legislation be enacted to make permanent the 
    amendment of ERISA that would permit state-registered advisers to serve 
    as investment managers.193
    ---------------------------------------------------------------------------
    
        \192\ For analytical purposes, the Commission assumes that ERISA 
    assets may make up as much as 30% (or $6.8 billion) of the total of 
    approximately $22.7 billion of discretionary assets managed by all 
    advisers that manage less than $25 million of discretionary assets. 
    Assuming that all of those assets would be transferred from those 
    smaller advisers, and that on average the smaller advisers earned a 
    1% fee to manage those ERISA assets, it is estimated that as much as 
    $68 million in fees could be foregone by small advisers that no 
    longer qualify as investment managers under ERISA. These fees would 
    probably be earned instead by larger advisers that are registered 
    with the Commission.
        \193\ Letters from Arthur Levitt, Chairman, SEC (Apr. 7, 1997) 
    to The Honorable James M. Jeffords, Chairman, Committee on Labor and 
    Human Resources, U.S. Senate, and The Honorable William F. Goodling, 
    Chairman, Committee on Education and the Work Force, U.S. House of 
    Representatives (available in SEC File No. S7-31-96).
    ---------------------------------------------------------------------------
    
        The FRFA is available for public inspection in File No. S7-31-96, 
    and a copy may be obtained by contacting Cynthia G. Pugh, Securities 
    and Exchange Commission, 450 Fifth Street, NW, Mail Stop 10-2, 
    Washington, DC 20549.
    
    VII. Statutory Authority
    
        The Commission is adopting amendments to rule 203(b)(3)-1 pursuant 
    to the authority set forth in section 206A of the Investment Advisers 
    Act of 1940 (15 U.S.C. 80b-6A).
        The Commission is adopting new rule 203A-1 pursuant to the 
    authority set forth in section 203A(a)(1)(A) (15 U.S.C. 80b-
    3A(a)(1)(A)); 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 adopting new 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 adopting new rule 203A-3 pursuant to the 
    authority set forth in section 202(a)(17) (15 U.S.C. 80b-2(a)(17)) and 
    section 211(a) (15 U.S.C. 80b-11(a)) of the Investment Advisers Act of 
    1940.
        The Commission is adopting new rule 203A-4 pursuant to the 
    authority set forth in section 211(a) of the Investment Advisers Act of 
    1940 (15 U.S.C. 80b-11(a)).
        The Commission is adopting new rule 203A-5 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 adopting amendments to rule 204-1 pursuant to the 
    authority set forth in section 204 of the Investment Advisers Act of 
    1940 (15 U.S.C. 80b-4).
        The Commission is adopting amendments to rule 204-2 pursuant to the 
    authority set forth in sections 204 and 206(4) of the Investment 
    Advisers Act of 1940 (15 U.S.C. 80b-4 and 80b-6(4)).
        The Commission is adopting amendments to rule 205-3 pursuant to the 
    authority set forth in section 206A of the Investment Advisers Act of 
    1940 (15 U.S.C. 80b-6A).
        The Commission is adopting amendments to rules 206(4)-1, 206(4)-2, 
    and 206(4)-4 pursuant to the authority set forth in section 206(4) of 
    the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(4)).
        The Commission is adopting amendments to 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, and 80b-11).
        The Commission is adopting new rules 222-1 and 222-2 pursuant to 
    the authority set forth in section 211(a) of the Investment Advisers 
    Act of 1940 (15 U.S.C. 80b-11(a)).
        The Commission is adopting amendments to rule 279.3, new Form ADV-
    T, and amendments 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).
    
    Text of Rules and Forms
    
    List of Subjects in 17 CFR Parts 275 and 279
    
        Reporting and recordkeeping requirements, Securities.
    
        For the reasons set out in the preamble, Title 17, Chapter II of 
    the Code of Federal Regulations is amended as follows:
    
    PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
    
        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.
    
        2. Section 275.203(b)(3)-1 is revised to read as follows:
    
    
    Sec. 275.203(b)(3)-1  Definition of ``client'' of an investment 
    adviser.
    
    Preliminary Note to Sec. 203(b)(3)-1
    
        This rule is a safe harbor and is not intended to specify the 
    exclusive method for determining who may be deemed a single client 
    for purposes of section 203(b)(3) of the Act.
    
        (a) General. For purposes of section 203(b)(3) of the Act (15 
    U.S.C. 80b-3(b)(3)), the following are deemed a single client:
        (1) A natural person, and:
        (i) Any minor child of the natural person;
        (ii) Any relative, spouse, or relative of the spouse of the natural 
    person who has the same principal residence;
        (iii) All accounts of which the natural person and/or the persons 
    referred to in this paragraph (a)(1) are the only primary 
    beneficiaries; and
        (iv) All trusts of which the natural person and/or the persons 
    referred to in this paragraph (a)(1) are the only primary 
    beneficiaries;
        (2)(i) A corporation, general partnership, limited partnership, 
    limited liability company, trust (other than a trust referred to in 
    paragraph (a)(1)(iv) of this section), or other legal organization (any 
    of which are referred to hereinafter as a ``legal organization'') that 
    receives investment advice based on its investment objectives rather 
    than
    
    [[Page 28133]]
    
    the individual investment objectives of its shareholders, partners, 
    limited partners, members, or beneficiaries (any of which are referred 
    to hereinafter as an ``owner''); and
        (ii) Two or more legal organizations referred to in paragraph 
    (a)(2)(i) of this section that have identical owners.
        (b) Special Rules. For purposes of this section:
        (1) An owner must be counted as a client if the investment adviser 
    provides investment advisory services to the owner separate and apart 
    from the investment advisory services provided to the legal 
    organization, Provided, however, that the determination that an owner 
    is a client will not affect the applicability of this section with 
    regard to any other owner;
        (2) An owner need not be counted as a client of an investment 
    adviser solely because the investment adviser, on behalf of the legal 
    organization, offers, promotes, or sells interests in the legal 
    organization to the owner, or reports periodically to the owners as a 
    group solely with respect to the performance of or plans for the legal 
    organization's assets or similar matters;
        (3) A limited partnership is a client of any general partner or 
    other person acting as investment adviser to the partnership;
        (4) Any person for whom an investment adviser provides investment 
    advisory services without compensation need not be counted as a client; 
    and
        (5) An investment adviser that has its principal office and place 
    of business outside of the United States must count only clients that 
    are United States residents; an investment adviser that has its 
    principal office and place of business in the United States must count 
    all clients.
        (c) Holding Out. Any investment adviser relying on this section 
    shall not be deemed to be holding itself out generally to the public as 
    an investment adviser, within the meaning of section 203(b)(3) of the 
    Act (15 U.S.C. 80b-3(b)(3)), solely because such investment adviser 
    participates in a non-public offering of interests in a limited 
    partnership under the Securities Act of 1933.
        Sections 275.203A-1 through 275.203A-5 are added to read as 
    follows:
    
    
    Sec. 275.203A-1  Eligibility for Commission registration.
    
        (a) Threshold increased to $30 million of assets under management. 
    No investment adviser that is registered or required to be registered 
    as an investment adviser in the State in which it maintains its 
    principal office and place of business shall register with the 
    Commission under section 203 of the Act (15 U.S.C. 80b-3), unless the 
    investment adviser:
        (1) Has assets under management of not less than $30,000,000, as 
    reported on the Form ADV (17 CFR 279.1) of the investment adviser; or
        (2) Is an investment adviser to an investment company registered 
    under the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.].
        (b) Exemption for Investment advisers having between $25 and $30 
    million of assets under management. Notwithstanding paragraph (a) of 
    this section, an investment adviser that is registered or required to 
    be registered as an investment adviser in the State in which it 
    maintains its principal office and place of business may register with 
    the Commission if the investment adviser has assets under management of 
    not less than $25,000,000 but not more than $30,000,000, as reported on 
    the Form ADV (17 CFR 279.1) of the investment adviser. This paragraph 
    (b) shall not apply to an investment adviser:
        (1) To an investment company registered under the Investment 
    Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or
        (2) That is exempted by Sec. 275.203A-2 from the prohibition in 
    section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) on registering with 
    the Commission.
    
    Note to Paragraphs (a) and (b)
    
        Paragraphs (a) and (b) together make registration with the 
    Commission optional for certain investment advisers that have 
    between $25 and $30 million of assets under management.
    
        (c) Grace period for transition from Commission to State 
    Registration. An investment adviser registered with the Commission, 
    upon filing an amendment to Form ADV (17 CFR 279.1) that indicates that 
    it would be prohibited by section 203A(a) of the Act (15 U.S.C. 80b-
    3A(a)) from registering with the Commission, shall be subject to having 
    its registration cancelled pursuant to section 203(h) of the Act (15 
    U.S.C. 80b-3(h)), Provided, That the Commission shall not commence any 
    cancellation proceeding on the basis of the amendment until the 
    expiration of a period of not less than 90 days from the date the 
    investment adviser was required by Sec. 275.204-1(a) to file the 
    amendment.
        (d) Transition From State to Commission Registration. An investment 
    adviser that is registered with a securities commissioner (or any 
    agency or officer performing like functions) of any State that requires 
    such investment adviser annually to report to it the amount of assets 
    under management pursuant to a form or rule substantially similar to 
    Schedule I to Form ADV (17 CFR 279.1) must register with the Commission 
    within 90 days after the date on which the investment adviser is 
    required to report assets under management of $30,000,000 or more to 
    the state securities commissioner, unless, at the time of registration 
    with the Commission, the investment adviser is prohibited by section 
    203A(a) of the Act (15 U.S.C. 80b-3A(a)) from registering with the 
    Commission.
    
    Notes to Paragraph (d)
    
        1. An investment adviser may be prohibited by section 203A(a) 
    from registering with the Commission if its assets under management 
    have decreased to an amount less than $25,000,000 during the 90-day 
    period.
        2. An investment adviser not eligible to rely on paragraph (d) 
    must register with the Commission promptly when no longer prohibited 
    by section 203A(a) from registering with the Commission.
    
    
    Sec. 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:
        (a) Nationally recognized statistical rating organizations. An 
    investment adviser that is a nationally recognized statistical rating 
    organization, as that term is used in paragraphs (c)(2)(vi)(E), (F), 
    and (H) of Sec. 240.15c3-1 of this chapter.
        (b)(1) Pension consultants. An investment adviser that is a 
    ``pension consultant,'' as defined in this section, with respect to 
    assets of plans having an aggregate value of at least $50,000,000.
        (2) An investment adviser is a pension consultant, for purposes of 
    paragraph (b) of this section, if the investment adviser provides 
    investment advice to:
        (i) Any employee benefit plan described in section 3(3) of the 
    Employee Retirement Income Security Act of 1974 (``ERISA'') [29 U.S.C. 
    1002(3)];
        (ii) Any governmental plan described in section 3(32) of ERISA (29 
    U.S.C. 1002(32)); or
        (iii) Any church plan described in section 3(33) of ERISA (29 
    U.S.C. 1002(33)).
        (3) In determining the aggregate value of assets of plans, only 
    that portion of a plan's assets for which the investment adviser 
    provided investment advice (including any advice with respect to the 
    selection of an investment adviser to manage such assets) may be 
    included. The value of assets shall be determined
    
    [[Page 28134]]
    
    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.
        (c) Investment advisers controlling, controlled by, or under common 
    control with an investment adviser registered with the Commission. An 
    investment adviser that controls, is controlled by, or is under common 
    control with, an investment adviser eligible to register, and 
    registered with, the Commission (``registered adviser''), provided that 
    the principal office and place of business of the investment adviser is 
    the same as that of the registered adviser. For purposes of this 
    paragraph, control means the power to direct or cause the direction of 
    the management or policies of an investment adviser, whether through 
    ownership of securities, by contract, or otherwise. Any person that 
    directly or indirectly has the right to vote 25 percent or more of the 
    voting securities, or is entitled to 25 percent or more of the profits, 
    of an investment adviser is presumed to control that investment 
    adviser.
        (d) Investment advisers expecting to be eligible for Commission 
    registration within 120 Days. An investment adviser that:
        (1) Immediately before it registers with the Commission, is not 
    registered or required to be registered with the Commission or a 
    securities commissioner (or any agency or officer performing like 
    functions) of any State and has a reasonable expectation that it would 
    be eligible to register with the Commission within 120 days after the 
    date the investment adviser's registration with the Commission becomes 
    effective;
        (2) Includes on Schedule E to its Form ADV (17 CFR 279.1) an 
    undertaking to withdraw from registration with the Commission if, on 
    the 120th day after the date the investment adviser's registration with 
    the Commission becomes effective, the investment adviser would be 
    prohibited by section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) from 
    registering with the Commission; and
        (3) Within 120 days after the date the investment adviser's 
    registration with the Commission becomes effective, files an amendment 
    to Form ADV (17 CFR 279.1) revising Schedule I thereto and, if the 
    amendment indicates that the investment adviser would be prohibited by 
    section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) from registering with 
    the Commission, the amendment is accompanied by a completed Form ADV-W 
    (17 CFR 279.2) whereby it withdraws from registration with the 
    Commission.
    
    
    Sec. 275.203A-3  Definitions.
    
        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 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:
        (A) Immediately after entering into the investment advisory 
    contract with the investment adviser has at least $500,000 under 
    management with the investment adviser, or
        (B) The investment adviser reasonably believes, immediately prior 
    to entering into the advisory contract, has a net worth (together with 
    assets held jointly with a spouse) at the time the contract is entered 
    into of more than $1,000,000.
        (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 
    Sec. 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.
        (b) Place of business. ``Place of business'' of an investment 
    adviser representative means:
        (1) An office at which the investment adviser representative 
    regularly provides investment advisory services, solicits, meets with, 
    or otherwise communicates with clients; and
        (2) Any other location that is held out to the general public as a 
    location at which the investment adviser representative provides 
    investment advisory services, solicits, meets with, or otherwise 
    communicates with clients.
        (c) Principal office and place of business. ``Principal office and 
    place of business'' of an investment adviser means the executive office 
    of the investment adviser from which the officers, partners, or 
    managers of the investment adviser direct, control, and coordinate the 
    activities of the investment adviser.
    
    
    Sec. 275.203A-4  Investment advisers registered with a State securities 
    commission.
    
        The Commission shall not assert a violation of section 203 of the 
    Act (15 U.S.C. 80b-3) (or any provision of the Act to which an 
    investment adviser becomes subject upon registration under section 203 
    of the Act (15 U.S.C. 80b-3)) for the failure of an investment adviser 
    registered with the securities commission (or any agency or office 
    performing like functions) in the State in which it has its principal 
    office and place of business to register with the Commission if the 
    investment adviser reasonably believes that it does not have assets 
    under management of at least $30,000,000 and is therefore not required 
    to register with the Commission.
    
    
    Sec. 275.203A-5  Transition rules.
    
        (a) Every investment adviser registered with the Commission on July 
    8, 1997 shall file a completed Form ADV-T (17 CFR 279.3) no later than 
    July 8, 1997.
        (b) If an investment adviser registered with the Commission on July 
    8, 1997 would be prohibited from registering with the Commission under 
    section 203A(a) of the Act (15 U.S.C. 80b-3A(a)), and is not otherwise 
    exempted by Sec. 275.203A-2 from such prohibition, such investment 
    adviser shall withdraw from registration with the Commission on Form 
    ADV-T (17 CFR 279.3).
        (c)(1) Except as provided in paragraph (c)(2) of this section, an 
    investment adviser that indicates on Form ADV-T (17 CFR 279.3) that the 
    investment adviser withdraws from registration with the Commission 
    shall be deemed to have withdrawn from registration as of the later of:
        (i) July 8, 1997; or
        (ii) The date the investment adviser first files with the 
    Commission Form ADV-T (17 CFR 279.3) or any amendment to Form ADV-T (17 
    CFR 279.3) that indicates that the investment adviser withdraws from 
    registration with the Commission.
        (2) If, prior to the effective date of the withdrawal from 
    registration of an investment adviser on Form ADV-T (17 CFR 279.3), the 
    Commission has instituted a proceeding pursuant to section 203(e) of 
    the Act (15 U.S.C. 80b-3(e)) to suspend or revoke registration,
    
    [[Page 28135]]
    
    or a proceeding pursuant to section 203(h) of the Act (15 U.S.C. 80b-
    3(h)) to impose terms or conditions upon withdrawal, the withdrawal 
    from registration shall not become effective except at such time and 
    upon such terms and conditions as the Commission deems necessary or 
    appropriate in the public interest or for the protection of investors.
        4. Section 275.204-1 is revised to read as follows:
    
    
    Sec. 275.204-1  Amendments to application for registration.
    
        (a) Every investment adviser whose registration with the Commission 
    is effective on the last day of its fiscal year shall, within 90 days 
    of the end of its fiscal year, unless its registration has been 
    withdrawn, cancelled, or revoked prior to that day, file:
        (1) Schedule I to Form ADV (17 CFR 279.1);
        (2) A balance sheet if the balance sheet is required by Item 14 of 
    Part II of Form ADV (17 CFR 279.1); and
        (3) An executed page one of Part I of Form ADV (17 CFR 279.1).
        (b)(1) If the information contained in the response to Items 1, 2, 
    3, 4, 5, 8, 11, 13A, 13B, 14A and 14B of Part I of any application for 
    registration as an investment adviser, or in any amendment thereto, 
    becomes inaccurate for any reason, or if the information contained in 
    response to any question in Items 9 and 10 of Part I, all of Part II 
    (except Item 14), and all of Schedule H of any application for 
    registration as an investment adviser, or in any amendment thereto, 
    becomes inaccurate in a material manner, the investment adviser shall 
    promptly file an amendment on Form ADV (17 CFR 279.1) correcting the 
    information.
        (2) For all other changes not designated in paragraph (b)(1) of 
    this section, the investment adviser shall file an amendment on Form 
    ADV (17 CFR 279.1) updating the information together with the 
    amendments required by paragraph (a) of this section.
        5. Section 275.204-2 is amended by revising the introductory text 
    of paragraph (a) and adding paragraph (k) to read as follows:
    
    
    Sec. 275.204-2  Books and records to be maintained by investment 
    advisers.
    
        (a) Every investment adviser registered or required to be 
    registered under section 203 of the Act (15 U.S.C. 80b-3) shall make 
    and keep true, accurate and current the following books and records 
    relating to its investment advisory business:
    * * * * *
        (k) Every investment adviser that registers under section 203 of 
    the Act (15 U.S.C. 80b-3) after July 8, 1997 shall be required to 
    preserve in accordance with this section the books and records the 
    investment adviser had been required to maintain by the State in which 
    the investment adviser had its principal office and place of business 
    prior to registering with the Commission.
        Section 275.205-3 is amended by revising the section heading and 
    paragraph (a) to read as follows:
    
    
    Sec. 275.205-3  Exemption from the compensation prohibition of section 
    205(a)(1) for registered investment advisers.
    
        (a) General. The provisions of section 205(a)(1) of the Act (15 
    U.S.C. 80b-5(a)(1)) shall not prohibit any investment adviser from 
    entering into, performing, renewing or extending an investment advisory 
    contract that provides for compensation to the investment adviser on 
    the basis of a share of the capital gains upon, or the capital 
    appreciation of, the funds, or any portion of the funds, of a client, 
    Provided, That all the conditions in this section are satisfied.
    * * * * *
        7. Section 275.206(3)-2 is amended by revising the introductory 
    text of paragraph (a) to read as follows:
    
    
    Sec. 275.206(3)-2  Agency cross transactions for advisory clients.
    
        (a) An investment adviser, or a person registered as a broker-
    dealer under section 15 of the Securities Exchange Act of 1934 (15 
    U.S.C. 78o) and controlling, controlled by, or under common control 
    with an investment adviser, shall be deemed in compliance with the 
    provisions of sections 206(3) of the Act (15 U.S.C. 80b-6(3)) in 
    effecting an agency cross transaction for an advisory client, if:
    * * * * *
        8. Section 275.206(4)-1 is amended by revising the introductory 
    text of paragraph (a) to read as follows:
    
    
    Sec. 275.206(4)-1  Advertisements by investment advisers.
    
        (a) It shall constitute a fraudulent, deceptive, or manipulative 
    act, practice, or course of business within the meaning of section 
    206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser 
    registered or required to be registered under section 203 of the Act 
    (15 U.S.C. 80b-3), directly or indirectly, to publish, circulate, or 
    distribute any advertisement:
    * * * * *
        9. Section 275.206(4)-2 is amended by revising the introductory 
    text of paragraph (a) to read as follows:
    
    
    Sec. 275.206(4)-2  Custody or possession of funds or securities of 
    clients.
    
        (a) It shall constitute a fraudulent, deceptive, or manipulative 
    act, practice or course of business within the meaning of section 
    206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser 
    registered or required to be registered under section 203 of the Act 
    (15 U.S.C. 80b-3) who has custody or possession of any funds or 
    securities in which any client has any beneficial interest, to do any 
    act or take any action, directly or indirectly, with respect to any 
    such funds or securities, unless:
    * * * * *
    
    
    Sec. 275.206(4)-3  [Amended]
    
        10. In Sec. 275.206(4)-3, paragraph (a)(1)(ii)(C) is amended by 
    revising the cite ``paragraphs (1), (4) or (5)'' to read ``paragraphs 
    (1), (5) or (6)''.
        11. Section 275.206(4)-4 is amended by revising the introductory 
    text of paragraph (a) to read as follows:
    
    
    Sec. 275.206(4)-4  Financial and disciplinary information that 
    investment advisers must disclose to clients.
    
        (a) It shall constitute a fraudulent, deceptive, or manipulative 
    act, practice, or course of business within the meaning of section 
    206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser 
    registered or required to be registered under section 203 of the Act 
    (15 U.S.C. 80b-3) to fail to disclose to any client or prospective 
    client all material facts with respect to:
    * * * * *
        12. Sections 275.222-1 and 222-2 are added to read as follows:
    
    
    Sec. 275.222-1  Definitions.
    
        For purposes of section 222 (15 U.S.C. 80b-18a) of the Act:
        (a) Place of business. ``Place of business'' of an investment 
    adviser means:
        (1) An office at which the investment adviser regularly provides 
    investment advisory services, solicits, meets with, or otherwise 
    communicates with clients; and
        (2) Any other location that is held out to the general public as a 
    location at which the investment adviser provides investment advisory 
    services, solicits, meets with, or otherwise communicates with clients.
        (b) Principal place of business. ``Principal place of business'' of 
    an investment adviser means the executive office of the investment 
    adviser from which the officers, partners, or managers of the 
    investment adviser direct, control, and coordinate the activities of 
    the investment adviser.
    
    [[Page 28136]]
    
    Sec. 275.222-2  Definition of ``client'' for purposes of the national 
    de minimis standard.
    
        For purposes of section 222(d)(2) of the Act (15 U.S.C. 80b-
    18a(d)(2)), an investment adviser may rely upon the definition of 
    ``client'' provided by Sec. 275.203(b)(3)-1.
    
    PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
    1940
    
        13. 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.
    
    
    Sec. 279.1  (Form ADV) [Amended]
    
        14. By revising Instructions 2 and 7 of Form ADV (referenced in 
    Sec. 279.1), and by adding Instruction 10 to read as follows:
    
        Note: The text of Form ADV does not and the amendments will not 
    appear in the Code of Federal Regulations.
    
    Form ADV
    
    * * * * *
    
    Form ADV Instructions
    
    * * * * *
    
    2. Organization
    
        This Form contains two parts. Parts I and II are filed with the 
    SEC and the jurisdictions; Part II generally can be given to clients 
    to satisfy the brochure rule. The Form also contains the following 
    schedules:
    
         Schedule A--for corporations;
         Schedule B--for partnerships;
         Schedule C--for entities that are not sole 
    proprietorships, partnerships or corporations (e.g., limited 
    liability companies and limited liability partnerships);
         Schedule D--for reporting information about individuals 
    under Part I Item 12;
         Schedule E--for continuing responses to Part I items;
         Schedule F--for continuing responses to Part II items;
         Schedule G--for the balance sheet required by Part II 
    Item 14;
         Schedule H--for satisfaction of the brochure rule by 
    sponsors of wrap fee programs; and
         Schedule I--for reporting information related to 
    eligibility for SEC registration.
    * * * * *
    
    7. SEC Filings
    
         Submit filings in triplicate to the Securities and 
    Exchange Commission, Washington DC 20549. There is no fee for 
    registration or amendments.
         Non-residents--Rule 0-2 under the Investment Advisers 
    Act of 1940 (17 CFR 275.0-2) covers those non-resident persons named 
    anywhere in Form ADV that must file a consent to service of process 
    and a power of attorney. Rule 204-2(j) under the Investment Advisers 
    Act of 1940 (17 CFR 275.204-2(j)) covers the notice of undertaking 
    on books and records non-residents must file with Form ADV.
         Federal Information Law and Requirements--Investment 
    Advisers Act of 1940 sections 203(c), 204, 206, and 211(a) authorize 
    the SEC to collect the information on this Form from applicants for 
    investment adviser registration. The information is used for 
    regulatory purposes, including deciding whether to grant 
    registration. The SEC maintains files of the information on this 
    Form and makes it publicly available. Only the Social Security 
    Number, which aids in identifying the applicant, is voluntary. The 
    SEC may return as unacceptable Forms that do not include all other 
    information. By accepting this Form, however, the SEC does not make 
    a finding that it has been filled out or submitted correctly. 
    Intentional misstatements or omissions constitute Federal criminal 
    violations under 18 U.S.C. 1001 and 15 U.S.C. 80b-17.
    * * * * *
    
    10. Updating
    
        Amendments to this form should be filed:
    
    --promptly for any changes in:
        Part I--Items 1, 2, 3, 4, 5, 8, 11, 13A, 13B, 14A, and 14B;
    --promptly for material changes in:
        Part I--Items 9, 10, all items of Part II except Item 14, and 
    all Items of Schedule H;
    --within 90 days of the end of the fiscal year for the filing of 
    Schedule I and any other changes.
        Note: Every investment adviser is required to file Schedule I no 
    later than 90 days after the end of its fiscal year.
    * * * * *
    
    
    Sec. 279.1   (Form ADV) [Amended]
    
        15. By revising Items 18 and 19 of Form ADV (referenced in 
    Sec. 279.1) to read as follows:
    
        Note: The text of Form ADV does not and the amendments will not 
    appear in the Code of Federal Regulations.
    * * * * *
    
    18. Assets Under Management: Discretionary
    
        Does applicant manage client securities portfolios that receive 
    continuous and regular supervisory or management services on a 
    discretionary basis?
    Yes {time}       No {time} 
        If yes, at the end of applicant's last fiscal year:
        A. These securities portfolios numbered ____________.
        B. These securities portfolios, in aggregate market value, 
    totaled $____________.00 (to nearest dollar).
        Determine: (i) whether an account is a ``securities portfolio''; 
    (ii) whether a securities portfolio receives ``continuous and 
    regular supervisory or management services''; and (iii) the 
    aggregate market value of such a securities portfolio, in accordance 
    with Instruction 7 of Schedule I to Form ADV. Items 18(B) and 19(B) 
    should total the response (if any) to Part II of Schedule I.
    
    19. Assets Under Management: Non-Discretionary
    
        Does applicant manage or supervise client securities portfolios 
    that receive continuous and regular supervisory or management 
    services on a non-discretionary basis?
    Yes {time}       No {time} 
        If yes, at the end of applicant's last fiscal year:
        A. These securities portfolios numbered ____________.
        B. These securities portfolios, in aggregate market value, 
    totaled $____________.00 (to nearest dollar).
        Determine: (i) whether an account is a ``securities portfolio''; 
    (ii) whether a securities portfolio receives ``continuous and 
    regular supervisory or management services''; and (iii) the 
    aggregate market value of such a securities portfolio, in accordance 
    with Instruction 7 of Schedule I to Form ADV. Items 18(B) and 19(B) 
    should total the response (if any) to Part II of Schedule I.
    * * * * *
    
    
    Sec. 279.1   (Form ADV) [Amended]
    
        16. By adding Schedule I to Form ADV [Sec. 279.1].
    
        Note: The text of Schedule I will not appear in the Code of 
    Federal Regulations. Schedule I is attached as Appendix B to this 
    Release.
    
        17. Section 279.3 and Form ADV-S are revised to read as follows:
    
    
    Sec. 279.3  Form ADV-T, transition form for determining eligibility for 
    Commission registration.
    
        Note: The text of Form ADV-T will not appear in the Code of 
    Federal Regulations. Form ADV-T is attached as Appendix A to this 
    Release.
    
        This form shall be filed pursuant to Sec. 275.203A-5(a) of this 
    chapter by every investment adviser registered with the Commission on 
    July 8, 1997.
    
        By the Commission.
    
        Dated: May 15, 1997.
    Margaret H. McFarland,
    Deputy Secretary.
    
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    [FR Doc. 97-13284 Filed 5-21-97; 8:45 am]
    BILLING CODE 8010-01-C
    
    
    

Document Information

Effective Date:
7/21/1997
Published:
05/22/1997
Department:
Securities and Exchange Commission
Entry Type:
Rule
Action:
Final rules.
Document Number:
97-13284
Dates:
July 8, 1997, except for Sec. 275.203A-2, which will become effective on July 21, 1997. See section iii of this Release.
Pages:
28112-28151 (40 pages)
Docket Numbers:
Release No. IA-1633, File No. S7-31-96
RINs:
3235-AH07: Rules Implementing Amendments to the Investment Advisers Act of 1940
RIN Links:
https://www.federalregister.gov/regulations/3235-AH07/rules-implementing-amendments-to-the-investment-advisers-act-of-1940
PDF File:
97-13284.pdf
CFR: (19)
17 CFR 279.1)
17 CFR 275.206(4)-1
17 CFR 275.206(4)-2
17 CFR 275.206(3)-2
17 CFR 275.206(4)-3
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