[Federal Register Volume 63, Number 142 (Friday, July 24, 1998)]
[Rules and Regulations]
[Pages 39708-39726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19750]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-1733, File No. S7-28-97]
RIN 3235-AH22
Exemption for Investment Advisers Operating in Multiple States;
Revisions to Rules Implementing Amendments to the Investment Advisers
Act of 1940; Investment Advisers With Principal Offices and Places of
Business in Colorado or Iowa
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: The Commission is adopting rule amendments under the
Investment Advisers Act of 1940 to exempt multi-state investment
advisers from the prohibition on Commission registration and to revise
the definition of the term ``investment adviser representative.'' The
Commission also is adopting amendments to Schedule I to Form ADV to
reflect the enactment of investment adviser statutes in Colorado and
Iowa. The rule amendments refine rules implementing the Investment
Advisers Supervision Coordination Act.
DATES: Effective Date: The rule amendments will become effective August
31, 1998.
Compliance Date: Supervised persons of Commission-registered
investment advisers must comply with amendments to Sec. 275.203A-
3(a)(3)(i) no later than December 31, 1998.
FOR FURTHER INFORMATION CONTACT: Carolyn-Gail Gilheany, Attorney, or
Jennifer S. Choi, Special Counsel, at (202) 942-0716, Task Force on
Investment Adviser Regulation, Division of Investment Management, Stop
5-6, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
rule 203A-2 (17 CFR 275.203A-2), rule 203A-3 (17 CFR 275.203A-3), rule
206(4)-3 (17 CFR 275.206(4)-3), Form ADV (17 CFR 279.1), Schedule G to
Form ADV (17 CFR 279.1), and Schedule I to Form ADV (17 CFR 279.1)
under the Investment Advisers Act of 1940 (15 U.S.C. 80b) (``Advisers
Act''). The Commission also is withdrawing rule 203A-5 (17 CFR
275.203A-5) and Form ADV-T (17 CFR 279.3) under the Advisers Act.
Table of Contents
Executive Summary
I. Background
II. Discussion
A. Multi-State Investment Adviser Exemption from Prohibition on
Registration with the Commission
B. Definition of Investment Adviser Representative
1. Accommodation Clients
2. High Net Worth Clients and Other Excepted Persons
C. Other Amendments
D. Investment Advisers with Principal Offices and Places of
Business in Colorado or Iowa
III. Cost-Benefit Analysis
IV. Paperwork Reduction Act
V. Summary of Regulatory Flexibility Analysis
VI. Statutory Authority
Text of the Rule and Form Amendments
Appendix A: Schedule I to Form ADV
Appendix B: Schedule G to Form ADV
Appendix C: Illustrations of Accommodation Client Provision
Executive Summary
Section 203A of the Advisers Act generally prohibits an investment
adviser from registering with the Commission unless it has more than
$25 million of assets under management or is an adviser to a registered
investment company. The Commission is adopting amendments to rule 203A-
2 under the Advisers Act to exempt from the prohibition on Commission
registration those advisers that are required to register as investment
advisers in 30 or more states.
Section 203A preempts most state regulatory requirements for
Commission-registered investment advisers and their supervised persons
except for certain ``investment adviser representatives.'' The
Commission is adopting amendments to rule 203A3 under the Advisers Act
to revise the definition of investment adviser representative. Under
the amended definition, supervised persons of Commission-registered
investment advisers are investment adviser representatives (and
therefore subject to state qualification requirements) if they have
more than five clients who are natural persons and more than ten
percent of their clients are natural persons.
Under section 203A, the Commission retains regulatory authority for
an investment adviser with a principal office and place of business in
a state that does not have an investment adviser statute. The
Commission is adopting amendments to Schedule I to Form ADV to reflect
that Colorado and Iowa have recently enacted investment adviser
statutes.
I. Background
Two years ago, Congress enacted the National Securities Markets
Improvement Act of 1996 (``1996 Act'').\1\ Title III of the 1996 Act,
the Investment Advisers Supervision Coordination Act (``Coordination
Act''), amended the Advisers Act to, among other things, reallocate
federal and state responsibilities for regulation of investment
advisers by limiting federal registration and preempting certain state
laws. Under section 203A(a) of the Advisers Act,\2\ 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 investment adviser (i) has at least $25 million of assets
under management, or (ii) is an investment adviser to an investment
[[Page 39709]]
company registered under the Investment Company Act of 1940
(``Investment Company Act'').\3\ Section 203A(b) of the Advisers Act
generally preempts state regulatory requirements with respect to
Commission-registered investment advisers and their supervised persons,
except for certain of their investment adviser representatives.\4\
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\1\ Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in
scattered sections of the United States Code).
\2\ 15 U.S.C. 80b-3a(a).
\3\ 15 U.S.C. 80a. The Commission has authority to deny
registration to any applicant that does not meet the criteria for
Commission registration and to cancel the registration of any
adviser that no longer meets the registration criteria. Sections
203(c) and (h) of the Advisers Act (15 U.S.C. 80b-3(c) and (h)).
\4\ 15 U.S.C. 80b-3a(b). In addition, state law is preempted
with respect to advisers that are excepted from the definition of
investment adviser under section 202(a)(11) of the Advisers Act (15
U.S.C. 80b-2(a)(11)).
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Last year, the Commission adopted new rules and rule amendments to
implement the Coordination Act.\5\ These implementing rules included
exemptions from the statutory prohibition on Commission registration
for four types of investment advisers.\6\ The rules also defined
certain terms used in the Coordination Act, including the term
``investment adviser representative.'' \7\ At the time it adopted these
rules, the Commission anticipated that experience with the new
regulatory scheme might reveal the need for additional rules or
refinement of existing rules.
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\5\ Rules Implementing Amendments to the Investment Advisers Act
of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997) (62
FR 28112 (May 22, 1997)) (``Implementing Release'').
\6\ See rule 203A-2 (17 CFR 275.203A-2). See infra section II.A
of this Release.
\7\ See rule 203A-3 (17 CFR 275.203A-3). See infra section II.B
of this Release.
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On November 13, 1997, the Commission issued a release proposing (1)
amendments to rule 203A-2 to exempt multi-state investment advisers
from the prohibition on Commission registration; (2) two alternative
amendments to rule 203A-3 to revise the definition of investment
adviser representative; and (3) other amendments to clarify certain
implementing rules (``Proposing Release'').\8\ The proposed amendments
to rule 203A-2 would allow an investment adviser that does not have $25
million of assets under management but has a national or multi-state
practice that requires it to register as an investment adviser in 30 or
more states to register with the Commission. The proposed amendments to
rule 203A-3 would correct an anomaly in the current rule and allow
supervised persons who provide services to a small number of
institutions to have accommodation clients without being subject to
state qualification requirements.
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\8\ Exemption for Investment Advisers Operating in Multiple
States; Revisions to Rules Implementing Amendments to the Investment
Advisers Act of 1940, Investment Advisers Act Release No. 1681 (Nov.
13, 1997) (62 FR 61866 (Nov. 19, 1997)).
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In response to the proposals, the Commission received 12 comment
letters from professional and trade organizations, investment advisers,
the North American Securities Administrators Association, Inc.
(``NASAA''),\9\ and two state securities administrators. Most
commenters supported the proposals.
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\9\ 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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II. Discussion
A. Multi-State Investment Adviser Exemption from Prohibition on
Registration With the Commission
As discussed above, section 203A limits registration with the
Commission, in most cases, to investment advisers with at least $25
million of assets under management and preempts state adviser
regulation of these investment advisers.\10\ The $25 million threshold
was designed to allocate regulatory responsibility to the Commission
for larger investment advisers, whose activities are likely to affect
national markets, and to relieve these larger advisers of the burdens
associated with multiple state regulations.\11\ Congress recognized,
however, that some investment advisers with less than $25 million of
assets under management may have national businesses for which multiple
state registration would be burdensome.\12\ To reduce the burden on
these advisers, the Commission was given authority in section 203A(c)
of the Advisers Act to exempt investment advisers, by rule or order,
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.\13\
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\10\ Section 203A(a) and (b). Notwithstanding section
203A(b)(1), states retain authority over Commission-registered
advisers under state investment adviser statutes to: (1) investigate
and bring enforcement actions with respect to fraud or deceit
against an investment adviser or a person associated with an
investment adviser; (2) require filings, for notice purposes only,
of documents filed with the Commission; and (3) require payment of
state filing, registration, and licensing fees. See section
203A(b)(2) of the Advisers Act (15 U.S.C. 80b-3a(b)(2)). Moreover,
section 203A(b) specifically preserves state law with respect to
investment adviser representatives of Commission-registered advisers
who have a place of business in the state. See infra section II.B of
this Release.
\11\ See S. REP. NO. 293, 104th Cong., 2d Sess. 3-5 (1996).
\12\ Id. at 5.
\13\ 15 U.S.C. 80b-3a(c).
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Using this authority, the Commission adopted rule 203A-2, which
permits Commission registration for nationally recognized statistical
rating organizations and certain pension consultants, affiliated
investment advisers, and newly formed investment advisers. The
Commission also, by order, has granted individual exemptive relief to
certain investment advisers that do not have $25 million of assets
under management but have a national or multi-state practice that
requires them to register as investment advisers in 30 or more
states.\14\ The Commission proposed to amend rule 203A-2 to codify the
exemptions provided by the individual orders to investment advisers
required to be registered in multiple states.\15\
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\14\ See Arthur Andersen Financial Advisers, Investment Advisers
Act Release Nos. 1637 (June 16, 1997), 62 FR 33689 (Notice of
Application), 1642 (July 8, 1997 64 SEC Docket 2417 (Order); Ernst &
Young Investment Advisers LLP, Investment Advisers Act Release Nos.
1638 (June 16, 1997), 62 FR 33692 (Notice of Application), and 1641
(July 8, 1997), 64 SEC Docket 2416 (order); KPMG Investment
Advisors, Investment Advisers Act Release Nos. 1639 (June 17, 1997),
62 FR 33945 (Notice of Application), and 1643 (July 8, 1997), 64 SEC
Docket 2418 (Order); and ProFutures Capital Management, Inc.,
Investment Advisers Act Release Nos. 1686 (Dec. 11, 1997), 62 FR
66153 (Notice of Application), and 1693 (Jan. 8, 1998), 66 SEC
Docket 0835 (Order).
\15\ Proposing Release, supra note 8, at section II.A.
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Under proposed rule 203A-2(e), an investment adviser required to be
registered as an investment adviser with 30 or more state securities
authorities would register with the Commission even if it has less than
$25 million of assets under management. Once registered with the
Commission, the investment adviser would remain eligible for the
exemption as long as the adviser would, but for the exemption, be
obligated to register in at least 25 states, five fewer than when it
initially registered under the multi-state exemption (``five-state
provision''). The Commission also proposed to permit newly formed
advisers to rely on the multi-state exemption in conjunction with the
``start-up adviser'' exemption in paragraph (d) of rule 203A2.\16\
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\16\ 17 CFR 275.203A-2(d).
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Commenters generally supported the multi-state proposal as being
consistent with the language and intent of the Coordination Act.
Commenters agreed that the five-state provision should be the minimum
cushion to prevent an investment adviser registered with the Commission
from having to de-register and then re-register with the Commission
frequently as a result of a change in registration obligation in one or
a few states. All commenters concurred with the Commission that
[[Page 39710]]
newly formed investment advisers should be permitted to rely on the
multi-state exemption in conjunction with the ``start-up'' adviser
exemption.
Most commenters supported the 30-state threshold as an appropriate
measure of whether an adviser has a national business. Three
commenters, however, recommended lowering the threshold because they
believed that investment advisers that do business in fewer than 30
states also may have national businesses. NASAA opposed lowering the
30-state threshold, arguing that an adviser that is required to
register in less than 30 states does not have a national business. At
this time, the Commission believes the 30-state threshold to be an
appropriate standard for measuring whether an adviser has a national
business and therefore is adopting the threshold and the rule, as
proposed.
Rule 203A-2(e), as adopted, requires an investment adviser applying
for registration in reliance on the multi-state exemption to submit a
representation to the Commission that the adviser is obligated to
register in 30 or more states.\17\ To continue to rely on the
exemption, the adviser annually must provide a representation that it
is obligated to register in at least 25 states.\18\ The investment
adviser also must maintain a record of the states that the adviser
believes it would, but for the exemption, be required to register.\19\
A newly formed investment adviser not registered in any state could
register with the Commission if it reasonably expected that it would be
required to register in 30 or more states within 120 days after the
date its registration becomes effective.\20\
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\17\ 17 CFR 275.203A-2(e). In determining the number of states
in which an adviser is required to register, the investment adviser
would be required to exclude those states in which it is not
obligated to register because of the applicable state laws or the
national de minimis standard of section 222(d) of the Advisers Act
(15 U.S.C. 80b-18a). At the time of its application for registration
with the Commission or upon subsequent amendment of its registration
to reflect reliance on the multi-state exemption, the investment
adviser would include on Schedule E to Form ADV an undertaking to
withdraw from registration with the Commission if it would no longer
be required to register in at least 25 states at the time of filing
Schedule I. Under the rule, as adopted, an investment adviser that
indicates that it is no longer obligated to register in at least 25
states would be required to withdraw from Commission registration by
filing Form ADV-W within 180 days after the end of the adviser's
fiscal year. Rule 203A-2(e)(3)(17 CFR 275.203A-2(e)(3)). The
Commission is adopting a slight revision to the grace period for
withdrawing from Commission registration. Under the rule as
proposed, the 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 under the multi-state
exemption. Under the rule as adopted, the period begins to run on
the date on which the adviser was obligated by rule 204-1(a) to file
such amendment. 17 CFR 275.204-1(a).
\18\ This representation must be attached to the investment
adviser's annual amendment to Form ADV revising Schedule I. Rule
203A-2(e)(2) (17 CFR 275.203A-2(e)(2)). If an adviser that is
registered with the Commission in reliance on another exemption
(e.g., affiliated adviser exemption) relies on the multi-state
exemption because the adviser can no longer rely on the other
exemption (e.g., the affiliate has moved its principal office and
place of business), the adviser would be required: (1) to attach a
representation to Schedule I that, but for the exemption, it would
be required to register with at least 25 states; (2) to check box
(a)(x) of Part I of Schedule 1; and (3) to include an undertaking on
Schedule E that the adviser will withdraw from Commission
registration if it would be no longer required to register in at
least 25 states. If the adviser is no longer eligible for Commission
registration under any criterion and therefore cannot check any box
in (a) of Part I of Schedule I, then the adviser must check box (b)
of part I of Schedule I to Form ADV and file Form ADV-W within 180
days after the end of the adviser's fiscal year. See rule 203A-
2(e)(3).
\19\ Rule 203A-2(e)(4)(17 CFR 275.203A-2(e)(4)).
\20\ After the 120-day period, the investment adviser would be
required to file an amendment to Form ADV revising Schedule I and
attach a representation that, but for the multi-state exemption, the
investment adviser would be required to register in at least 25
states. See rules 203A-2(d) and 203A-2(e)
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B. Definition of Investment Adviser Representative
Section 203A preempts most state regulatory requirements for
Commission-registered investment advisers and their supervised
persons,\21\ but permits a state to continue to license, register, or
otherwise qualify an ``investment adviser representative'' who has a
place of business in the state.\22\ Under the current definition of
investment adviser representative in rule 203A-3, supervised persons of
Commission-registered investment advisers are not deemed to be
investment adviser representatives and thus not subject to state
qualification requirements if no more than ten percent of their clients
are natural persons other than ``excepted persons'' \23\ (``ten percent
allowance'').\24\
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\21\ The term supervised person is defined in the Advisers Act
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.'' Section
202(a)(25) of the Advisers Act (15 U.S.C. 80b-2(a)(25)).
\22\ Section 203A(b).
\23\ Rule 203A-3(a)(3)(i) defines ``excepted persons'' as
natural persons who have $500,000 or more under management with the
representative's investment advisory firm immediately after entering
into the advisory contract with the firm, or whom the advisory firm
reasonably believes immediately prior to entering into the advisory
contract have a net worth in excess of $1 million. 17 CFR 275.203A-
3(a)(3)(i). (The Commission is adopting changes to the criteria for
determining excepted persons. See infra section II.B.2 of this
Release.) The Commission also excluded from the term ``investment
adviser representative'' those 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. Rule 203A-3(a)(2)(17 CFR 275.203A-3(a)(2)).
\24\ 17 CFR 275.203A-3(a).
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1. Accommodation Clients
The ``ten percent allowance'' in the definition of investment
adviser representative was designed to permit supervised persons who
provide advisory services principally to clients other than natural
persons to continue to accept ``accommodation clients'' without being
subject to state qualification requirements.\25\ The ten percent
allowance, however, can pose a problem for supervised persons with one
or a few institutional clients: for a supervised person to have one
accommodation client without being subject to state qualification
requirements, the supervised person would need to have at least ten
clients that are not retail clients.
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\25\ Implementing Release, supra note 5, at nn.113-117 and
accompanying text.
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To address this concern, the Commission proposed two alternative
amendments to the definition of investment adviser representative to
allow supervised persons who provide services to a few institutional
clients to have accommodation clients without being subject to state
qualification requirements.\26\ Under the first alternative, the
Commission proposed to retain the ten percent allowance and to add a
provision to the rule that would permit supervised persons to have,
without being subject to state qualification requirements, the greater
of five natural person clients or the number of natural person clients
permitted under the ten percent allowance (``Alternative I''). Under
the second alternative, the Commission proposed to eliminate the ten
percent allowance and to permit supervised persons to have, without
being subject to state qualification requirements, an unlimited number
of accommodation clients who are (1) partners, officers, or directors
of the investment adviser for
[[Page 39711]]
whom the supervised person works or of a business or institutional
client of the investment adviser for whom the supervised person works;
(2) relatives, spouses, or relatives of spouses of such partners,
officers, or directors; or (3) relatives, spouses, or relatives of
spouses of the supervised person (``Alternative II'').
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\26\ Proposing Release, supra note 8, at section II.B.1.
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Three commenters supported Alternative I, none favored Alternative
II, and three recommended combining Alternatives I and II. The
commenters favoring Alternative I praised it as a simple and
straightforward method of permitting supervised persons with a few
institutional clients to accept a small number of accommodation clients
without being subject to state registration or qualification
requirements. NASAA supported Alternative I because it believes that
the benefits of a bright line test outweigh the concern that the five
natural person clients may not necessarily be limited to those clients
who the supervised person advises on an accommodation basis.\27\
Several commenters acknowledged that Alternative II would more closely
tie the accommodation client provision to the purpose for which it was
adopted, but believe it is too complicated. These commenters were
concerned with the problems that advisory firms may have in monitoring
the relationships of the accommodation clients and in adopting costly
and complex compliance systems. The Commission agrees that Alternative
I has many advantages over Alternative II and is adopting it, as
proposed.\28\
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\27\ NASAA recommended a slight modification to Alternative I.
In the Proposing Release, the Commission acknowledged that the
disadvantage to Alternative I was that the five natural person
minimum could include natural persons who have no relationship to
the investment adviser or its institutional or business clients.
Proposing Release, supra note 8, at section II.B.1. NASAA,
addressing this concern, suggested that a supervised person be
permitted to claim the five client exemption only if he has at least
one client who is either an excepted person or non-natural person
and cannot otherwise claim the ten percent allowance. The Commission
is not adopting this proposal because it is concerned that this
formula would make the provision too complicated.
\28\ See Appendix C for examples that illustrate the application
of rule 203A-3. The Commission believes that amending the definition
of investment adviser representative to allow for five natural
person clients would not affect many supervised persons. As the
Commission noted in the Proposing Release, many states do not
require supervised persons to register in the state until they have
more than five clients in the respective state. Proposing Release,
supra note 8, at n.27.
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Three commenters recommended combining aspects of Alternative I and
Alternative II in ways that would expand the accommodation client
provision to allow supervised persons to have a defined group of
accommodation clients in addition to a group of natural persons (up to
ten percent of the supervised person's clients) who have no
relationship to the supervised persons. In the Proposing Release, the
Commission, in response to a similar proposal, explained that it wanted
to limit the provision to clients who are or may reasonably be presumed
to be accommodation clients.\29\ The Commission believes that combining
the two alternatives would expand the accommodation client provision
beyond the purpose for which it was adopted.
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\29\ Id. at n.28.
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2. High Net Worth Clients and Other Excepted Persons
Under the current rule, certain ``high net worth'' individuals are
not treated as retail clients; they are considered ``excepted persons''
for purposes of the definition of investment adviser representative and
thus are not counted towards the ten percent allowance.\30\ The
criteria for determining which clients are excepted persons are based
on the criteria in rule 205-3 under the Advisers Act, which permits
advisers to enter into performance fee contracts with certain
clients.\31\ The Commission has revised the criteria to reflect the
effects of inflation since the rule was adopted in 1985 and to include
qualified purchasers and certain knowledgeable employees of the
investment adviser. \32\
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\30\ Rule 203A-3(a)(3)(i).
\31\ 17 CFR 275.205-3.
\32\ See Exemption to Allow Investment Advisers to Charge Fees
Based Upon a Share of Capital Gains Upon or Capital Appreciation of
a Client's Account, Investment Advisers Act Release No. 1731 (July
15, 1998) (``Performance Fee Release'').
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The Commission is adopting, as proposed, an amendment to the
definition of investment adviser representative to treat ``qualified
clients'' under rule 205-3 as excepted persons.\33\ As a result, the
following clients would not be counted towards the ten percent
allowance: (1) Clients who immediately after entering into the
investment advisory contract have at least $750,000 under management
with the investment adviser; \34\ (2) clients whom the investment
adviser reasonably believes, immediately prior to entering into the
investment advisory contract, either have a net worth of more than
$1,500,000 at the time the contract is entered into \35\ or are
qualified purchasers as defined in section 2(a)(51)(A) of the
Investment Company Act \36\ at the time the contract is entered into;
and (3) executive officers, directors, trustees, general partners, or
persons serving in a similar capacity, of the investment adviser, as
well as certain other employees of the adviser who participate in
investment activities and have performed such functions for at least 12
months.\37\
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\33\ Amended rule 203A-3(a)(3)(i) (17 CFR 275.203A-3(a)(3)(i)).
\34\ This amount represents an increase from $500,000 under
management.
\35\ This amount represents an increase from $1,000,000 net
worth.
\36\ 15 U.S.C. 80a-2(a)(51)(A).
\37\ The term ``qualified client'' does not include employees
performing solely clerical, secretarial or administrative functions
on behalf of the investment adviser.
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As several commenters pointed out, increasing the threshold levels
for determining high net worth clients may result in some supervised
persons being subject to state licensing requirements to which they
were not previously subject. The Commission has decided not to require
compliance with the amendments to rule 203A-3(a)(3)(i) until December
31, 1998, to provide supervised persons who are affected by this change
with sufficient time to prepare for and pass state qualification
examinations.\38\
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\38\ Amendments to rule 203A-3(a)(3)(i) would immediately change
the state licensing obligations of only those supervised persons, a
sufficient number of whose clients would no longer be considered
``high net worth'' clients under the new threshold levels. The other
amendments to the rule (i.e., acceptance of qualified purchasers and
knowledgeable employees as clients) would not subject supervised
persons to new state licensing obligations. Therefore, the
Commission will not require compliance with amendments to rule 203A-
3(a)(3)(i) to the extent that the increase in the threshold levels
would obligate a supervised person to register with a state until
December 31, 1998; supervised persons, however, may choose to comply
with the other amendments upon the effective date of the amendments.
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C. Other Amendments
The Commission is adopting, in addition to the rule amendments
discussed above, several technical and clarifying amendments to the
rules implementing the Coordination Act. Amended rule 203A-2(b)(3)
permits investment advisers relying on the pension consultant exemption
from the prohibition on Commission registration to determine the
aggregate value of plan assets during a 12-month period ending 90 days
before the investment adviser files Schedule I to Form ADV.\39\ The
Commission is amending rule 206(4)-3(a)(1)(ii)(D) \40\ to cross-
reference to section 203(e)(4),\41\ and amending Instructions 5 and 7
to Schedule I for
[[Page 39712]]
clarification.\42\ Rule 203A-5,\43\ Form ADV-T,\44\ and Instruction 8
to Schedule I to Form ADV are withdrawn. The Commission is amending
Items 18 and 19 to Part I of Form ADV to eliminate an erroneous
instruction. Finally, the Commission is revising the introductory
language to Schedule G to Form ADV to remove an unnecessary reference
to Form ADV-S, which has been eliminated.\45\
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\39\ 17 CFR 275.203A-2(b)(3). Under the current rule, investment
advisers relying on the pension consultant exemption are required to
value plan assets 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.
\40\ 17 CFR 275.206(4)-3(a)(1)(ii)(D).
\41\ 15 U.S.C. 80b-3(e)(4).
\42\ The Commission also is deleting the unnecessary reference
to the date of the valuation of the assets under management in Part
II of Schedule I.
\43\ 17 CFR 275.203A-5.
\44\ 17 CFR 279.3.
\45\ See Implementing Release, supra note 5, at section I.1.
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D. Investment Advisers With Principal Offices and Places of Business in
Colorado or Iowa
Under section 203A(a)(1) of the Advisers Act, the Commission
retains regulatory responsibility for an adviser with a principal
office and place of business in a state that has not enacted an
investment adviser statute.\46\ Since the implementing rules were
adopted and the publication of the Proposing Release, Colorado and Iowa
have enacted investment adviser statutes, which become effective on
January 1, 1999. As a result, an adviser that has its principal office
and place of business in Colorado or Iowa will be prohibited from
registering with the Commission after January 1, 1999, unless it has
$25 million of assets under management, is an adviser to a registered
investment company, or qualifies for one of the exemptions in rule
203A-2. The Commission is revising Schedule I and Instructions to
Schedule I to accommodate and explain these changes.\47\
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\46\ 15 U.S.C. 80b-3a(a)(1).
\47\ The Commission also is revising Schedule I to reflect that
the U.S. Virgin Islands does not have an investment adviser statute.
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Commission-registered advisers that have their principal offices
and places of business in Colorado or Iowa and are no longer eligible
for Commission registration after January 1, 1999, must indicate on
their annual amendment to Form ADV revising Schedule I that they are no
longer eligible for Commission registration.\48\ Advisers withdrawing
their Commission registration must register, if required, with their
appropriate state securities authorities.
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\48\ Advisers that are no longer eligible for Commission
registration must check box (b) of Part I of Schedule I to Form ADV
and withdraw their registration using Form ADV-W within the 90-day
grace period provided by rule 203A-1(c) (17 CFR 275.203A-1(c)).
Advisers that are no longer eligible for Commission registration and
do not voluntarily withdraw their registration will be subject to a
cancellation proceeding under section 203(h). See generally
Implementing Release, supra note 5. An adviser in Colorado or Iowa
that is no longer eligible for Commission registration may withdraw
from Commission registration as early as January 1, 1999, or as late
as 180 days after the end of the adviser's fiscal year.
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III. Cost-Benefit Analysis
The multi-state investment adviser exemption will permit investment
advisers required to register with 30 or more states to register with
the Commission even though they do not otherwise meet the criteria for
Commission registration.\49\ The Commission has limited data on the
number of investment advisers that will qualify for the multi-state
investment adviser exemption.\50\ Generally, most advisers that have
clients in as many as 30 states have assets under management of more
than $25 million. Thus, the Commission estimates that as few as ten
investment advisers will qualify for the multi-state exemption each
year.\51\ The Commission requested comment on the number of investment
advisers that would qualify for this exemption but received none. The
Commission believes that the multi-state exemption generally will not
impose significant additional costs on investment advisers but will
result in a net savings for certain advisers when compared with the
costs of complying with multiple state registration requirements.
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\49\ See supra section II.A of this Release.
\50\ Every investment adviser applying for registration with the
Commission is required to file Form ADV with the Commission and to
file an amended Form ADV when information on the form has changed.
Form ADV requires information about the states in which an
investment adviser is registered, but does not distinguish between
states in which the registration is mandatory and in which
registration is voluntary. Moreover, the Commission no longer
receives Form ADV information for state-registered advisers.
\51\ According to information provided to the Commission on Form
ADV-T, approximately 21 advisers are registered with 30 or more
states but no longer are registered with the Commission as a result
of the enactment of the Coordination Act. Although approximately 21
investment advisers are registered in more than 30 states, the
Commission estimates that only about half of these advisers are
required to register in 30 or more states. Therefore, the Commission
estimates that there may be ten investment advisers that will
qualify for the multi-state exemption each year.
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The multi-state exemption will benefit investment advisers who
register with the Commission relying on the exemption by saving those
advisers the costs of complying with the regulations of 30 different
states. For the purposes of this analysis, the Commission estimates
that it costs each adviser $30,000 to comply with state registration
requirements.\52\ Therefore, the cost savings for the ten advisers
expected to be eligible for the multi-state exemption may be as much as
$300,000 annually. The Commission requested comment on the
reasonableness of the savings estimates but did not receive any
comments.
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\52\ In the Cost-Benefit Analysis of Rules Implementing
Amendments to the Investment Advisers Act of 1940, the Commission
estimated that the cost for a mid-size adviser to comply with state-
law registration requirements could be as much as $20,000. See Cost-
Benefit Memorandum (available in File No. S7-31-96) (``Implementing
Amendments Cost-Benefit Analysis''). The Commission believes that,
because advisers eligible for the multi-state exemption would
typically be required to register in more states (i.e., in at least
30 states) than the average adviser registered with the Commission,
the cost would be at least $30,000 per adviser. These dollar
estimates were based on discussions with law firms that provide
these kinds of services to investment advisers.
---------------------------------------------------------------------------
The benefits of the multi-state exemption will include savings for
investment advisers of the costs associated with being examined by 30
different state regulators. State regulators also would save the
expense of examining these investment advisers. In response to the
Commission's request for comment on the costs of examining investment
advisers and the frequency of adviser examinations, the Department of
Banking and Finance of Nebraska stated that it would save between $200
and $1,000 per examination depending on the size of the advisory
firm.\53\ In addition, the multi-state exemption will provide
unquantifiable regulatory benefits to advisers that will be regulated
by one entity instead of 30 separate entities.
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\53\ Nebraska commented that, although it has not begun routine
examinations of investment advisory firms, it estimates the
examination of a small firm to cost between $200 and $400 and the
examination of a larger firm to cost between $800 and $1,000.
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The multi-state investment adviser exemption will impose certain
costs on advisers relying on the exemption. Investment advisers relying
on the exemption will be required to attach a representation to
Schedule I initially when registering, and annually when amending Form
ADV, about the number of states in which the adviser would be required
to register. The investment adviser also will be required to maintain a
record of the states in which it believes, but for the exemption, it
would be required to register. The Commission estimates that the cost
per year to each adviser will be approximately $24,000 for a total of
$240,000 for the ten investment advisers expected to be eligible for
the exemption.\54\ The
[[Page 39713]]
Commission requested comment on the costs associated with the
requirements of the multi-state exemption, but did not receive any
empirical data concerning the costs.
---------------------------------------------------------------------------
\54\ The Commission estimated this figure by multiplying the
aggregate burden hours that are required in making a representation,
which is attached to Schedule I to Form ADV (240 hours), by an
average hourly compensation rate of $100. The estimation of the
aggregate burden hours for complying with the requirements of the
multi-state exemption is based on the Commission's Paperwork
Reduction Act Submission. See Proposing Release, supra note 8, at
section IV.
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As discussed above, the Commission is amending the definition of
investment adviser representative to allow supervised persons who
provide advice to a few institutional or business clients to have at
least five natural persons as accommodation clients without being
subject to state registration requirements even if they are not able to
take advantage of the ten percent allowance.\55\ The revised definition
provides a bright-line test that should enable firms and
representatives alike to determine easily whether a supervised person
would be subject to state qualification requirements. The Commission
also is amending the definitions of high net worth clients and other
``excepted persons,'' who are not counted towards the ten percent
allowance.\56\ As discussed above, the amendments raise the threshold
levels for determining high net worth clients and include qualified
purchasers and certain knowledgeable employees as excepted persons.
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\55\ See supra section II.B.1 of this Release.
\56\ See supra section II.B.2 of this Release.
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The Commission estimates that Commission-registered advisers
together employ approximately 153,000 investment adviser
representatives.\57\ The Commission, however, has no data on the number
of representatives who may be affected by the amendments. Although the
Commission requested comment on the number of investment adviser
representatives who would be affected by the revision of the
definition, commenters did not provide any data. The Commission,
therefore, is unable to quantify the total benefits and costs that may
result from these amendments.
---------------------------------------------------------------------------
\57\ This estimate of the number of investment adviser
representatives was made for the purposes of the Implementing
Amendments Cost-Benefit Analysis. See Cost-Benefit Memorandum, supra
note 52.
---------------------------------------------------------------------------
The amendments to the definitions of investment adviser
representative and excepted persons who are excluded from the ten
percent allowance may increase the number of supervised persons of
Commission-registered advisers who are not subject to state
qualification requirements. Under the amended definition of investment
adviser representative, all supervised persons of Commission-registered
investment advisers may provide services to five natural person clients
without being subject to state qualification requirements. Moreover,
the amendments to the definition of excepted persons permit supervised
persons to accept qualified purchasers and certain knowledgeable
employees of the investment adviser as clients without being subject to
state qualification requirements. On the other hand, the number of
supervised persons who are not subject to state qualification
requirements may not increase substantially because many states already
do not require investment adviser representatives to register with the
state until they have more than five clients in the state.\58\
Moreover, supervised persons must count clients who no longer qualify
as high net worth under the amended criteria towards the ten percent
allowance.
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\58\ See, e.g., Unif. Sec. Act section 201(c) (1997); Burns Ind.
Code Ann. section 23-2-1-8(c)(3) (1997); Md. Code Ann., Corps. &
Ass'ns section 11-401(b)(3)(ii) (1997); Utah Code Ann. section 61-1-
3(3)(c) (1997).
---------------------------------------------------------------------------
Although the Commission is unable to quantify the total benefits
and costs relating to the adoption of the amendments, the Commission
believes that the amendments generally will not impose significant
costs on investment advisers and their supervised persons. Supervised
persons who are no longer subject to state qualification requirements
because of the revised definitions may benefit by saving the expense
associated with state qualification examinations (i.e., monitoring
state registration requirements and registering for state exams).\59\
Moreover, because the Coordination Act preserved the authority of the
states to require the payment of state filing, registration, and
licensing fees, there will be no loss to the states of fees collected.
---------------------------------------------------------------------------
\59\ The Commission estimated the following costs: $96 to take
an exam, $850 for examination preparation, and $150 annually per
investment adviser representative to monitor state registration
requirements. See Cost-Benefit Memorandum, supra note 52.
---------------------------------------------------------------------------
The costs associated with revising the definitions, which may
result in certain supervised persons no longer being subject to state
qualification requirements, include the fees for state examinations of
investment advisers that will not be collected by the National
Association of Securities Dealers Regulation, Inc. (``NASDR'') and
NASAA.\60\ The Commission requested comment on the costs incurred by
investment advisers and their supervised persons and on the examination
fees collected by the NASDR and NASAA but did not receive any comments
on these issues.
---------------------------------------------------------------------------
\60\ The Commission estimated that the revenue from examination
fees would be $32 per examination. Id.
---------------------------------------------------------------------------
The clarifying amendments that the Commission is adopting, which
are described above, will eliminate any confusion created by the
language of the rules and instructions.\61\ The Commission believes
that these amendments will not impose any additional costs on
investment advisers.
---------------------------------------------------------------------------
\61\ See supra section II.C of this Release.
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Finally, the Commission believes that the amendments to Schedule I
to Form ADV to reflect the enactment of investment adviser statutes in
Colorado and Iowa will not impose significant costs on investment
advisers. The Commission estimates that approximately 650 advisers that
have their principal offices and places of business in Colorado or Iowa
will no longer be eligible for Commission registration after January 1,
1999.\62\
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\62\ This number is based on information provided to the
Commission on Form ADV-T.
---------------------------------------------------------------------------
The benefits of amending Schedule I to Form ADV to reflect the
enactment of investment adviser statutes include: (1) Implementing the
Coordination Act by prohibiting Commission registration of advisers
that have their principal offices and places of business in a state
that regulates investment advisers; and (2) preventing the preemption
of state law in Colorado and Iowa for those advisers that should be
regulated by the states. These benefits are substantial, but are not
quantifiable.
Advisers that are no longer eligible for Commission registration
will incur some additional costs in complying with state registration
requirements once they are no longer registered with the Commission and
state law is not preempted.\63\ These advisers may be required to
register and to comply with requirements of other states in which they
transact business if they have a place of business in the state or have
six or more clients who are residents of that state.
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\63\ Because the Coordination Act preserved the authority of the
states to require the payment of state filing, registration, and
licensing fees, advisers in Colorado or Iowa will be required to pay
fees regardless of whether they are registered with the Commission
or with the state in which they have their principal offices and
places of business.
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IV. Paperwork Reduction Act
As set forth in the Proposing Release, certain provisions of the
rule amendments contain ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\64\ Therefore, the collection of information requirements,
titled ``Form ADV'' and ``Schedule I to Form ADV'' contained in the
rule
[[Page 39714]]
amendments were submitted to the Office of Management and Budget
(``OMB'') for review pursuant to section 3507(d) of the PRA and 5 CFR
1320.11. 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. An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless the agency displays a valid OMB control number. OMB approved the
PRA request and assigned control numbers 3235-0049 to Form ADV and
3235-0490 to Schedule I to Form ADV, each with an expiration date of
February 28, 2001.
---------------------------------------------------------------------------
\64\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------
Form ADV is required by rule 203-1 (17 CFR 275.203-1) to be filed
by every adviser applying for registration with the Commission as an
investment adviser. The rules imposing this collection of information
are found at 17 CFR 275.203-1 and 17 CFR 279.1. The Commission is not
amending rule 203-1, but is amending Schedule I to Form ADV, which is
referenced in rule 279.1 (discussed below as a related, though
separate, collection of information).
Rule 204-1 (17 CFR 275.204-1) describes the circumstances requiring
the filing of an amended Form ADV. Registrants must file an amended
Form ADV when information on the initial Form ADV has changed, either
at the end of the fiscal year or promptly for certain material changes.
In addition, rule 204-1 requires an investment adviser to file the
cover page of Form ADV (along with a Schedule I to Form ADV) annually
within 90 days after the end of the investment adviser's fiscal year
regardless of whether other changes have taken place during the year.
The Commission is not amending rule 204-1. The collection of
information required by Form ADV is mandatory, and responses are not
kept confidential.
The Commission has revised its estimate of the burden hours
required by Form ADV as a result of a change in the number of estimated
respondents. The total burden hours imposed by Form ADV are estimated
to be 19,448.42.
Schedule I to Form ADV requires an investment adviser to declare
whether it is eligible for Commission registration. Schedule I, as 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 is not amending rule 203-1, but is amending Schedule I to
Form ADV, which is referenced in rule 279.1. The collection of the
information required by Schedule I to Form ADV is mandatory, and
responses are not kept confidential.
Schedule I to Form ADV permits the Commission to determine whether
investment advisers meet the eligibility criteria for Commission
registration set out in section 203A and the rules under the section,
both at the time of initial registration and annually thereafter.
Schedule I to Form ADV also will be used to determine the eligibility
of investment advisers that rely on the multi-state exemption under
rule 203A-2(e) and to implement that exemption.
The Commission has revised its estimate of the burden hours
required by Schedule I to Form ADV as a result of a change in the
number of estimated respondents and a program change (i.e.,
requirements for advisers relying on the new multi-state exemption).
The total burden hours imposed by Schedule I to Form ADV are estimated
to be 9,480. The rule amendments, as adopted, do not impose a greater
paperwork burden upon respondents than that estimated and described in
the Proposing Release.
V. Summary of Regulatory Flexibility Analysis
A summary of the Initial Regulatory Flexibility Analysis (``IRFA'')
was published in the Proposing Release. No comments were received on
the IRFA. The Commission has prepared a Final Regulatory Flexibility
Analysis (``FRFA'') in accordance with 5 U.S.C. 604 relating to
amendments to rules 203A-2, 203A-3, and 206(4)-3, Form ADV, Schedule G
to Form ADV, and Schedule I to Form ADV, and the withdrawal of rule
203A-5 and Form ADV-T under the Advisers Act. The following summarizes
the FRFA.
The FRFA discusses the need for, and objectives of, the rule
amendments. The amendments, as adopted, refine rules implementing the
Coordination Act. The amendments (1) exempt multi-state investment
advisers from the prohibition on Commission registration; (2) revise
the definition of investment adviser representative; (3) clarify other
implementing rules; and (4) amend Schedule I to Form ADV to reflect
that Colorado and Iowa have recently enacted investment adviser
statutes. In addition, the Commission is withdrawing rule 203A-5 and
Form ADV-T to eliminate the transition rule and form that are no longer
necessary.
The FRFA also provides a description of and an estimate of the
number of small entities to which the rule amendments will apply. For
purposes of the Advisers Act and the Regulatory Flexibility 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 or (ii) if it renders
other advisory services, has $50,000 or less in assets related to its
advisory business.\65\ The Commission estimates that up to 17,650
advisers are small entities and that approximately 850 investment
advisers that are registered with the Commission are small
entities.\66\
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\65\ Rule 275.0-7 (17 CFR 275.0-7) The Commission has revised
the definition of ``small entity,'' effective July 30, 1998. See
Definitions of ``Small Business'' or ``Small Organization'' Under
the Investment Company Act of 1940, the Investment Advisors Act of
1940, the Securities Exchange Act of 1934, and the Securities Act of
1933, Release No. 33-7548, 34-40122, IC-23272, and IA-1727 (June 24,
1998) (63 FR 35508 (June 30, 1998)). Because the IRFA concerning the
proposed amendments was prepared under the old definition, that
definition applies to the Commission's preparation of the FRFA
concerning these amendments Id. at n. 32.
\66\ These estimates of the number of small entities were made
for purposes of the Final Regulatory Flexibility Analysis for the
rules implementing the Coordination Act. See Implementing Release,
supra note 5, at nn. 189-190 and accompanying text.
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The rule amendments will have some effect on small entities. The
multi-state rule should affect only a few small entities because the
Commission estimates that only ten investment advisers can avail
themselves of the multi-state exemption annually. The Commission
believes that the effect on small entities from the amended definition
of investment adviser representative may be significant; the Commission
estimates that the number of supervised persons who are not investment
adviser representatives and are thus not subject to state qualification
requirements will increase slightly. The clarifying amendments should
not have a significant effect on small entities because the amendments
eliminate any confusion the language of the rules or the instructions
to forms may have created and do not impose any additional burden on
investment advisers. The withdrawal of rule 203A-5 and Form ADV-T
should not affect any small entities because there should not be any
advisers currently filing Form ADV-T. Finally, the enactment of
investment adviser statutes by Colorado or Iowa (and the resulting
amendments to Schedule I to Form ADV to reflect these changes) may have
a significant effect on small entities. The Commission estimates that
approximately 650 investment advisers that have their principal offices
and places of business in Colorado or Iowa will no longer be eligible
for Commission registration after January 1, 1999.
[[Page 39715]]
Finally, the FRFA states that, in adopting the amendments, the
Commission considered (a) the establishment of differing compliance
requirements that take into account the resources available to small
entities; (b) simplification of the rule's requirements for small
entities; (c) the use of performance rather than design standards; and
(d) an exemption from the rules for small entities. The FRFA states
that the Commission concluded that different standards for small
entities are not necessary or appropriate.
The FRFA is available for public inspection in File No. S7-28-97,
and a copy may be obtained by contacting Carolyn-Gail Gilheany,
Securities and Exchange Commission, 450 Fifth Street, N.W., Stop 5-6,
Washington, D.C. 20549.
VI. Statutory Authority
The Commission is adopting amendments to rule 203A-2 under the
authority set out in section 203A(c) of the Investment Advisers Act of
1940 (15 U.S.C. 80b-3a(c)).
The Commission is adopting amendments to rule 203A-3 under the
authority set out in sections 202(a)(17) and 211(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)(17), 80b-11(a)).
The Commission is adopting amendments to rule 206(4)-3 under the
authority set out in sections 204, 206, and 211 of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-4, 80b-6, 80b-11).
The Commission is withdrawing rule 203A-5 under the authority set
out in sections 204 and 211(a) of the Investment Advisers Act of 1940
(15 U.S.C. 80b-4, 80b-11(a)).
The Commission is adopting amendments to Form ADV, Schedule G to
Form ADV, and Schedule I to Form ADV under the authority set out in
sections 203(c)(1) and 204 of the Investment Advisers Act of 1940 (15
U.S.C. 80b-3(c)(1), 80b-4).
The Commission is removing and reserving rule 279.3 and removing
Form ADV-T under the authority set out in sections 204 and 211(a) of
the Investment Advisers Act of 1940 (15 U.S.C. 80b-4, 80b11(a)).
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
Text of Rule and Form Amendments
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
1. The authority citation for Part 275 continues to read in part as
follows:
Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.
* * * * *
2. Section 275.203A-2 is amended by revising the introductory texts
of Sec. 275.203A-2 and paragraph (b), revising paragraphs (b)(1) and
(b)(3) and adding paragraph (e) to read as follows:
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))
does not apply to:
* * * * *
(b) Pension Consultants. (1) 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.
* * * * *
(3) In determining the aggregate value of assets of plans, include
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). Determine
the aggregate value of assets by cumulating the value of assets of
plans with respect to which the investment adviser was last employed or
retained by contract to provide investment advice during a 12-month
period ended within 90 days of filing Schedule I to Form ADV (17 CFR
279.1).
* * * * *
(e) Multi-state investment advisers. An investment adviser that:
(1) Upon submission of its application for registration with the
Commission, is required by the laws of 30 or more States to register as
an investment adviser with the securities commissioners (or any
agencies or officers performing like functions) in the respective
States, and thereafter would, but for this section, be required by the
laws of at least 25 States to register as an investment adviser with
the securities commissioners (or any agencies or officers performing
like functions) in the respective States;
(2) Attaches a representation to Schedule I to Form ADV (17 CFR
279.1) that the investment adviser has reviewed the applicable State
and federal laws and has concluded that, in the case of an application
for registration with the Commission, it is required by the laws of 30
or more States to register as an investment adviser with the securities
commissioners (or any agencies or officers performing like functions)
in the respective States or, in the case of an amendment to Form ADV
revising Schedule I to Form ADV, it would be required by the laws of at
least 25 States to register as an investment adviser with the
securities commissioners (or any agencies or officers performing like
functions) in the respective States, within 90 days prior to the date
of filing Schedule I;
(3) Includes on Schedule E to Form ADV (17 CFR 279.1) an
undertaking to withdraw from registration with the Commission if an
amendment to Form ADV revising Schedule I to Form ADV indicates that
the investment adviser would be required by the laws of fewer than 25
States to register as an investment adviser with the securities
commissioners (or any agencies or officers performing like functions)
in the respective States, and, if an amendment to Form ADV revising
Schedule I 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, files a completed Form ADV-W (17 CFR 279.2) within 90
days from the date the investment adviser was required by Sec. 275.204-
1(a) to file the amendment to Form ADV revising Schedule I, whereby the
investment adviser withdraws from registration with the Commission; and
(4) Maintains in an easily accessible place a record of the States
in which the investment adviser has determined it would, but for the
exemption, be required to register for a period of not less than five
years from the filing of a Schedule I to Form ADV that includes a
representation that is based on such record.
3. In Sec. 275.203A-3 the introductory text and paragraph (a) are
revised to read as follows:
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:
(i) Who has more than five clients who are natural persons (other
than excepted persons described in paragraph (a)(3)(i) of this
section); and
(ii) More than ten percent of whose clients are natural persons
(other than excepted persons described in paragraph (a)(3)(i) of this
section).
[[Page 39716]]
(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 is a qualified
client as described in Sec. 275.205-3(d)(1).
(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.
* * * * *
4. Section 275.203A-5 is removed and reserved.
5. In Sec. 275.206(4)-3 paragraph (a)(1)(ii)(D) is amended by
revising the cite ``203(e)(3)'' to read ``203(e)(4)''.
Sec. 275.203A-1 and 275.203A-2 [Amended]
6. In 17 CFR part 275 remove ``(15 U.S.C. 80b-3A(a))'' and add, in
its place, ``(15 U.S.C. 80b-3a(a))'' in the following places:
a. Section 275.203A-1(b)(2), (c), and (d); and
b. Section 275.203A-2(d)(2) and (d)(3).
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
7. 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.
8. By removing the last sentence in Items 18 and 19 to Part I of
Form ADV (referenced in Sec. 279.1).
Note: The text of Form ADV (Sec. 279.1) does not and the
amendments will not appear in the Code of Federal Regulations.
9. By revising Schedule G to Form ADV (referenced in Sec. 279.1) to
read as follows:
Note: The text of Schedule G to Form ADV (Sec. 279.1) does not
and the amendments will not appear in the Code of Federal
Regulations. Schedule G is attached as Appendix B.
10. By revising Schedule I to Form ADV (referenced in Sec. 279.1)
to read as follows:
Note: The text of Schedule I to Form ADV (Sec. 279.1) does not
and the amendments will not appear in the Code of Federal
Regulations. Schedule I is attached as Appendix A.
11. Section 279.3 is removed and reserved.
12. Form ADV-T is removed.
Note: Form ADV-T does not appear in the Code of Federal
Regulations.
By the Commission.
Dated: July 17, 1998.
Jonathan G. Katz,
Secretary.
BILLING CODE 8010-01-P
[[Page 39717]]
[GRAPHIC] [TIFF OMITTED] TR24JY98.011
[[Page 39718]]
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[FR Doc. 98-19750 Filed 7-23-98; 8:45 am]
BILLING CODE 8010-01-C
