[Federal Register Volume 62, Number 223 (Wednesday, November 19, 1997)]
[Proposed Rules]
[Pages 61866-61882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30296]
[[Page 61865]]
_______________________________________________________________________
Part III
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 275 and 279
Exemption for Investment Advisers Operating in Multiple States;
Revisions to Rules Implementing Amendments to the Investment Advisers
Act of 1940; Proposed Rule
17 CFR Part 275
Exemption to Allow Investment Advisers To Charge Fees Based Upon a
Share of Capital Gains Upon or Capital Appreciation of a Client's
Account; Proposed Rule
Federal Register / Vol. 62, No. 223 / Wednesday, November 19, 1997 /
Proposed Rules
[[Page 61866]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-1681, 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
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
-----------------------------------------------------------------------
SUMMARY: The Commission is publishing for comment under the Investment
Advisers Act of 1940 rule amendments to exempt multi-state investment
advisers from the prohibition on Commission registration and two
alternative amendments to revise the definition of the term
``investment adviser representative.'' The Commission is proposing
these amendments to refine the rules implementing the Investment
Advisers Supervision Coordination Act.
DATES: Comments must be received on or before January 20, 1998.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Stop 6-9, Washington, D.C. 20549. Comments also may be submitted
electronically at the following E-mail address: rule-comments@sec.gov.
All comment letters should refer to File No. S7-28-97; this file number
should be included on the subject line if E-mail is used. Comment
letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Electronically submitted comment letters also will be
posted on the Commission's Internet web site (http://www.sec.gov).
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
10-6, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is requesting public comment
on proposed 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] and Schedule I
to Form ADV [17 CFR 279.1] under the Investment Advisers Act of 1940
[15 U.S.C. 80b-1 et seq.] (``Advisers Act''). The Commission also is
proposing to withdraw 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
C. Other Amendments
1. Pension Consultants--Determining the Value of Assets of Plans
2. Rule 206(4)-3--Cash Payments for Client Solicitations
3. Schedule I to Form ADV
4. Transition Rule 203A-5 and Form ADV-T
D. General Request for Comment
III. Cost-Benefit Analysis
IV. Paperwork Reduction Act
V. Summary of Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Proposed rule and Form Amendments
Appendix A: Schedule I to Form ADV
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. Section 203A also preempts most state regulatory
requirements for Commission-registered investment advisers and their
supervised persons except for certain ``investment adviser
representatives.'' The Commission is proposing an exemption from the
prohibition on Commission registration for advisers required to
register as an investment adviser in 30 or more states. The Commission
also is proposing two alternative amendments to the definition of
investment adviser representative. Under the current definition,
supervised persons of Commission-registered investment advisers will
not be subject to state qualification requirements if no more than ten
percent of their clients are natural persons (``ten percent
allowance''). The Commission is proposing either (1) to add a provision
that would permit supervised persons to have the greater of five
natural person clients or the number of natural person clients
permitted under the ten percent allowance, or (2) to eliminate the ten
percent allowance and permit supervised persons to have an unlimited
number of accommodation clients who have certain business or familial
relationships with the supervised person or the supervised person's
business or institutional clients.
I. Background
Last year, 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 by reallocating
federal and state responsibilities for regulation of investment
advisers. By limiting federal registration and preempting certain state
laws, the Coordination Act divided regulatory responsibilities for the
approximately 23,350 investment advisers that were registered with the
Commission. 2 The Coordination Act became effective on July
8, 1997.
---------------------------------------------------------------------------
\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, (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 any person associated with such
investment adviser), 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.
---------------------------------------------------------------------------
Under new section 203A(a) of the Advisers Act, 3 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 company registered under the Investment Company Act of 1940
(``Investment Company Act''). 4 Section 203A(b) of the
Advisers Act generally preempts state law with respect to Commission-
registered investment advisers. 5
---------------------------------------------------------------------------
\3\ 15 U.S.C. 80b-3a(a).
\4\ 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. Section 203(c) and (h) of
the Advisers Act [15 U.S.C. 80b-3(c) and (h)].
\5\ 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)].
---------------------------------------------------------------------------
On May 15, 1997, the Commission adopted new rules and rule
[[Page 61867]]
amendments to implement the Coordination Act. 6 These
implementing rules included rules that exempt four types of investment
advisers from the statutory prohibition on Commission registration and
define certain terms used in the Coordination Act. 7 In
adopting these rules, the Commission anticipated that experience with
the new regulatory scheme might reveal the need for additional rules or
further refinement of existing rules. Based on its experience, the
Commission is proposing to exempt multi-state investment advisers from
the prohibition on Commission registration, to amend the definition of
investment adviser representative, and to clarify certain other
implementing rules.
---------------------------------------------------------------------------
\6\ 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)] (``Adopting Release'').
\7\ Id. The Commission also amended several rules under the
Advisers Act to reflect the changes made by the 1996 Act.
---------------------------------------------------------------------------
II. Discussion
A. Multi-State Investment Adviser Exemption from Prohibition on
Registration with the Commission
As discussed above, section 203A of the Advisers Act limits
registration with the Commission, in most cases, to investment advisers
with at least $25 million of assets under management and preempts state
law with respect to these investment advisers. 8 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 them of the burdens
imposed by multiple state regulation. 9 Congress recognized,
however, that there may be investment advisers with less than $25
million of assets under management that have national businesses and
for which multiple state registration would be burdensome.
10 Therefore, 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.
11
---------------------------------------------------------------------------
\8\ Section 203A(a) and (b). Notwithstanding section 203A(b),
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. 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.
\9\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-5 (1996)
[hereinafter Senate Report].
\10\ Id. at 5.
\11\ Section 203A(c) [15 U.S.C. 80b-3a(c)].
---------------------------------------------------------------------------
Pursuant to its 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
with reasonable expectations that they would soon become eligible for
Commission registration.12 The Commission also, by order,
has granted exemptive relief to investment advisers that do not have
$25 million of assets under management but have a national or multi-
state practice and conduct advisory activities that require them to
register as investment advisers in 30 or more states.13 The
Commission is proposing to amend rule 203A-2 to codify the exemptions
provided by individual orders to investment advisers required to be
registered in multiple states.
---------------------------------------------------------------------------
\12\ 17 CFR 275.203A-2.
\13\ 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); and 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).
---------------------------------------------------------------------------
Under the proposed exemption, an investment adviser required to be
registered as an investment adviser with 30 or more state securities
authorities would be permitted to register with the
Commission.14 The Commission believes that an investment
adviser whose activities trigger registration requirements in 30 states
is a national firm and that the multiple state registration
requirements for such a firm would constitute a burden on interstate
commerce. For that reason, the Commission believes that such an
investment adviser would be the type of firm for which Congress
expected the Commission to exercise its section 203A(c) exemptive
authority and, as a result, would have a single, national
regulator.15
---------------------------------------------------------------------------
\14\ In tallying 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 required to register because
of applicable state laws or the national de minimis standard of
section 222(d) of the Advisers Act. [15 U.S.C. 80b-18a] The
Commission believes such an exclusion is appropriate because it is
the obligation to register in a state, rather than the business
decision to register voluntarily, that demonstrates that the adviser
is subject to the type of burden contemplated by the exemption.
\15\ See Senate Report at 5 (Congress recognized that the
``definition of `assets under management' * * * may, in some cases,
exclude firms with a national or multistate practice from being able
to register with the SEC'').
---------------------------------------------------------------------------
Under the proposed rule amendments, an adviser applying for
registration relying on the exemption would be required to submit a
representation that the investment adviser has reviewed its obligations
under state law and concluded that it is required to register as an
investment adviser with the securities authorities of at least 30
states.16 Once registered with the Commission, the
investment adviser would continue to be eligible for the exemption as
long as it is annually able to provide a representation that the
investment adviser has determined that, but for the exemption, it would
be obligated to register in at least 25 states, five fewer states than
when it initially registered.17 The Commission is proposing
this five-state difference to prevent an investment adviser registered
with the Commission from losing the exemption simply because, for
example, it lost a few clients in a small number of
states.18
---------------------------------------------------------------------------
\16\ Proposed paragraph (e)(2) of rule 203A-2. At the time of
its application for registration with the Commission, the investment
adviser would be required to 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. The exemption would require an investment
adviser that indicates that it is no longer required to register in
at least 25 states to withdraw from Commission registration by
filing Form ADV-W within 90 days of filing Schedule I. Proposed
paragraph (e)(3) of rule 203A-2.
\17\ This representation must be attached to the investment
adviser's annual amendment to Form ADV revising Schedule I. Proposed
paragraph (e)(2) of rule 203A-2. Under the proposed multi-state
exemption, the investment adviser also would be required to maintain
a record of the states that the adviser believes it would, but for
the exemption, be required to register. Proposed paragraph (e)(4) of
rule 203A-2.
\18\ This ``five-state difference'' is similar to the ``$5
million window,'' which makes Commission registration optional for
an adviser having between $25 and $30 million of assets under
management. See rule 203A-1(a), (b) [17 CFR 275.203A-1(a), (b)]. The
Commission adopted the $5 million window to avoid transient
registration problems that could occur because of a small decrease
in the value of client assets (as a result of a market decline) or
the departure of one or a few clients. See Rules Implementing
Amendments to the Investment Advisers Act of 1940, Investment
Advisers Act Release No. 1601 (Dec. 20, 1996) [61 FR 68480 (Dec. 27,
1996)] (``Proposing Release''). Under the proposed five-state
difference, an investment adviser registered with the Commission in
reliance upon the multi-state exemption would not be required 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.
---------------------------------------------------------------------------
Like other exemptions in rule 203A-2, the proposed multi-state
exemption
[[Page 61868]]
could be used by a newly formed investment adviser in conjunction with
the ``start-up adviser'' exemption in paragraph (d) of the
rule.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 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 proposed multi-state
exemption, the investment adviser would be required to register in at
least 25 states.20
---------------------------------------------------------------------------
\19\ 17 CFR 275.203A-2(d).
\20\ These requirements would be the result of the conditions
for the exemptions provided by rule 203A-2(d) and proposed paragraph
(e) of rule 203A-2.
---------------------------------------------------------------------------
Comment is requested whether the 30 state threshold should be
increased or decreased and whether the five-state difference is
sufficient to prevent transient registration problems. Because
determining the obligations to register under state law requires a
legal analysis, should the Commission require investment advisers to
represent that counsel has reviewed the applicable state and federal
laws and has concluded that the investment adviser qualifies for the
proposed multi-state exemption? Should the Commission prohibit a newly
formed investment adviser from using this exemption in conjunction with
the reasonable expectation exemption?
B. Definition of Investment Adviser Representative
The Coordination Act preempts most state regulatory requirements
for Commission-registered investment advisers and their supervised
persons,21 but permits states to continue to license,
register, or otherwise qualify an ``investment adviser representative''
who has a place of business in the state.22 In rule 203A-
3(a), the Commission defined investment adviser representative as a
supervised person more than ten percent of whose clients are natural
persons other than excepted persons.23
---------------------------------------------------------------------------
\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\ 17 CFR 275.203A-3(a). The rule 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 who the
advisory firm reasonably believes immediately prior to entering into
the advisory contract have a net worth in excess of $1 million
(collectively ``high net worth individuals''). Rule 203A-3(a)(3)(i)
[17 CFR 275.203A-3(a)(3)(i)]. (The Commission is proposing changes
to the criteria for determining high net worth individuals. 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)].
---------------------------------------------------------------------------
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 so-called ``accommodation clients''
without being subject to state qualification requirements.24
In adopting the ten percent allowance, the Commission acknowledged that
the allowance may pose a problem for supervised persons with one or a
few institutional clients who would not be able to have any
accommodation clients.25 To have one accommodation client, a
supervised person would need to have at least ten clients that are not
natural persons. Therefore, the Commission directed the staff to work
with investment advisers whose supervised persons would be affected by
the definition to develop a workable method of addressing this concern
and indicated that it may propose revisions to the
definition.26 The Commission staff has consulted with
members of the industry for their views and has recommended proposals
to the Commission to resolve this issue.
---------------------------------------------------------------------------
\24\ Adopting Release, supra note 6, at nn.113-117 and
accompanying text.
\25\ As originally proposed, the ten percent allowance would
have been measured either by reference to the assets under
management attributable to the supervised person or by reference to
clients of the supervised person. The Commission adopted only the
client test because there did not appear to be any workable method
of attributing client assets to supervised persons. See Adopting
Release, supra note 6, at n.115 and accompanying text.
\26\ Id.
---------------------------------------------------------------------------
The Commission is now proposing two alternative amendments to the
definition of investment adviser representative to allow supervised
persons who provide services to one or a few institutional or business
client accounts to continue to have accommodation clients without being
subject to state qualification requirements. Under the first
alternative, the Commission proposes to retain the ten percent
allowance and add a provision that would permit supervised persons to
have up to five natural person clients. Supervised persons could have
under the first alternative the greater of five natural person clients
or the number of natural person clients permitted under the ten percent
allowance without being subject to state qualification requirements.
The first alternative would allow supervised persons with one or a
few institutional or business clients to accept at least five natural
person clients and would address the problem with the current rule.
Moreover, this alternative would provide a simple, bright-line test for
supervised persons to determine when they are subject to state
qualification requirements. The disadvantage of this alternative,
however, is that the five clients may not necessarily be limited to
those clients who the supervised person advises on an accommodation
basis; the proposed five natural person minimum could include natural
persons who have no relationship to an investment adviser's
institutional or business clients. Furthermore, the five natural person
minimum would permit supervised persons who have only retail clients
(i.e., natural person clients) to avoid state qualification
requirements until they obtained their sixth client. The provision,
however, likely would have a small effect on the number of supervised
persons who would not be subject to state qualification requirements
because many states do not require supervised persons to register in
the state until they have more than five clients in their respective
state.27
---------------------------------------------------------------------------
\27\ 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. section 11-
401(b)(3)(ii) (1997); Utah Code Ann. section 61-1-3(3)(c) (1997).
The first alternative is narrower than these state exemptions
because it would permit supervised persons to have a total of five
natural person clients nationwide, rather than five natural person
clients per state as permitted by these states.
---------------------------------------------------------------------------
Under the second alternative, supervised persons who have natural
person clients would be excluded from the definition of investment
adviser representative if the natural person clients either are ``high
net worth'' clients or have a familial or business relationship with
the supervised person or his business or institutional
clients.28
[[Page 61869]]
Under this alternative, the Commission would eliminate the current ten
percent allowance, and a supervised person could have an unrestricted
number of clients who are natural persons without being subject to
state qualification requirements. These clients would be limited,
however, to either (i) high net worth clients (as currently permitted
by the rule), or (ii) persons who are (A) partners, officers, or
directors of the investment adviser for whom the supervised person
works or of a business or institutional client of the investment
adviser for whom the supervised person works, (B) relatives, spouses,
or relatives of spouses of such partners, officers or directors, or (C)
relatives or spouses, or relatives of spouses of the supervised person.
---------------------------------------------------------------------------
\28\ The Investment Company Institute (``ICI'') suggested that
the Commission retain the ten percent allowance and exclude from the
term natural persons certain clients who are ``affiliated with non-
natural person clients.'' See Letter from Craig S. Tyle, Vice-
President and Senior Counsel, ICI, dated August 12, 1997 (available
in File No. S7-28-97). Under the current rule, the ten percent
allowance is designed as a proxy for accommodation clients and
assumes that a supervised person who has a small number of natural
person clients does so on the basis of an accommodation to her
institutional clients. The ICI proposal would permit the supervised
person 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 are unrelated to her institutional clients
without being subject to the state qualification requirements. The
Commission is proposing a narrower version of the ICI's
recommendation to limit the rule's exception to clients who are or
may reasonably be presumed to be accommodation clients.
---------------------------------------------------------------------------
The advantage of this approach is that it extends the provision of
the rule for accommodation clients to supervised persons with one or a
few clients while more closely tying the accommodation client exception
to the purpose for which it was adopted. Instead of presuming that the
natural person clients of a supervised person having primarily business
clients are accommodation clients, the rule would (with the exception
of high net worth clients) require there be the type of relationship
between the supervised person and the client that customarily results
in the client being considered an accommodation client. This approach,
however, could greatly increase or decrease the number of natural
person clients supervised persons are permitted to have by the rule
before they are subject to state qualification requirements. Moreover,
it would make the rule somewhat more complex and, perhaps, the status
of a supervised person as an investment adviser representative less
transparent to a state securities commissioner seeking to enforce state
law. Comment is requested on the scope of the accommodation client
exception under this alternative. Are there additional relationships
between the investment adviser, supervised person, and client that
suggest the client is an accommodation client?
Comment is requested on the advantages and disadvantages of the two
approaches. Comment is requested on whether additional approaches could
be used to permit a supervised person with one or a few institutional
or business clients to accept a small number of natural person clients
on an accommodation basis without being subject to state qualification
requirements. Commenters suggesting an additional approach should
address whether the approach limits the scope of the exception to its
original purpose (i.e., to permit accommodation clients), any
additional complexity it adds to the rule, and the ease with which
supervised persons can determine whether they are subject to state
qualification requirements.
2. ``High Net Worth'' Clients
Under the current rule, certain ``high net worth'' individuals are
excepted persons for purposes of the definition of investment adviser
representative and are not counted towards the ten percent allowance.
The criteria for determining high net worth individuals are based on
the criteria in rule 205-3 under the Advisers Act for determining those
clients with whom investment advisers may enter into a performance fee
contract under that exemptive rule.29 The Commission
excluded these high net worth individuals from the definition of
investment adviser representative because the Commission presumed that
these individuals, who are less dependent on the protections of the
performance fee prohibition, do not need the protections of state
qualification requirements.30
---------------------------------------------------------------------------
\29\ 17 CFR 275.205-3.
\30\ See Adopting Release, supra note 6, at nn. 110-112 and
accompanying text.
---------------------------------------------------------------------------
In a companion release, the Commission is proposing to revise the
high net worth criteria in rule 205-3 to reflect, among other things,
the effects of inflation since the standards were adopted in
1985.31 The criteria for determining which individuals
qualify as high net worth individuals in the definition of investment
adviser representative would be revised to reflect the changes being
proposed in the companion release. Therefore, the threshold levels for
high net worth individuals would increase from $500,000 under
management and $1,000,000 net worth to $750,000 and $1,500,000,
respectively.
---------------------------------------------------------------------------
\31\ See Investment Advisers Release No. 1682 (November 13,
1997). In the companion release, the Commission also is proposing to
add a third alternative test of sophistication.
---------------------------------------------------------------------------
C. Other Amendments
1. Pension Consultants--Determining the Value of Assets of Plans
The Commission adopted rule 203A-2(b) to exempt certain pension
consultants from the prohibition on Commission registration. Under the
rule, pension consultants that provide investment advice to employee
benefit plans with respect to assets having an aggregate value of at
least $50 million are required to register with the Commission even if
they do not otherwise meet the criteria for Commission
registration.32 Rule 203A-2(b)(3) requires investment
advisers relying on the exemption 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.33 Because of the fiscal year requirement, an
investment adviser could not rely on the pension consultant exemption
when, in fact, it provides investment advice to over $50 million of
assets of employee benefit plans if the amount of assets grew to more
than $50 million after the end of the investment adviser's fiscal year,
but before it filed Schedule I.34 The Commission, therefore,
is proposing to amend the rule to permit investment advisers to
determine the aggregate value of plan assets during a 12-month period
ending within 90 days before the investment adviser files Schedule
I.35
---------------------------------------------------------------------------
\32\ See rule 203A-2(b) [17 CFR 275.203A-2(b)]; Adopting
Release, supra note 6, at nn. 58-61 and accompanying text.
\33\ 17 CFR 275.203A-2(b)(3).
\34\ Conversely, if the value of the assets of plans was above
$50 million as of the adviser's last fiscal year, but decreased to
below $50 million before Schedule I is filed, under the current
rule, the adviser would be eligible to rely on the pension
consultant exemption.
\35\ An adviser seeking to rely on the pension consultant
exemption would be required to aggregate: (i) the value of plan
assets for which it provided advisory services at the end of the 12-
month period, and (ii) the value of any other plan assets for which
it provided advisory services at the end of its employment or
contract (if terminated before the end of the 12-month period).
During the interim period before the proposed rule is adopted,
the Commission would not object if pension consultants chose to
value plan assets under the method being proposed rather than under
the method provided by the current rule.
---------------------------------------------------------------------------
2. Rule 206(4)-3--Cash Payments for Client Solicitations
The Coordination Act amended section 203(e) of the Advisers Act by
adding new section 203(e)(3), which provided the Commission with the
authority to deny or revoke the registration of any investment adviser
if the investment adviser (or any person
[[Page 61870]]
associated with the investment adviser) is convicted of any felony, and
redesignating section 203(e)(3) as section 203(e)(4).36 The
Commission proposes to conform a cross-reference in rule 206(4)-
3(a)(1)(ii)(D) to the redesignated section.37
---------------------------------------------------------------------------
\36\ See section 305 of the 1996 Act.
\37\ Rule 206(4)-3 prohibits cash payments for client
solicitation under certain circumstances.
---------------------------------------------------------------------------
3. Schedule I to Form ADV
Instructions to Schedule I provide guidance on how an investment
adviser should determine the amount of its assets under management for
purposes of section 203A of the Advisers Act. The Commission is
proposing to amend Instruction 7 to Schedule I to clarify that, in
determining the total amount of assets under management, investment
advisers may include only those securities portfolios for which they
provide continuous and regular supervisory or management services as of
the date of filing Schedule I. In valuing these securities portfolios,
however, investment advisers may use market values as determined within
90 days prior to the filing of Schedule I. The Commission also is
proposing several other miscellaneous conforming amendments to Schedule
I.\38\
---------------------------------------------------------------------------
\38\ Instruction 5 would be revised to eliminate an unnecessary
reference to July 8, 1997, amend the instruction with respect to the
pension consultant exemption consistent with the revision proposed
in this Release, and add an instruction with respect to the proposed
multi-state adviser exemption. In addition, the Commission is
proposing to delete Instruction 8 and the unnecessary reference to
the date of the valuation of the assets under management in Schedule
I, Part II.
---------------------------------------------------------------------------
4. Transition Rule 203A-5 and Form ADV-T
The Commission is proposing to withdraw transition rule 203A-5 and
Form ADV-T. The rule and form are unnecessary because the transition
under the Coordination Act is now complete.
D. General Request for Comment
Any interested persons wishing to submit written comments on the
proposed rule amendments and form changes that are the subject of this
Release, to suggest additional changes (including changes to the
provisions of the rules that the Commission is not proposing to amend),
or to submit comments on other matters that might have an effect on the
proposals described above, are requested to do so. Commenters
suggesting alternative approaches are encouraged to submit their
proposed rule text.
III. Cost-Benefit Analysis
As discussed above, the proposed multi-state investment adviser
exemption would 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.\39\ The
Commission has limited data on the number of investment advisers that
would qualify for the proposed multi-state investment adviser
exemption.\40\ Because investment advisers must be required to register
in a large number of states to qualify for the proposed multi-state
investment adviser exemption, the Commission expects that only a few
investment advisers would be eligible. For Paperwork Reduction Act
purposes, the Commission estimates that there may be ten investment
advisers that would qualify each year. \41\ Comment is requested on
whether there may be more than ten investment advisers eligible for
this proposed multi-state investment adviser exemption annually.
Investment advisers that believe they would qualify for this exemption
are requested to notify the Commission.
---------------------------------------------------------------------------
\39\ See supra section II.A of this Release.
\40\ 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 where the registration is mandatory and where registration is
voluntary. Moreover, the Commission no longer receives Form ADV
information for state-registered advisers.
\41\ According to information obtained from the one-time form,
Form ADV-T, there are approximately 21 advisers that are registered
with 30 or more states and no longer registered with the Commission.
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 would qualify for the proposed multi-state exemption
each year.
---------------------------------------------------------------------------
The proposed multi-state investment adviser exemption would benefit
investment advisers by permitting them to save costs they otherwise
would incur if they were required to comply with 30 separate sets of
state regulations, especially where state regulations may be
duplicative or conflicting. These benefits would include cost savings
for complying with state registration requirements, which the
Commission estimates may be as much as $300,000 annually.\42\ Although
these annual costs may vary from adviser to adviser, the Commission
assumes, for purposes of this analysis, that it would cost each adviser
$30,000 to comply with state-law registration requirements.\43\ Based
on that figure, the Commission estimates that the annual benefit from
the proposed multi-state investment adviser exemption, in the form of
the foregone costs of state registration, would be approximately
$300,000 for all ten investment advisers expected to be eligible for
the proposed multi-state investment adviser exemption. Comment is
requested on the reasonableness of this cost estimate. Commenters are
requested to provide factual support or assumptions underlying any
alternative cost estimate.
---------------------------------------------------------------------------
\42\ The Coordination Act expressly preserved the authority of
the states to require Commission-registered investment advisers to
pay state filing, registration, and licensing fees. Section 307(b)
of the Coordination Act.
\43\ 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 proposed multi-state exemption
would typically be required to register in more states than the
average adviser registered with the Commission (i.e., at least 30
states), 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 also would include savings for investment advisers
from the cost of being examined by 30 different state regulators. State
regulators would save the expense of examining these investment
advisers.\44\ The Commission does not have information to estimate the
costs of state examinations for investment advisers because the
Commission has no data on the frequency with which these investment
advisers would be examined by a particular state or the number of
states that would examine these investment advisers each year. The
Commission requests comment on the state examination costs saved by
investment advisers that are regulated only by the Commission. Finally,
the proposed multi-state investment adviser exemption would produce
certain unquantifiable regulatory benefits in allowing qualifying
investment advisers to be regulated by one entity rather than 30
separate state regulators.
---------------------------------------------------------------------------
\44\ The Commission requests comment from the states on the
costs of investment adviser examinations and the frequency of such
examinations.
---------------------------------------------------------------------------
The proposed multi-state investment adviser exemption would impose
certain costs on investment advisers relying on the proposed exemption.
Under the proposed multi-state investment adviser exemption, an
investment adviser would be required to attach a representation to
Schedule I
[[Page 61871]]
initially, when registering, and annually, when amending Form ADV,
about the number of states in which the investment adviser would be
required to register. The investment adviser also would be required to
maintain a record of the states in which it believes it would, but for
the exemption, be required to register that was the basis of its
representation included on the attachment to Schedule I.
The Commission estimates that the total cost to each eligible
investment adviser to comply with the requirements of the proposed
multi-state investment adviser exemption would be approximately
$24,000.\45\ Thus, the Commission estimates that the total cost for the
ten investment advisers expected to be eligible for the proposed multi-
state investment adviser exemption would be approximately $240,000.
There also may be incidental costs to the Commission of registering
investment advisers that qualify for this proposed multi-state
investment adviser exemption and costs associated with examining those
investment advisers.
---------------------------------------------------------------------------
\45\ The Commission estimated this figure by multiplying the
aggregate burden hours required to attach a representation 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 proposed multi-state
exemption is based on the Commission's Paperwork Reduction Act
Submission. See infra section IV of this Release.
---------------------------------------------------------------------------
Overall, the Commission believes that the proposed rule amendments
would not impose significant additional costs on investment advisers,
but rather would result in a net savings when compared with the costs
of complying with state registration requirements. Comment is requested
concerning the savings for complying with state registration
requirements and any benefit to multi-state advisers in having one
regulator. Comment is also requested concerning the costs associated
with the requirements of the proposed multi-state investment adviser
exemption.
As discussed in more detail above, the Commission is proposing two
alternative amendments to the definition of investment adviser
representative.\46\ Although the Commission has never registered
investment adviser representatives, the Commission estimates that
Commission-registered advisers employ a total of approximately 153,000
investment adviser representatives.\47\ The Commission, however, does
not have data on the number of representatives who may be affected by
the proposed amendments. The Commission, therefore, is unable to
quantify the total benefits and costs that may result from these
proposed amendments. The Commission believes, nonetheless, that the
proposed amendments could provide benefits to Commission-registered
investment advisers and their supervised persons because the proposed
amendments would reduce their regulatory burdens by permitting
supervised persons who provide services to a few institutional clients
to have a small number of natural persons as accommodation clients
without being subject to state qualification requirements. The
Commission requests comment on the percentage of all investment adviser
representatives who would be exempt from state qualification
requirements under each of the alternatives being proposed.
---------------------------------------------------------------------------
\46\ See supra section II.B of this Release.
\47\ This estimate of the number of investment adviser
representatives employed by Commission-registered advisers was made
for purposes of the Implementing Amendments Cost-Benefit Analysis.
See Cost-Benefit Memorandum, supra note .
---------------------------------------------------------------------------
The first proposed alternative amendment to the definition of
investment adviser representative would retain the present ten percent
allowance and also permit a supervised person to have up to five
natural person clients. The first alternative definition would benefit
supervised persons who provide advice to five natural person clients
because they would no longer be subject to state qualification
requirements even if they are not able to take advantage of the ten
percent allowance. Under the current rule, a supervised person would
need to have ten institutional clients to have one accommodation
client. The first proposed alternative amendment would provide a bright
line test that would allow supervised persons and their firms to
determine easily when supervised persons must register with the states.
The first alternative would increase the number of supervised
persons of Commission-registered advisers who would no longer be
subject to state qualification requirements. This proposal would
benefit affected supervised persons by permitting them to save the
expense associated with investment adviser representative qualification
examinations, such as the costs of monitoring state registration
requirements and preparing and registering for state exams.\48\ The
Commission is unable to quantify the total savings because the
Commission does not have data on the number of representatives who
would be affected by this proposed amendment. Because the Coordination
Act preserved the authority of states to require the payment of state
filing, registration, and licensing fees, there would be no loss to the
states of fees collected.
---------------------------------------------------------------------------
\48\ In the Implementing Amendments Cost-Benefit Analysis, the
Commission estimated the following costs: $96 to take an exam, $850
for exam preparation, and $150 annually per investment adviser
representative to monitor state registration requirements. See Cost-
Benefit Memorandum, supra note .
---------------------------------------------------------------------------
Costs associated with the first proposed amendment include the
foregone fees collected by the National Association of Securities
Dealers Regulation (``NASDR'') and the North American Securities
Administrators Association, Inc. (``NASAA'') for state examinations for
investment adviser representatives.\49\ The Commission is unable to
quantify the total costs because the Commission does not have data on
the number of representatives who would be affected by this proposed
amendment. Comment is requested on the effect this provision will have
on the costs incurred or avoided by investment advisers and their
supervised persons and on the exam fees collected by the NASDR and
NASAA.
---------------------------------------------------------------------------
\49\ In the Implementing Amendments Cost-Benefit Analysis, the
Commission estimated that foregone revenue from the exam fees would
$32 per exam. Id.
---------------------------------------------------------------------------
As detailed above, the second alternative proposed amendment to the
definition of investment adviser representative would replace the ten
percent allowance and allow supervised persons to have accommodation
clients who have a familial or business relationship with the
supervised persons or their institutional clients without limitation on
the number of accommodation clients. This alternative proposal might
have the effect of either increasing or decreasing the number of
supervised persons subject to state qualification requirements, and
comment is requested on which outcome is more likely.
To the extent that the second alternative increases the number of
supervised persons who are no longer subject to state qualification
requirements, affected supervised persons would save state examination
and examination preparation fees.\50\ The costs associated with such an
increase would be the foregone fees collected by the NASDR and NASAA
for the state examinations.\51\
---------------------------------------------------------------------------
\50\ See supra note and accompanying text.
\51\ See supra note and accompanying text. The Commission does
not believe that there are any substantial costs to investor
protection that would be associated with this proposed amendment.
---------------------------------------------------------------------------
If the second alternative decreases the number of supervised
persons who are not subject to state qualification requirements, the
alternative would
[[Page 61872]]
produce unquantifiable benefits by tying the accommodation client
exception more closely to the purpose for which it was adopted. The
second alternative would permit supervised persons to accept clients
who have a relationship with the supervised person or his institutional
clients that would result in the individual client being considered an
accommodation client. The costs of the second alternative, if it
decreases the number of supervised persons not subject to state
qualification requirements, would be the expense associated with state
investment adviser representative examinations.52 Comment is
requested on the effect of the second alternative amendment on the
costs incurred or avoided by investment advisers and their supervised
persons.
---------------------------------------------------------------------------
\52\ See supra note and accompanying text.
---------------------------------------------------------------------------
The other proposed rule amendments would revise the time period for
determining the value of assets of plans for pension consultants,
clarify the instructions in Schedule I to Form ADV, and provide an
additional instruction in Schedule I to Form ADV. The benefits of these
proposed amendments would be to eliminate any confusion that the
language of the rules or instructions may have created. The Commission
believes that these amendments would not impose any additional costs to
investment advisers.
Comment is requested on this cost-benefit analysis. Commenters are
requested to provide views and empirical data relating to any costs and
benefits associated with the proposed rule amendments.
For purposes of making determinations required by the Small
Business Regulatory Enforcement Fairness Act of 1996, the Commission is
requesting information regarding the potential effect of the proposed
rule amendments on the economy on an annual basis. Commenters should
provide data to support their views.
IV. Paperwork Reduction Act
Certain provisions of the proposed rule amendments contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995,53 and the Commission has
submitted them to the Office of Management and Budget (``OMB'') for
review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The
title for the collections of information are ``Form ADV'' and
``Schedule I to Form ADV,'' both under the Advisers Act. Form ADV and
Schedule I to Form ADV, which the Commission is proposing to amend,
contain currently approved collections of information under OMB control
numbers 3235-0049 and 3235-0490, respectively. The proposed rule
amendments are necessary to clarify previously-adopted rules that
implemented changes to the Advisers Act. An agency may not sponsor,
conduct, or require response to an information collection unless a
currently valid OMB control number is displayed.
---------------------------------------------------------------------------
\53\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
Form ADV
Form ADV is required by rule 203-1 [17 CFR 275.203-1] to be filed
by every adviser that applies 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 amendment to 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 also
requires an investment adviser to file the cover page of Form ADV
(along with a Schedule I) 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.
After 1997, the Commission estimates approximately 7,300 investment
advisers would be registered with the Commission and required to amend
Form ADV on an annual basis as required by rule 204-1.54 The
Commission previously estimated that there would be 750 new investment
advisers registering with the Commission each year. The Commission
estimates that an additional ten investment advisers each year would be
eligible for Commission registration under the proposed multi-state
exemption. Thus, the annual number of responses for filing an
application for investment adviser registration is estimated to be
approximately 760. The 760 new advisers each year also will be subject
to the annual amendment requirement. The Commission estimates that
there would be 8,060 total respondents to this collection of
information on an annual basis.
---------------------------------------------------------------------------
\54\ Under rule 203A-5 of the Advisers Act, all investment
advisers registered with the Commission were required to file a
completed Form ADV-T with the Commission by July 8, 1997, indicating
whether they remain eligible for Commission registration. Of the
23,350 Commission-registered investment advisers, approximately
7,200 advisers indicated that they remain eligible for Commission
registration, 10,600 advisers withdrew their registrations, and
5,800 advisers did not file their Form ADV-T. The Commission
believes that most of the investment advisers that did not file Form
ADV-T are either no longer in the advisory business or no longer
eligible to register with the Commission. The Commission expects to
cancel the registrations of most of these investment advisers.
---------------------------------------------------------------------------
The Commission estimates that each of the 7,300 investment advisers
registered with the Commission will amend Form ADV, as required by rule
204-1, an average of 1.5 times annually. Of the 760 new advisers each
year, 660 will amend Form ADV an average of once annually. The
estimated 100 newly-formed investment advisers that will rely on rule
203A-2(d) will amend Form ADV an average of twice annually. Thus, the
annual number of responses for completing amended Form ADV is estimated
to be approximately 11,810.
The total number of annual responses for Form ADV (initial
registration and amendments) is estimated to be 760 responses for new
advisers (including ten responses for new advisers relying on the
proposed multi-state exemption) and 11,810 responses for annual
amendments. The average burden hours for completing Form ADV for
initial registration is 9.0063 hours for each respondent (unchanged
from previous estimate). The average burden hours for completing Form
ADV as an annual amendment is 1.0672 hours (unchanged from previous
estimate). The total burden hours imposed by Form ADV is estimated to
be 19,448.42.
The collection of information required by Form ADV is mandatory,
and responses are not kept confidential.
Schedule I
Schedule I 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. Rule 204-1
[17 CFR 275.204-1] sets forth the circumstances requiring the filing of
an amended Form ADV. Rule 204-1 requires an investment adviser
registered with the Commission to file an amended Schedule I to Form
ADV annually within 90 days after the end of the investment adviser's
fiscal year.
The Commission estimates that 7,300 investment advisers registered
with the Commission would respond to the information collection
requirements of Schedule I to Form ADV an average of once a year. In
addition, the Commission estimates that approximately 760 new advisers
each year will file Schedule I of Form ADV. Of the 760 advisers, 660
will file Schedule I to Form ADV an average of once each year, and the
remaining 100 that rely on the exemption provided by
[[Page 61873]]
rule 203A-2(d) will file Schedule I to Form ADV an average of twice
each year. It is estimated that the total number of responses would be
8,160.
For the 765 investment advisers that must calculate assets under
management for the purpose of completing Schedule I (9.5% of
respondents--excluding the ten investment advisers expected to rely on
the proposed multi-state exemption), compliance with the requirement to
file an amended Schedule I would impose a total annual burden for each
investment adviser of approximately 2 hours (unchanged from previous
estimate). For the 7,285 investment advisers that either do not need to
calculate assets under management to complete Schedule I or calculate
assets under management as part of their normal business operations
(90.5% of respondents--excluding the ten investment advisers expected
to rely on the proposed multi-state exemption) this burden would be
0.75 of an hour (unchanged from previous estimate).
The Commission estimates that an additional ten investment advisers
would be eligible for the proposed multi-state exemption. For the ten
investment advisers that would rely on the proposed multi-state
exemption, the Commission estimates compliance with the requirement to
file an amended Schedule I attaching a representation that the
investment adviser is required to register as an investment adviser in
30 or more states would impose a total annual burden for each
investment adviser of approximately 240 hours.55
---------------------------------------------------------------------------
\55\ Investment advisers also would be required to maintain a
record of the states in which they believe they would, but for the
exemption, be required to register that was the basis of their
representation included on the attachment to Schedule I. The
Commission believes that the requirement that the investment
advisers maintain a record would impose a nominal burden on
investment advisers because the information would have to be
gathered for purposes of making the representation.
---------------------------------------------------------------------------
The total burden hours imposed by Schedule I to Form ADV is
estimated to be 9,480.313.
The collection of information required by Schedule I is mandatory,
and responses are not kept confidential.
The Commission estimates that these collections of Form ADV and
Schedule I together would impose a total hourly burden of 28,928.73
hours.
The total burdens associated with Form ADV and Schedule I to Form
ADV would change from the filing of the last Paperwork Reduction Act
Submission because of the proposed multi-state exemption and the
tabulation of Form ADV-Ts.56 The current total Form ADV
burden is 18,127.88 hours. The new total Form ADV burden would be
19,448.42 hours. The total change in burden hours for Form ADV would be
1,320.54 hours. The current total burden for Schedule I is 6,418.94
hours. The new total burden for Schedule I would be 9,480.313 hours.
The total change in burden for Schedule I of Form ADV would be
3,061.373 hours.
---------------------------------------------------------------------------
\56\ The total hourly burdens for Form ADV and Schedule I would
change because (1) the proposed multi-state exemption would permit a
small number of additional advisers to register with the Commission,
and (2) the tabulation of information from the completed Forms ADV-T
has provided the Commission with a more accurate number of advisers
it regulates after the July 8, 1997 division of regulatory
responsibilities between the federal and state governments.
---------------------------------------------------------------------------
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to (i) evaluate whether the proposed collections of
information are necessary for the proper performance of the functions
of the agency, including whether the information will have practical
utility; (ii) evaluate the accuracy of the agency's estimate of the
burden of the proposed collections of information; (iii) enhance the
quality, utility, and clarity of the information to be collected; and
(iv) minimize the burden of the collections of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and should also send a copy of their comments to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Stop 6-9, Washington, D.C. 20549 with reference to File
No. S7-28-97. OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication, so
that a comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.
V. Summary of Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding
amendments to rules 203A-2, 203A-3, 206(4)-3 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 IRFA.
As set forth in greater detail in the IRFA, the Coordination Act,
which became effective on July 8, 1997, amended the Advisers Act by
reallocating federal and state responsibilities for regulation of
investment advisers. On May 15, 1997, the Commission adopted new rules
and rule amendments to implement the Coordination Act.57 The
Commission proposes to revise some of these implementing rules. The
IRFA states that the proposed rule amendments would exempt multi-state
investment advisers from the prohibition on Commission registration,
amend the definition of investment adviser representative, and clarify
certain other implementing rules.
---------------------------------------------------------------------------
\57\ See Adopting Release, supra note 6.
---------------------------------------------------------------------------
The IRFA sets forth the statutory authority for the proposed rule
amendments. The IRFA also discusses the effect of the proposed rule
amendments on small entities. 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 nondiscretionary 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.58
---------------------------------------------------------------------------
\58\ Rule 275.0-7 [17 CFR 275.0-7]. In January 1997, the
Commission proposed to revise this definition of ``small entity.''
See Definitions of ``Small Business'' or ``Small Organization''
Under the Investment Company Act of 1940, the Investment Advisers
Act of 1940, the Securities Exchange Act of 1934, and the Securities
Act of 1933, Release Nos. 33-7383, 34-38190, IC-22478, and IA-1609
(Jan. 22, 1997) [62 FR 4106 (Jan. 28, 1997)]. The Commission expects
to adopt a revised definition of small investment adviser for
Regulatory Flexibility Act purposes to reflect the Coordination Act.
---------------------------------------------------------------------------
The proposed multi-state exemption for investment advisers would be
available to any investment adviser that is prohibited from registering
with the Commission and is required to register in 30 or more states.
The Commission estimates that there may be ten such investment advisers
that would be eligible for the proposed multi-state exemption each
year.59 Therefore, the Commission believes that there would
be a few small entities that would be affected by the proposed rule.
---------------------------------------------------------------------------
\59\ See supra note 41.
---------------------------------------------------------------------------
The proposed rule amendments minimize regulatory burdens on small-
entity investment advisers that are eligible for the proposed multi-
state exemption by permitting the investment adviser, once registered
with the
[[Page 61874]]
Commission, to continue to be eligible for the proposed multi-state
exemption until it is obligated to register in less than 25 states.
This five-state difference prevents an investment adviser from being
required to register and then de-register frequently with the
Commission as a result of a change in its registration obligation in
one state or few states.
The proposed amendments to the definition of investment adviser
representative would permit supervised persons of Commission-registered
investment advisers who only have a few business or institutional
clients to accept accommodation clients. The Commission does not have
information from which to estimate the number of Commission-registered
investment advisers managing assets of $50 million or less or having
less than $50,000 in assets relating to its advisory business whose
supervised persons would be exempt from the definition of investment
adviser representative under the proposed amendments.
The other proposed rule amendments affect only Commission-
registered investment advisers. For purposes of these amendments, the
Commission estimates that approximately 850 investment advisers are
small entities.60 These proposed amendments clarify the
implementing rules and do not impose any additional burden on
investment advisers. Therefore, the Commission believes that it is
reasonable to estimate that these clarifying amendments would not have
a significant economic effect on small entities. Comment is requested
on the number of small entities that would be affected by these
proposed amendments.
---------------------------------------------------------------------------
\60\ This estimate of the number of small entities was made for
purposes of the Final Regulatory Flexibility Analysis for the rules
implementing the Coordination Act. See Adopting Release, supra note
6, at nn. 189-190 and accompanying text. Of the 23,350 Commission-
registered investment advisers, 5,800 advisers have not filed their
Form ADV-T, indicating their eligibility to remain registered with
the Commission. See supra note 54. The Commission also expects to
adopt a revised definition of small entity for purposes of the
Regulatory Flexibility Act. See supra note 58. Therefore, the
Commission plans to revise its estimate of the number of Commission-
registered advisers that are small entities after the transition is
complete so that the Commission would have more accurate information
to estimate the number of small entities under the new definition of
that term.
---------------------------------------------------------------------------
The proposed withdrawal of rule 203A-5 and Form ADV-T would have no
effect on small entities because no investment advisers currently
should be filing Form ADV-T.
The proposed rule amendments would impose certain new reporting and
recordkeeping requirements and eliminate certain other requirements.
Investment advisers relying on the proposed multi-state exemption would
be required at initial registration to attach a representation to
Schedule I that the investment adviser has determined that it must
register in at least 30 states and a representation on Schedule E to
Form ADV that it will withdraw from Commission registration when it is
no longer required to register in at least 25 states.61
Thereafter, in the annual amendment to Form ADV revising Schedule I,
the investment adviser would be required to submit a representation
that it has concluded that, but for the proposed multi-state exemption,
it would be required to register in at least 25 states. If the amended
Schedule I indicated that the investment adviser was no longer eligible
for Commission registration, the proposed amendment would require the
investment adviser to file a Form ADV-W within 90 days to withdraw its
registration with the Commission.
---------------------------------------------------------------------------
\61\ The proposed multi-state investment adviser exemption also
would require investment advisers to maintain a record of the states
in which they would, but for the exemption, be required to register.
---------------------------------------------------------------------------
The Commission estimates that it will take approximately 240 hours,
annually on average, to comply with these requirements. This burden on
investment advisers that use this proposed rule would be outweighed by
the cost savings and benefits to the multi-state investment advisers
relying on the proposed multi-state exemption.
The proposed withdrawal of Form ADV-T and rule 203A-5 would
eliminate any incidental burden that may continue to be imposed by the
transition rule. The proposed rule amendments to rule 206(4)-3 and Form
ADV would not impose any new reporting, recordkeeping or other
compliance requirements.
The Commission believes that there are no rules that duplicate,
overlap, or conflict with, the proposed rule amendments.
The IRFA discusses the various alternatives considered by the
Commission in connection with the proposed rule amendments that might
minimize the effect on small entities, including (a) the establishment
of differing compliance or reporting requirements or timetables that
take into account 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) an exemption from
coverage of the rule, or any part thereof, for small entities.
As stated in the IRFA, after taking into account the resources
available to small entities and the potential burden that could be
placed on investment advisers that may no longer qualify for the
proposed multi-state exemption because of a change in the registration
obligations in a few states, the Commission proposes to permit an
investment adviser, once registered with the Commission, to continue to
be eligible for the proposed multi-state exemption as long as it would
be obligated to register in at least 25 states, five fewer states than
when it initially registered. Moreover, the burdens associated with
complying with the requirements of the rule would affect only a very
small number of investment advisers each year.
With respect to the other proposed rule amendments, the Commission
believes that the establishment of different compliance or reporting
requirements for small entities is neither necessary nor practicable.
The information required by Form ADV and Schedule I is necessary for
the Commission to determine whether the investment advisers are
eligible for Commission registration. The proposed rule amendments will
not change significantly any compliance costs. Further clarification,
consolidation or simplification of the requirements for small entities
does not seem feasible. The Commission believes that the rule
amendments, as proposed, will not adversely affect small entities and,
instead, include regulatory alternatives that minimize the effect on
small entities.
The IRFA includes information concerning the solicitation of
comments with respect to the IRFA generally, and in particular, the
number of small entities that would be affected by the proposed rule
amendments. A copy of the IRFA may be obtained by contacting Carolyn-
Gail Gilheany, Securities and Exchange Commission, 450 5th Street,
N.W., Mail Stop 10-6, Washington, D.C. 20549.
VI. Statutory Authority
The Commission is proposing amendments to 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 proposing amendments to rule 203A-3 pursuant to
the authority set forth 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 proposing amendments to rule 206(4)-3 pursuant to
the authority set forth in sections 204,
[[Page 61875]]
206, and 211 of the Investment Advisers Act of 1940 [15 U.S.C. 80b-4,
80b-6, 80b-11].
The Commission is proposing to withdraw rule 203A-5 pursuant to the
authority set forth 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 proposing amendments to Schedule I 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].
The Commission is proposing to remove and reserve rule 279.3 and
proposing to remove Form ADV-T pursuant to the authority set forth in
sections 204 and 211(a) of the Investment Advisers Act of 1940 [15
U.S.C. 80b-4, 80b-11(a)].
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
Text of Proposed Rule and Form Amendments
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1. 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.
Section 275.205-3 is also issued under 15 U.S.C. 80b-5(e).
2. Section 275.203A-2 is amended by revising the introductory text
of Sec. 275.203A-2 and paragraph (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))
shall not apply to:
* * * * *
(b) * * *
(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 the 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 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 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 and, 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 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 its 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, within 90 days after filing Schedule I
to Form ADV, files a completed Form ADV-W (17 CFR 279.2) whereby the
investment adviser withdraws from registration with the Commission if
the amendment to Form ADV revising Schedule I indicates that the
investment adviser would be prohibited by section 203A of the Act (15
U.S.C. 80b-3a) from registering with the Commission; and
(4) Maintains in an easily accessible place a record of the States
that 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:
Proposal I
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;
or
(ii) 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 is a qualified
client as defined 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.
Proposal II
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
[[Page 61876]]
investment adviser 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 is a:
(A) Qualified client as defined in Sec. 275.205-3(d)(1);
(B) Partner, officer, director, (or other person occupying a
similar status or performing similar functions), of the investment
adviser for whom the supervised person works or of a client that is not
a natural person of the investment adviser for whom the supervised
person works;
(C) Relative, spouse, or relative of spouse of such partner,
officer or director; or
(D) Relative, spouse or relative of spouse of the supervised
person.
(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.
Sec. 275.203A-5 [Removed and Reserved]
4. Section 275.203A-5 is removed and reserved.
Sec. 275.206(4)-3 [Amended]
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)''.
Secs. 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 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
Regulation. Schedule I is attached as Appendix A.
Sec. 279.3 [Removed and Reserved]
9. Section 279.3 is removed and reserved.
10. Form ADV-T is removed.
Note: Form ADV-T does not appear in the Code of Federal
Regulation.
Dated: November 13, 1997.
By the Commission.
Jonathan G. Katz,
Secretary.
BILLING CODE 8010-01-P
[[Page 61877]]
[GRAPHIC] [TIFF OMITTED] TP19NO97.027
[[Page 61878]]
[GRAPHIC] [TIFF OMITTED] TP19NO97.028
[[Page 61879]]
[GRAPHIC] [TIFF OMITTED] TP19NO97.029
BILLING CODE 8010-01-C
[[Page 61880]]
Schedule Instructions
Instruction 1. General Instructions
(a) SEC's Collection of Information. 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 control number.
Sections 203(c)(1) and 204 of the Advisers Act authorize the Commission
to collect the information on this Schedule from applicants. See 15
U.S.C. Secs. 80b-3(c)(1) and 80b-4. Filing of this Schedule is
mandatory. The principal purpose of this collection of information is
to enable the Commission to determine which investment advisers are
eligible to maintain their registration with the Commission and to
provide for the withdrawal from Commission registration for advisers
that are no longer eligible. The Commission will maintain files of the
information on this Schedule and will make the information publicly
available. Any member of the public may direct to the Commission any
comments concerning the accuracy of the burden estimate on page one of
this Schedule, and any suggestions for reducing this burden. This
collection of information has been reviewed by the Office of Management
and Budget in accordance with the clearance requirements of 44 U.S.C.
Sec. 3507. The applicable Privacy Act system of records is SEC-2, and
the routine use of the records are set forth at 40 Federal Register
39255 (Aug. 27, 1975) and 41 FR 5318 (Feb. 5, 1976).
(b) For Further Information: Additional information about the rules
referred to in this Schedule is found in the Commission's adopting
release, Rules Implementing Amendments to the Investment Advisers Act
of 1940, Investment Advisers Act Rel. No. 1633 (May 15, 1997).
Instruction 2. Principal Place of Business
Applicant's principal place of business reported in Form ADV, Part
I, Item 2.A. is the applicant's principal office and place of business,
i.e., the executive office from which the officers, partners, or
managers of the applicant direct, control, and coordinate applicant's
activities. See rule 203A-3(c).
Instruction 3. Advisers in Colorado, Iowa, Ohio, or Wyoming; Foreign
Advisors
Under the Advisers Act, an applicant whose principal office and
place of business (see Instruction 2) is in a State that does not
register investment advisers is required to register with the
Commission, even if none of the criteria for SEC registration (e.g.,
$25 million of assets under management) is met. Currently these States
are Colorado, Iowa, Ohio, and Wyoming. Applicants that have their
principal office and place of business in one of these States should
check the box in item (a)(ii) of Part I.
An applicant whose principal office and place of business is
located in a country other than the United States (i.e., not in the
United States, the District of Columbia, Puerto Rico, the Virgin
Islands, or any other possession of the United States) also is required
to register with the Commission. Such an applicant should check the box
in item (a)(iii) of Part I.
Instruction 4. Advisers to Investment Companies
An applicant should not check item (a)(iv) of Part I unless
applicant currently provides advisory services pursuant to an
investment advisory contract to an investment company registered under
the Investment Company Act of 1940. The investment company must be
operational, i.e., have assets and shareholders (other than just the
organizing shareholders).
Instruction 5. Exemptions
(a) Pension Consultants. An applicant that provides investment
advice to employee benefit plans with respect to assets having an
aggregate value of more than $50 million during the 12-month period
ended within 90 days of filing this Schedule may register with the
Commission. An investment adviser seeking to rely on the pension
consultant exemption must aggregate: (i) the value of assets for which
it provided advisory services at the end of the 12-month period, and
(ii) the value of any other assets for which it provided advisory
services at the end of its employment or contract (if terminated before
the end of the 12-month period). See rule 203A-2(b).
(b) Affiliated Advisers. An applicant that controls, is controlled
by, or is under common control with, an investment adviser that is
eligible to maintain its registration with the Commission (``eligible
adviser'') is itself eligible to maintain its registration with the
Commission if the principal office and place of business of the
applicant is the same as that of the eligible adviser. See rule 203A-
2(c).
(c) Newly Formed Advisers. A newly formed investment adviser may
register with the Commission at the time of its formation if the
adviser has a reasonable expectation that within 120 days of
registration it will become eligible for Commission registration. At
the end of the 120-day period, the adviser is required to file an
amended Schedule I. If the investment 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 from registration with the
Commission. An applicant registering with the Commission in reliance on
this exemption must include on Schedule E of Form ADV an undertaking to
withdraw from registration if, at the end of the 120-day period, the
investment adviser would be prohibited from Commission registration.
See rule 203A-2(d).
(d) Multi-State Advisers. An investment adviser may register with
the Commission if it is required to register as an investment adviser
with the securities authorities of 30 or more states. To take advantage
of this exemption, an applicant must (i) attach to this Schedule a
representation that it has reviewed the state and federal laws and has
concluded that it must register with the securities authorities of at
least 30 states within 90 days prior to the date of filing this
Schedule, and (ii) include on Schedule E to Form ADV an undertaking to
withdraw from registration if it would no longer be required to
register in at least 25 states when it files its annual amendment to
Form ADV revising this Schedule. Each year (and for so long as the
investment adviser continues to rely on the multi-state investment
adviser exemption), when the adviser updates its Schedule I, it must
attach a new representation that it has concluded that, but for the
exemption, it would be required to register with the securities
authorities of at least 25 states within 90 days prior to the date of
filing Schedule I. Additionally, each time the adviser makes such a
representation, the adviser must create and maintain a list of the
states that, but for the exemption, it would be required to register.
This list must be maintained in an easily accessible place for a period
of not less than five years from the date each representation is filed
as an attachment to this Schedule. See rule 203A-2(e).
Instruction 6. Part I, Item (b)
If item (b) of Part I is checked, registrant's investment
registration with the SEC must be withdrawn within 90 days after the
date this Schedule I was required by rule 204-1(a) to have been filed
with the Commission. Thus, registrant's registration must be withdrawn
no later than 180 days after the end of its fiscal year. If
registrant's
[[Page 61881]]
registration is not withdrawn within this time period, registrant will
be subject to having its registration cancelled pursuant to section
203(h) of the Advisers Act. See rule 203A-1(c).
Instruction 7. Determining Assets Under Management
Not all applicants are required to provide the amount of their
assets under management. An applicant must report its assets under
management in Part II only if item I(a)(i) is check yes ``(x)'' and the
amount of assets applicant has under management is the sole basis for
applicant's eligibility for SEC registration (i.e., applicant has not
checked any of items I(a)(ii) through (x)).
In determining the assets applicant has under management, include
the ``securities portfolios'' (or portions thereof) for which applicant
provides ``continuous and regular supervisory or management services''
as of the date of filing this Schedule.
(a) Securities Portfolios. An account is a securities portfolio if
at least 50% of the total value of the account consists of securities.
For purpose of this 50% test, applicant may treat cash and cash
equivalents (i.e., bank deposits, certificates of deposit, bankers
acceptances, and similar bank instruments) as securities.
Applicants may include securities portfolios that are: (i) Family
or proprietary accounts of the applicant (unless applicant is a sole
proprietor, in which case the personal assets of the sole proprietor
must be excluded); (ii) accounts for which applicant receives no
compensation for its services; and (iii) accounts of clients who are
not U.S. residents.
(b) Value of Portfolio. Include the entire value of each securities
portfolio (or portion thereof) for which applicant provides
``continuous and regular supervisory or management services.'' If
applicant provides continuous and regular supervisory or management
services for only a portion of a securities portfolio, include as
assets under management only the portion of the securities portfolio
that receives such services. Exclude, for example, a portion of an
account:
(1) under management by another person; or
(2) that consists of real estate or businesses the operations of
which are ``managed'' on behalf of a client but not as an investment.
No deduction is required for securities purchased on margin.
(c) Continuous and Regular Supervisory or Management Services.
General Criteria. An applicant provides continuous and regular
supervisory or management services with respect to a securities
portfolio if the applicant either--
(1) has discretionary authority over and provides ongoing
supervisory or management services with respect to the account; or
(2) does not have discretionary authority over the account, but 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.
Factors. Applicants should consider the following factors in
evaluating whether continuous and regular supervisory or management
services are being provided.
(1) Terms of the advisory contract. A provision in an advisory
contract by which the applicant agrees to provide ongoing management
services suggests that the account receives such services. Other
provisions in the contract, or the actual management of the applicant,
however, may rebut such a suggestion.
(2) Form of compensation. A form of compensation based on the
average value of assets under management over a specified period of
time would suggest that the applicant provides continuous and regular
supervisory or management services. On the other hand, a form of
compensation based upon time the applicant spends with a client during
a client visit would suggest otherwise. A retainer based upon a
percentage of assets covered by a financial plan would not suggest that
the applicant provides continuous and regular supervisory or management
services.
(3) The management practice of the applicant. The extent to which
the applicant is actively managing the assets or providing advice bears
on whether the services are continuous and regular supervisory or
management services. However, infrequent trades (e.g., based on a ``buy
and hold'' strategy) should not alone form the basis for a
determination that the services are not provided on a continuous and
regular basis.
Examples. To assist applicants, the Commission is providing
examples of accounts that may receive continuous and regular
supervisory or management services, based upon the criteria and factors
discussed above. These examples are not exclusive.
Accounts that may receive continuous and regular supervisory or
management services:
(1) Accounts for which the applicant allocates assets of a client
among mutual funds (even if it does so without a grant of discretionary
authority, but only if the general criteria for non-discretionary
accounts is satisfied and the factors suggest that the account receives
continuous and regular supervisory or management services); and
(2) Accounts for which the applicant allocates assets among other
managers--but only under a grant of discretionary authority by which it
may hire and fire managers and reallocate assets among them.
Accounts that do not receive continuous and regular supervisory or
management services:
(1) Accounts for which the applicant provides market timing
recommendations (to buy or sell) but has no ongoing management
responsibilities;
(2) Accounts for which the applicant provides only impersonal
advice, e.g., market newsletters;
(3) Accounts for which the applicant provides an initial asset
allocation, without continuous and regular monitoring and reallocation;
and
(4) Accounts for which the applicant provides advice only on an
intermittent or periodic basis, upon the request of the client, or in
response to some market event, e.g., an account that is reviewed and
adjusted on a quarterly basis.
(d) Value of Assets Under Management. Calculate the total amount of
applicant's assets under management by including the value, as
determined within 90 days prior to the date of filing this Schedule, of
securities portfolios (or portions thereof) for which applicant
provides continuous and regular supervisory or management services as
of the date of filing this Schedule. Current market value should be
determined using the same method as that used to determine the account
value reported to clients or fees for investment advisory services.
(e) Example. To assist applicants, the Commission is providing an
example of the method of determining whether a client account may be
included as ``assets under management.''
Example
A client's portfolio consists of the following:
$6,000,000.. stocks and bonds
$1,000,000.. cash and cash equivalents
$3,000,000.. non-securities (collectibles, commodities, real estate,
etc.)
-------------
[[Page 61882]]
$10,000,000. Total Assets
=============
First, is the account a ``securities portfolio?'' The account is a
securities portfolio because securities as well as cash and cash
equivalents (which the applicant has chosen to include as securities)
($6,000,000+$1,000,000=$7,000,000) comprise at least 50% of the value
of the account (here, 70%). (See Instruction 7(a))
Second, does the account receive ``continuous and regular
supervisory or management services?'' The entire account is managed on
a discretionary basis and is provided ongoing supervisory and
management services, and therefore receives continuous and regular
supervisory or management services. (See Instruction 7(c))
Third, what is the entire value of the account? The entire value of
the account ($10,000,000) is included in the calculation of the
investment adviser's total assets under management.
[FR Doc. 97-30296 Filed 11-18-97; 8:45 am]
BILLING CODE 8010-01-P
