[Federal Register Volume 61, Number 250 (Friday, December 27, 1996)]
[Proposed Rules]
[Pages 68480-68502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32799]
[[Page 68479]]
_______________________________________________________________________
Part VIII
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 275 and 279
Rules Implementing Amendments to the Investment Advisers Act of 1940;
Proposed Rule and Suspension of Form ADV-S; Final Rule
Federal Register / Vol. 61, No. 250 / Friday, December 27, 1996 /
Proposed Rules
[[Page 68480]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-1601, File No. S7-31-96]
RIN 3235-AH07
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 new rules and rule
amendments under the Investment Advisers Act of 1940 (``Advisers Act'')
to implement provisions of the Investment Advisers Supervision
Coordination Act (``Coordination Act'') that reallocate regulatory
responsibilities for investment advisers between the Commission and the
states. The proposed rules would establish the process by which certain
advisers would withdraw from Commission registration, exempt certain
advisers from the prohibition on Commission registration, and define
certain terms. The Commission also is proposing amendments to several
rules under the Advisers Act to reflect the changes made by the
Coordination Act. The proposed rules and rule amendments are intended
to clarify provisions of the Coordination Act and assist investment
advisers in ascertaining their regulatory status.
DATES: Comments must be received on or before February 10, 1997.
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. S7-31-96; 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 will be posted on
the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Catherine M. Saadeh, Staff Attorney,
or Cynthia G. Pugh, Staff Attorney, at (202) 942-0690, Office of
Regulatory Policy, Division of Investment Management, Stop 10-2,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission today is requesting public
comment on new rules 203A-1, 203A-2, 203A-3, 203A-4, 203A-5, 222-1, and
222-2 [17 CFR 275.203A-1, 275.203A-2, 275.203A-3, 275.203A-4, 275.203A-
5, 275.222-1, and 275.222-2], and proposed amendments to rules 204-1,
204-2, 205-3, 206(4)-1, 206(4)-2, and 206(4)-4 [17 CFR 275.204-1,
275.204-2, 275.205-3, 275.206(4)-1, 275.206(4)-2, and 275.206(4)-4],
and Form ADV and Form ADV-S [17 CFR 279.1 and 279.3] under the
Investment Advisers Act of 1940 [15 USC 80b-1 et seq.] (the ``Advisers
Act'' or the ``Act'').
Table of Contents
Executive Summary
I. Background
II. Discussion
A. Form ADV-T
B. Assets Under Management
1. Securities Portfolios
2. Valuation and Reporting of Securities Portfolios
3. Continuous and Regular Supervisory or Management Services
4. Proposed Safe Harbor for State-Registered Investment Adviser
C. Transitions Between State and Commission Registration
1. Transition from State to Commission Registration
2. Transition from Commission to State Registration
D. Exemptions from Prohibition on Registration with the
Commission
1. Nationally Recognized Statistical Rating Organizations
2. Pension Consultants
3. Certain Affiliated Investment Advisers
4. Investment Advisers With Reasonable Expectation of
Eligibility
E. Investment Advisers Not Regulated or Required to be Regulated
by States
1. ``Regulated or Required to be Regulated''
2. ``Principal Office and Place of Business''
F. Persons Who Act on Behalf of Investment Advisers
1. ``Investment Adviser Representative''
2. ``Place of Business''
3. Solicitors
G. National De Minimis Standard
H. Other Amendments to Advisers Act Rules
1. Amendments to Form ADV; Elimination of Form ADV-S
2. Rule 204-2--Books and Records
3. Rule 105-3--Performance Fee Arrangements
4. Rules 206(4)-1, 106(4)-2, and 206(4)-4--Anti Fraud Rules
I. Provisions of the Advisers that Continue to Apply to State-
Registered Investment Advisers
III. General Request for Comments
IV. Cost Benefit Analysis
V. Summary of Regulatory Flexibility Analysis
VI. Paperwork Reduction Act
VII. Statutory Authority
Text of Proposed Rules and Form
Executive Summary
The Commission is proposing rules and rule amendments to implement
certain provisions of the Investment Advisers Supervision Coordination
Act (``Coordination Act''). The Coordination Act amended the Advisers
Act to, among other things, reallocate the responsibilities for
regulating investment advisers (``investment advisers'' or
``advisers'') between the Commission and the securities regulatory
authorities of the states. Generally, the Coordination Act requires
advisers with $25 million or more of assets under management to
register with the Commission; advisers with less than $25 million of
assets under management that are registered with a state may not
register with the Commission. The proposed rules and rule amendments
would:
Establish the process by which advisers that are currently
registered with the Commission will determine their status as
Commission- or state-registered advisers after the effective date of
the Coordination Act;
Amend Form ADV to require advisers to report information
relevant to their status as Commission-registered advisers annually to
the Commission;
Relieve advisers from the burden of having to frequently
register and then de-register with the Commission as a result of
changes in the amount of their assets under management;
Provide certain exemptions from the prohibition on
registration with the Commission;
Define certain terms used in the Coordination Act,
including ``investment adviser representative,'' ``principal office and
place of business,'' and ``place of business;'' and
Clarify how advisers should count clients for purposes of
the new national de minimis standard.
I. Background
On October 11, 1996 President Clinton signed into law the National
Securities Markets Improvement Act of 1996 (``1996 Act'').1 Title
III of the 1996 Act, the Coordination Act, makes several amendments to
the Advisers Act. The most significant of these amendments reallocates
federal and state responsibilities for the regulation of the
approximately 22,500 investment advisers currently registered with the
[[Page 68481]]
Commission.2 These amendments will become effective on April 9,
1997.3
---------------------------------------------------------------------------
\1\ National Securities Markets Improvement Act of 1996, Pub. L.
104-290, 110 Stat. 3416 (1996) (to be codified in scattered sections
of 15 U.S.C.).
\2\ Other amendments made by the 1996 Act to the Advisers Act
include revisions to (i) section 205 [15 U.S.C. 80b-5] to create
additional exceptions to the Advisers Act's limitations on
performance fee arrangements, (ii) section 222 [15 U.S.C. 80b-18a]
to impose certain uniformity requirements on state investment
adviser laws (see section ii. G. of this Release), (iii) section
203(e) [15 U.S.C. 80b-3(e)] to permit the Commission to deny or
revoke the registration of any person convicted of any felony (or of
any adviser associated with such a person), and (iv) section 203(b)
[15 U.S.C. 80b-3(b)] to exempt from registration certain advisers to
church-sponsored employee pension plans. See 1996 Act sections 210,
304, 305(a), and 508(d).
\3\ See Coordination Act section 308(a).
---------------------------------------------------------------------------
The reallocation of regulatory responsibilities primarily grew out
of Congress' concern that the Commission's resources are inadequate to
supervise the activities of the growing number of investment advisers
registered with the Commission, many of which are small, locally
operated, financial planning firms.4 Congress concluded that if
the overlapping regulatory responsibilities of the Commission and the
states were divided by making the states primarily responsible for
smaller advisory firms and the Commission primarily responsible for
larger firms, the regulatory resources of the Commission and the states
could be put to better, more efficient use.5
---------------------------------------------------------------------------
\4\ The number of investment advisers registered with the
Commission increased dramatically from 5,680 in 1980 to
approximately 22,500 today. By 1995, the Commission was able to
examine smaller advisers on a routine basis on average only once
every forty-four years. See Testimony of Arthur Levitt, Chairman,
SEC, Concerning S. 1815, the ``Securities Investment Promotion Act
of 1996,'' Hearing Before the Senate Comm. on Banking, Housing, and
Urban Affairs (June 5, 1996) (hereinafter Senate Hearing), app. at
2.
\5\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-4 (1996)
(hereinafter Senate Report).
---------------------------------------------------------------------------
Congress also was concerned with the cost imposed on investment
advisers and their clients by overlapping, and in some cases,
duplicative, regulation.6 In addition to the Commission, forty-six
states regulate the activities of investment advisers under state
investment adviser statutes.7 States generally have asserted
jurisdiction over investment advisers that ``transact business'' in
their state.8 Consequently, many large advisers operating
nationally have been subject to the differing laws of many states.
Compliance with differing state laws has imposed significant regulatory
burdens on these large advisers.9# Congress intended to reduce
these burdens by subjecting large advisers to a single regulatory
program administered by the Commission.
---------------------------------------------------------------------------
\6\ Id. at 2.
\7\ The District of Columbia, Guam, and Puerto Rico also have
enacted statutes regulating investment advisers. See D.C. Code Ann.
sections 2-2631 et seq. (1994); Guam Gov't Code section 45201
(1996); P.R. Laws Ann. tit. 10, sections 861 et seq. (1992). The
four states that currently do not have investment adviser statutes
are Colorado, Iowa, Ohio, and Wyoming.
\8\ See, e.g., Unif. Sec. Act section 203 (1985); Ark. Stat.
Ann. section 23-42-301(c) (1996); Md. Code Ann., Corps & Ass'ns
section 11-401(b) (1993).
\9\ See Testimony of Mark D. Tomasko, Executive Vice President,
Investment Counsel Association of America, Inc., Senate Hearing, at
3 (``In some [advisory] firms, there are one or more persons whose
sole job is to work on state registrations and requirements.'').
---------------------------------------------------------------------------
The Coordination Act reallocates regulatory responsibilities over
advisers by limiting the application of federal law and preempting
certain state laws. Under new section 203A(a) of the Advisers
Act,10 an investment adviser that is regulated or required to be
regulated as an investment adviser in the state in which it maintains
its principal office and place of business is prohibited from
registering with the Commission unless the adviser (i) has assets under
management of not less than $25 million (or such higher amount as the
Commission may, by rule, deem appropriate), or (ii) is an adviser to an
investment company registered under the Investment Company Act of 1940
(the ``Investment Company Act'').11 The Commission is authorized
to deny registration to any applicant that does not meet the criteria
for Commission registration,12 and is directed to cancel the
registration of any adviser that no longer meets the criteria for
registration.13
---------------------------------------------------------------------------
\10\ 15 USC 80b-3A(a).
\11\ 15 USC 80a-1 et seq. The definition of ``investment
adviser'' in the Investment Company Act includes any person who,
pursuant to contract, regularly performs investment advisory
services on behalf of an adviser. See section 2(a)(20) of the
Investment Company Act [15 USC 80a-2(a)(20)]. Thus, any adviser that
provides advisory services to a registered investment company
pursuant to a contract (including a ``sub-adviser'') would be
eligible to register with the Commission, regardless of the amount
of assets under management.
\12\ Section 203(c) of the Advisers Act [15 USC 80b-3(c)] (as
amended by section 303(b)(1) of the Coordination Act).
\13\ Section 203(h) of the Advisers Act [15 USC 80b-3(h)] (as
amended by section 303(b)(2) of the Coordination Act).
---------------------------------------------------------------------------
The requirement that an adviser have assets under management of at
least $25 million in order to register with the Commission was designed
to limit Commission regulation to advisers likely to be subject to
multiple state registration requirements and whose activities affect
national markets.14 Congress recognized, however, that some
advisers that do not have $25 million of assets under management may
still have national businesses.15 Therefore, the Commission was
given the authority to exempt advisers from the prohibition on
Commission registration if the application of the prohibition would be
``unfair, a burden on interstate commerce, or otherwise inconsistent
with the purposes'' of section 203A.16
---------------------------------------------------------------------------
\14\ Congress has recognized that securities offerings of
investment companies are ``inherently national in nature.'' See H.R.
Conf. Rep. No. 864, 104th Cong., 2d Sess. 40 (1996). Therefore,
advisers to registered investment companies are permitted to (and,
in fact, must) register with the Commission, regardless of the
amount of their assets under management.
\15\ See Senate Report at 5.
\16\ Section 203A(c) of the Advisers Act [15 USC 80b-3A(c)]. The
exercise of this exemptive authority would not only permit
registration with the Commission, but would preempt state law with
respect to the exempted advisers. See section II.D. of this Release.
---------------------------------------------------------------------------
By prohibiting certain state-regulated advisers from registering
with the Commission, section 203A(a) gives the states the primary,
although not exclusive, responsibility to regulate those advisers.
Section 206 of the Advisers Act, which contains the anti-fraud
provisions of the Act, will continue to apply to state-registered
advisers,17 and the Commission retains the authority in section
209 of the Advisers Act to investigate and bring enforcement actions
against state-registered advisers for violating applicable provisions
of the Act.18
---------------------------------------------------------------------------
\17\ 15 USC 80b-6. By its terms, section 206 applies to all
persons who meet the definition of ``investment adviser'' in section
202(a)(11) of the Advisers Act [15 USC 80b-2(a)(11)], regardless of
whether they are registered with the Commission.
\18\ 15 USC 80b-9. Paragraphs (a) and (d) of section 209 of the
Advisers Act [15 USC 80b-9(a),(d)] give the Commission authority to
investigate all persons who violate provisions of the Advisers Act,
to bring actions in federal court to enforce compliance with the
Advisers Act, and, if proper showings are made, to obtain permanent
or temporary restraining orders or injunctions with respect to these
persons. The Commission may bring administrative actions against
``any investment adviser'' under section 203(e) of the Advisers Act,
and has cease-and-desist authority under section 203(k) of the
Advisers Act [15 USC 80b-3(k)] against any person who ``is
violating, has violated, or is about to violate'' any provision of
the Act, or who ``is, was, or would be a cause'' of such violation.
---------------------------------------------------------------------------
The Coordination Act gives the Commission primary responsibility to
regulate advisers that remain registered with the Commission by
preempting certain state laws with respect to those advisers. New
section 203A(b) of the Advisers Act 19 provides that state laws
requiring the ``registration, licensing, or qualification as an
investment adviser'' do not apply to any adviser registered with the
Commission or excepted from the definition of investment adviser under
section 202(a)(11) of the Advisers Act. Section 203A(b) preempts not
only a state's specific registration, licensing, or qualification
requirements, but all regulatory requirements imposed by state law on
such investment advisers
[[Page 68482]]
relating to their advisory activities or services, except those
provisions that are specifically preserved by the Coordination
Act.20 After April 9, 1997, state investment adviser laws that,
for example, establish recordkeeping, disclosure, and capital
requirements will no longer apply to advisers registered with the
Commission.21
---------------------------------------------------------------------------
\19\ 15 USC 80b-3A(b).
\20\ If Congress had intended section 203A(b) to preempt only
the specific registration, licensing, and qualification requirements
of state investment adviser statutes, it would not have had to
preserve the authority of states to investigate fraud, require
notice filings, and collect fees. See infra notes 22-26 and
accompanying text.
\21\ See, e.g., Unif. Sec. Act Model Rules 202(d)-1 (minimum
financial requirements), 202(e)-1 (bonding requirements), 203(a)-1
(recordkeeping requirements), 203(b)-1 (brochure rule), and 203(c)-1
(financial reporting requirements); N.C. Admin. Code tit. 18 r.
18.1704 (1995) (minimum financial requirements); N.J. Admin. Code
tit. 13, section 13:47A-2.3 (1992) (bonding requirements); Conn.
Agencies Regs. section 36b-31-14b (1995) (recordkeeping
requirements); Md. Regs. Code tit. 2, ch. 5 r. .05 (1994) (brochure
rule); Ga. Comp. R. & Regs. r. 590-4-8.14 (1989) (financial
reporting requirements).
---------------------------------------------------------------------------
The Coordination Act preserves state authority over Commission-
registered advisers in three areas.22 First, states may
investigate and bring enforcement actions against Commission-registered
advisers with respect to fraud and deceit.23 States may not,
however, indirectly regulate activities of Commission-registered
advisers by enforcing state requirements that define ``dishonest'' or
``unethical'' business practices unless the prohibited practices would
be fraudulent absent the requirements.24 Second, states may
require Commission-registered advisers to file, for notice purposes
only, documents filed with the Commission.25 Thus, for example, a
state could require a Commission-registered adviser to file its Form
ADV with the state, but could not require the adviser to provide any
information on the state filing other than the information that is
required by the Commission. Third, states may require Commission-
registered advisers to continue to pay state filing, registration, and
licensing fees.26
---------------------------------------------------------------------------
\22\ The Coordination Act also preserves state authority over
certain persons who act on behalf of Commission-registered advisers.
See section II.F. of this Release.
\23\ Section 203A(b)(2) of the Advisers Act [15 U.S.C. 80b-
3A(b)(2)].
\24\ While there is no legislative history addressing the scope
of section 203A(b)(2), Congress used similar language to preserve
state anti-fraud laws when it preempted state regulation of
securities offerings in Title I of the 1996 Act. See section
18(c)(1) of the Securities Act of 1933 [15 U.S.C. 77r(c)(1)] (``the
[state] securities commission[s] * * * shall retain jurisdiction
under the laws of such [s]tate[s] to investigate and bring
enforcement actions with respect to fraud or deceit * * *.''). The
House report discussing that section explained that ``[i]n
preserving [s]tate laws against fraud and deceit * * * the Committee
intends to prevent the [s]tates from indirectly doing what they have
been prohibited from doing directly * * *. The legislation preempts
authority that would allow the [s]tates to employ the regulatory
authority they retain to reconstruct in a different form the
regulatory regime * * * that [s]ection 18 has preempted.'' H.R. Rep.
No. 622, 104th Cong., 2d Sess. 34 (1996) (hereinafter House Report).
\25\ Coordination Act section 307(a).
\26\ Coordination Act section 307(b).
---------------------------------------------------------------------------
II. Discussion
The Commission is proposing several rules implementing the
provisions of the Coordination Act designed to reallocate the
regulatory responsibilities for investment advisers between the
Commission and the states.
A. Form ADV-T
Approximately 22,500 investment advisers are currently registered
with the Commission. Based on information provided by these advisers,
the Commission estimates that more than two-thirds of them would not be
eligible to register with the Commission after April 9, 1997. These
advisers must withdraw from registration or their registrations will be
subject to cancellation. To help determine each adviser's status under
the Advisers Act, as amended by the Coordination Act, and to provide
for the orderly withdrawal from Commission registration for advisers
that are no longer eligible, the Commission is proposing a transition
rule, rule 203A-5, and Form ADV-T. Under proposed rule 203A-5, all
advisers registered with the Commission on April 9, 1997 would be
required to file a completed Form ADV-T with the Commission no later
than that date.
Form ADV-T would enable an adviser to determine whether it meets
the criteria set forth in the Coordination Act for Commission
registration, as well as the criteria in the exemptive rules being
proposed by the Commission.27 Form ADV-T would require each
adviser to declare whether or not it remains eligible for Commission
registration. For an adviser that declares itself not eligible for
Commission registration, Form ADV-T would serve as the adviser's
request for withdrawal from registration as of April 9, 1997.28
---------------------------------------------------------------------------
\27\ See section II.D. of this Release.
\28\ An adviser that declares itself not eligible for Commission
registration on Form ADV-T would not be required to separately file
a Form ADV-W [17 CFR 279.2] in order to withdraw from registration
with the Commission.
---------------------------------------------------------------------------
Proposed rule 203A-5 would require every currently registered
adviser to complete, sign, and return Form ADV-T by April 9, 1997.
Failure to return the form would be a violation of a Commission rule.
Advisers that do not return the form or that fail to voluntarily
withdraw from Commission registration despite no longer being eligible
would be subject to a cancellation proceeding under section 203(h) of
the Advisers Act.
Proposed Form ADV-T is attached as an appendix to this release.
Comment is requested on proposed Form ADV-T, proposed rule 203A-5, and
the proposed process to de-register advisers that are no longer
eligible for Commission registration.
B. Assets Under Management
In most cases, the amount of assets an adviser has under management
will determine whether the adviser will be registered with the
Commission or the states. The Commission recognizes that it is
important that advisers understand how to determine the amount of
assets under management and is proposing instructions to Form ADV-T
that would provide guidance in this area.
1. Securities Portfolios
Section 203A(a)(2) of the Advisers Act defines ``assets under
management'' as the ``securities portfolios with respect to which an
investment adviser provides continuous and regular supervisory or
management services.'' 29 Proposed instruction 7(a) to Form ADV-T
would provide that a ``securities portfolio'' means any account at
least fifty percent of the total value of which consists of securities.
Real estate, commodities, and collectibles are not securities and would
not be included. In order to prevent an account in which the adviser
has taken a defensive position in cash from being excluded as a
``securities portfolio,'' the instruction would require an adviser to
exclude cash and cash equivalents (e.g., demand deposits) in
determining whether an account is a securities portfolio.30
---------------------------------------------------------------------------
\29\ 15 U.S.C. 80b-3A(a)(2).
\30\ Instruction 7(a) also would explain that the following
securities portfolios should be included in the determination of the
amount of assets under management: (i) Family or proprietary
accounts (except the personal assets of a sole proprietor), (ii)
accounts for which the adviser receives no compensation, and (iii)
accounts of foreign clients.
---------------------------------------------------------------------------
Instruction 7(b) would require that, once the adviser has
determined that an account is a ``securities portfolio,'' the entire
value of the account, including cash and any non-securities positions,
be included in the value of the adviser's assets under management.
Exclusion of any component of a securities portfolio is not expressly
required by section 203A(a)(2), and would be inconsistent with the
manner in which the value of client portfolios is traditionally
calculated. Comment is requested whether there are types of assets that
[[Page 68483]]
nonetheless should be excluded from a securities portfolio, and
therefore from the amount of assets under management.
2. Valuation and Reporting of Securities Portfolios
Instruction 7(d) to proposed Form ADV-T would address the method
and timing of the valuation of an adviser's securities
portfolios.31 The value of a securities portfolio would be
required to be determined as of a date no more than ten business days
before the filing of Form ADV-T.32 The instruction would require
that the methodology by which the securities are valued be the same as
that used to value the securities for purposes of client reporting or
to determine fees for investment advisory services.
---------------------------------------------------------------------------
\31\ In general, the value of assets under management would be
required to be included on Form ADV-T only if the amount of assets
under management is the sole basis upon which the adviser is
eligible for Commission registration. See Part III of proposed Form
ADV-T.
\32\ See Instruction 7(d) to proposed Form ADV-T.
---------------------------------------------------------------------------
3. Continuous and Regular Supervisory or Management Services
Instruction 7(c) to proposed Form ADV-T would provide guidance for
determining whether an adviser provides an account with ``continuous
and regular supervisory or management services'' within the meaning of
section 203A(a)(2). The Commission would consider accounts over which
advisers have discretionary authority and for which they provide
ongoing management services to receive continuous and regular
supervisory or management services (and therefore the assets of such
accounts to be ``assets under management''). In addition, the
Commission believes that a limited number of non-discretionary advisory
arrangements involve such services.
Whether an adviser that does not have discretionary authority will
be considered to provide continuous and regular management or
supervisory services with respect to an account would depend upon the
nature of the adviser's responsibilities. The greater the amount of
day-to-day responsibility an adviser has, the more likely the adviser
would be providing continuous and regular supervisory or management
services. For example, an adviser that has traditional portfolio
management responsibilities but must obtain client consent before
executing a trade would provide continuous and regular management or
supervisory services with respect to the account.33
---------------------------------------------------------------------------
\33\ The frequency with which an adviser initiates trades,
provides reports to clients, or has contacts with clients would not
necessarily determine whether the adviser provides continuous and
regular supervisory or management services.
---------------------------------------------------------------------------
The Commission believes that Congress intended to exclude from
Commission registration most advisers that do not engage in traditional
ongoing portfolio management, including most financial planners and
consultants. Under the proposed instructions, a financial planner that
merely undertakes to monitor the markets and advise its clients as to
the advisability of changes to their portfolios would not be providing
continuous and regular management or supervisory services.34 A
financial planner that otherwise would be regulated by the states could
not ``opt'' to be regulated by the Commission by revising its financial
planning agreements to include the statutory language or similar
language unless such a revision materially changes the nature of the
services being provided.35
---------------------------------------------------------------------------
\34\ To enable the Commission to evaluate the claims of advisers
relying on the non-discretionary management of assets as the basis
of eligibility to remain registered with the Commission, proposed
Form ADV-T would require these advisers to append a written
statement explaining the nature of the non-discretionary supervisory
or management services. See Part III, Item (c) of proposed Form ADV-
T.
\35\ The Commission is concerned that, if financial planners
were permitted to treat assets they ``monitor'' as assets under
management and therefore remain registered with the Commission, the
intent of Congress to reallocate regulatory responsibilities by
making ``almost 72 [percent] of Commission [investment adviser]
registrants'' subject primarily to state regulation would not be
effected. See Senate Report at 4.
---------------------------------------------------------------------------
In evaluating the effect that the $25 million threshold would have
on the number of investment advisers registered with the Commission,
Congress relied on data provided by the Commission that was derived
from responses on Form ADV.36 Thus, the Commission believes that
Congress intended to include as assets under management the types of
assets advisers have reported on Form ADV. The Commission is proposing
to require advisers to report on Form ADV-T the amount of assets under
management reported on Form ADV.37 An adviser that reports
substantially more assets under management on its Form ADV-T than on
its Form ADV could be asked to explain the difference.
---------------------------------------------------------------------------
\36\ See Testimony of Arthur Levitt, Chairman, SEC, Senate
Hearing, app. at 2 (providing data reflected in Senate Report). The
Form ADV data provided in the Commission's testimony was extracted
from responses to Items 18 and 19 of Part I of Form ADV, which
require information on the market value of client securities
portfolios managed on a discretionary basis and managed or
supervised on a non-discretionary basis.
\37\ See Part III, Item (b) of proposed Form ADV-T.
---------------------------------------------------------------------------
Comment is requested on the Commission's proposed interpretation of
``assets under management'' and the related proposed instructions to
Form ADV-T. Comment also is requested on the proposed examples provided
on Form ADV-T of accounts that receive continuous and regular
supervisory or management services. Commenters are requested to provide
additional examples. The Commission is also interested in commenters'
views whether the proposed form and instructions would allow
manipulation of the amount of an adviser's assets under management in
order to evade the eligibility requirements and, if so, whether there
are any alternative methods to address that potential problem.
4. Proposed Safe Harbor for State-Registered Investment Advisers
The Commission recognizes that section 203A(a)(2) does not, and
proposed Form ADV-T would not, provide a bright-line test by which an
adviser that does not have discretionary authority over client assets
may determine whether it is eligible to register with the Commission.
The Commission therefore is proposing rule 203A-4 to provide a safe
harbor from Commission registration for an adviser that is registered
with state securities authorities (rather than the Commission) based on
a reasonable belief that it is prohibited from registering with the
Commission because it has insufficient assets under management.
Under proposed rule 203A-4, the Commission would not assert a
violation of the Advisers Act for failure to register with the
Commission (or to comply with the provisions of the Advisers Act to
which an adviser is subject if required to register) if the adviser
reasonably believes that it does not have sufficient assets under
management (at least $30 million) and is therefore not required to
register with the Commission.38 This safe harbor would be
available only to an adviser that is registered with the state in which
it has its principal office and place of business.
---------------------------------------------------------------------------
\38\ As discussed infra, the Commission is proposing to increase
the $25 million threshold for Commission registration to $30
million, and to provide an optional exemption from the prohibition
on registering with the Commission for advisers having between $25
and $30 million of assets under management. See section II.C.1. of
this Release.
---------------------------------------------------------------------------
C. Transitions Between State and Commission Registration
The Coordination Act contemplates that a state-registered adviser
whose assets under management increase to
[[Page 68484]]
over $25 million will withdraw its state registration and register with
the Commission. Conversely, an adviser whose assets under management
decline below $25 million will withdraw its Commission registration and
register with a state (or states).
The Coordination Act could require an adviser that has close to $25
million of assets under management to register with the Commission only
to de-register and re-register with a state shortly thereafter. This
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. The Commission recognizes that this process would be
burdensome and costly to advisers and therefore is proposing to use the
authority provided to it in the Coordination Act to adopt a new rule,
rule 203A-1, that would create a more flexible regime to avoid
``transient'' registration problems.
1. Transition from State to Commission Registration
Section 203A(a)(1)(A) of the Advisers Act authorizes the Commission
to adopt a rule to increase the $25 million of assets under management
threshold for Commission registration.39 In addition, as discussed
above, the Commission has authority to exempt persons not meeting the
threshold from the prohibition on registering with the
Commission.40 The Commission is proposing to use these grants of
authority to increase the $25 million threshold to $30 million, and to
provide an optional exemption from the prohibition on registering with
the Commission for advisers having between $25 and $30 million of
assets under management.41
---------------------------------------------------------------------------
\39\ 15 USC 80b-3A(a)(1)(A).
\40\ See supra note and accompanying text.
\41\ Paragraphs (a) and (b) of proposed rule 203A-1.
---------------------------------------------------------------------------
Proposed rule 203A-1 would permit advisers having between $25 and
$30 million of assets under management to determine whether and when to
change from state to Commission registration. In order to avoid having
to de-register shortly after registering with the Commission, an
adviser reaching the $25 million of assets under management threshold
could defer registration with the Commission. An adviser would not be
required to register with the Commission until its assets under
management reached $30 million, and would not be subject to Commission
cancellation of its registration until its assets had fallen below $25
million. A state-registered adviser whose assets under management grew
to $30 million or more would be required to register with the
Commission promptly when the assets reached $30 million (not when the
adviser subsequently reported its assets under management to the
state). Comment is requested whether the proposed $5 million ``window''
would provide advisers with sufficient flexibility to avoid the costly
process of periodically registering and de-registering with the
Commission and the states. Comment is also requested on other
alternatives that could meet the needs of such advisers, for example,
by providing a grace period for the transition from state to Commission
registration, or by determining whether Commission registration is
required on an annual basis.
2. Transition from Commission to State Registration
The Commission is proposing to amend Form ADV by adding new
Schedule I (``eye'') that would require advisers to report information
necessary to determine continued eligibility for Commission
registration similar to that required by Form ADV-T.42 The
information on Schedule I would be used to determine whether the
Commission should cancel the registration of an adviser because the
adviser no longer meets the criteria for Commission registration.
Schedule I would be required to be updated annually, within 90 days
after the end of the adviser's fiscal year. An adviser whose assets
under management fell below $25 million would not be required to report
this event until after the end of its fiscal year (and not at all
unless its assets under management remained below $25 million at the
time of filing its Schedule I). Thus, eligibility for Commission
registration would be determined annually based upon the value of
assets under management at a single point in time. Comment is requested
whether the Commission should measure assets under management more
frequently, or based on the average value of assets at the end of
certain periods (e.g., calendar quarters).
---------------------------------------------------------------------------
\42\ See section II. A of this Release.
---------------------------------------------------------------------------
Section 203A(b) of the Advisers Act, together with most state
investment adviser statutes, will cause state registration requirements
to be triggered by either a withdrawal from, or by the Commission's
cancellation of, registration with the Commission. To allow an adviser
facing potential cancellation of its Commission registration sufficient
time to register under applicable state statutes, the Commission is
proposing to provide a ``grace period'' of 90 days after the date the
adviser files its Schedule I indicating that it would not be eligible
for Commission registration.43 Upon the expiration of this period,
the Commission would institute proceedings to cancel the adviser's
registration if the adviser had not withdrawn its registration on its
own. As provided under the Advisers Act, an adviser would be given
notice and an opportunity to show why its registration should not be
cancelled (i.e., because since the time the adviser had filed its
Schedule I to Form ADV, its amount of assets under management had
grown).44 Comment is requested whether a 90-day grace period would
allow sufficient time for an adviser to register with the states.
---------------------------------------------------------------------------
\43\ Paragraph (c) of proposed rule 203A-1. The Commission is
not proposing a similar grace period after the filing of Form ADV-T.
The Commission presumes that an adviser not eligible to maintain its
registration with the Commission on April 9, 1997 would already be
registered with the appropriate state(s) at the time of filing Form
ADV-T.
\44\ Section 211(c) of the Advisers Act [15 USC 80b-11(c)].
---------------------------------------------------------------------------
D. Exemptions from Prohibition on Registration with the Commission
As discussed above, the Coordination Act gives the Commission
authority to exempt advisers from the prohibition on Commission
registration if the prohibition would be ``unfair, a burden on
interstate commerce, or otherwise inconsistent with the purposes'' of
section 203A.45 Congress intended the Commission to grant these
exemptions to advisers having ``a national or multistate practice.''
46 The Commission is proposing a new rule, rule 203A-2, that would
exempt four types of advisers from the prohibition on Commission
registration. The effect of the first three exemptions would be to make
section 203 of the Advisers Act applicable to exempted advisers and,
thus, require them to register with the Commission (unless exempted
from Commission registration under section 203(b) of the Act). The
fourth exemption would enable newly formed advisers to register with
the Commission if they have a reasonable expectation that they will be
eligible for Commission registration within 90 days.
---------------------------------------------------------------------------
\45\ Section 203A(c). See supra notes and accompanying text. As
discussed above, the exercise of this exemptive authority would not
only permit registration with the Commission, but would preempt
state law with respect to the exempted advisers. See supra notes 19-
21 and accompanying text.
\46\ Senate Report at 5.
---------------------------------------------------------------------------
1. Nationally Recognized Statistical Rating Organizations
``Nationally recognized statistical rating organization''
(``NRSRO'') is a term used in several Commission rules
[[Page 68485]]
to identify a type of entity, often referred to as a ``rating agency,''
that provides ratings of securities, on the basis of which the
securities receive special treatment under Commission rules.47 All
of the entities currently designated as NRSROs are registered with the
Commission as investment advisers.48 While NRSROs do not have
assets under management, their activities have a significant effect on
the national securities markets and the operation of federal securities
laws.49 The Commission believes that it would be inconsistent with
the purposes of the Coordination Act for this type of entity to be
regulated by the states rather than by the Commission, and is proposing
to exempt NRSROs from the prohibition on registering with the
Commission.50
---------------------------------------------------------------------------
\47\ See, e.g., rule 15c3-1 under the Securities Exchange Act of
1934 (``Exchange Act'') [17 CFR 240.15c3-1] (broker-dealer net
capital); rule 2a-7 under the Investment Company Act [17 CFR 270.2a-
7] (money market funds).
\48\ The Commission's Division of Market Regulation responds to
requests for NRSRO designation through no-action letters, and has
designated six rating agencies as NRSROs for purposes of the net
capital rule (rule 15c3-1 under the Exchange Act).
\49\ See Exchange Act Rel. No. 34616 (Aug. 31, 1994) [59 FR
46314 (Sept. 7, 1994)] (describing the use of NRSRO ratings by
Congress and the Commission).
\50\ Paragraph (a) of proposed rule 203A-2.
---------------------------------------------------------------------------
2. Pension Consultants
Pension consultants provide various advisory services to
fiduciaries of pension plans, including assistance in selecting and
monitoring investment advisers that manage assets of such plans.51
Pension consultants may not have assets under management, but their
activities have a direct effect on the management of billions of
dollars of pension plan assets. The Commission believes that it would
be inconsistent with the purposes of the Coordination Act for these
advisers to be regulated by the states rather than by the Commission,
and is proposing to exempt certain pension consultants, as defined
under the proposed rule, from the prohibition on registering with the
Commission.
---------------------------------------------------------------------------
\51\ See Investment Advisers Act Rel. No. 1092 (Oct. 8, 1987)
[52 FR 38400, 38401 (Oct. 16, 1987)].
---------------------------------------------------------------------------
Not all pension consultants, however, are engaged in activities
that substantially affect national markets. Under paragraph (b) of
proposed rule 203A-2, a pension consultant would be defined as an
investment adviser that provides investment advice to certain employee
benefit plans with respect to assets having an aggregate value of at
least $50 million during the adviser's last fiscal year.52 Comment
is requested as to the appropriateness of the proposed exemption, and
the proposed criteria for determining whether a pension consultant's
activities warrant exemption.
---------------------------------------------------------------------------
\52\ In determining the aggregate value of advised assets, the
adviser would be able to include only that portion of a plan's
assets for which the adviser provided investment advice (including
any advice with respect to the selection of an investment adviser to
manage the assets). The value of assets would be determined as of
the date during the adviser's most recently completed fiscal year
that the adviser was last employed or retained by contract to
provide investment advice to the plan with respect to those assets.
See paragraph (b)(3) of proposed rule 203A-2.
---------------------------------------------------------------------------
3. Certain Affiliated Investment Advisers
Some firms conduct their advisory activities through separately
registered advisers, not all of which may meet the criteria for
Commission registration. For example, a firm may conduct its portfolio
management activities in Subsidiary A, while conducting its financial
planning activities in Subsidiary B, each of which is separately
registered as an investment adviser. As a result, Subsidiary B may have
no assets under management and, unless another exemption is available,
would be regulated by the states rather than by the Commission.
This result may be appropriate for affiliated advisers that are
related only by ownership.53 The activities of affiliated
advisers, however, may be centrally managed, and the effect of the
Coordination Act's prohibition on registration would be either to
subject an advisory firm to different schemes of regulation or force it
to reorganize its operations. The Commission believes that either
result could be unfair to the adviser and a burden on interstate
commerce and is therefore proposing to exempt from the prohibition on
Commission registration any adviser that directly or indirectly
controls, is controlled by, or is under common control with an
investment adviser that is eligible to register (and is, in fact,
registered) with the Commission.54 ``Control'' would be defined,
for purposes of the rule, as the power to direct or cause the direction
of the management or policies of an adviser, whether through ownership
of securities, by contract, or otherwise.55 The exemption would be
available only if the principal office and place of business of the
adviser is the same as that of the affiliated registered
adviser.56
---------------------------------------------------------------------------
\53\ The Commission does not believe that Congress intended to
permit an adviser to register with the Commission merely because it
is an affiliate of a Commission-registered adviser. In section
203A(b)(1)(A) of the Advisers Act [15 USC 80b-3A(b)(1)(A)], Congress
preempted state regulation of advisers and certain ``supervised
persons.'' Congress defined supervised persons as persons who
provide investment advice on behalf of the adviser. See section
202(a)(25) of the Advisers Act [15 USC 80b-2(a)(25)]. The principal
effect of using this new defined term, rather than the term
``persons associated with an investment adviser,'' which is defined
in section 202(a)(17) of the Advisers Act [15 USC 80b-2(a)(17)], is
to exclude any person controlling or controlled by the adviser
unless the person provides investment advice on behalf of the
adviser. See section F.1. of this Release.
\54\ Paragraph (c) of proposed rule 203A-2. By proposing rule
203A-2(c), the Commission is not suggesting that an advisory firm
may reorganize its operations in order to circumvent the
requirements of the Advisers Act. See section 208(d) of the Advisers
Act [15 USC 80b-8(d)] (making unlawful for any person ``indirectly,
or through or by any other person, to do any act or thing which it
would be unlawful for such person to do directly'' under the
Advisers Act). Cf. Preliminary Note 2 to rule 203(b)(3)-1 [17 CFR
275.203(b)(3)-1] under the Advisers Act.
\55\ Under this definition, any person that directly or
indirectly has the right to vote 25 percent or more of the voting
securities or is entitled to 25 percent or more of the profits of an
adviser would be presumed to control that adviser.
\56\ The definition of ``principal office and place of
business'' in proposed rule 203A-3(c) would also apply to this rule.
See section II.E.2. of this Release.
---------------------------------------------------------------------------
Affiliated advisers having the same principal office and place of
business are likely to have overlapping operations, similar books and
records, and integrated compliance systems. Compliance with separate
schemes of regulation may not permit the integration of such systems
and therefore would be burdensome for these advisers. Moreover, the
Commission has found that it is more efficient to examine all of the
activities of such affiliated advisers at the same time. Comment is
requested whether the proposed conditions for exempting an affiliated
adviser from the prohibition on registering with the Commission are
appropriate. Is having the same principal office and place of business
an appropriate criterion by which to assume the integration of
operations of affiliated advisers? If not, commenters are requested to
provide alternative criteria.
4. Investment Advisers With Reasonable Expectation of Eligibility
A newly formed adviser may not be eligible to register with the
Commission at the time of its formation, but may have a reasonable
expectation that within a short period of time it will become eligible
to register. For example, an adviser may not initially have assets
under management, but may anticipate an inflow of assets shortly after
commencing operations. The Commission recognizes that requiring a newly
formed adviser to register with the states, only to de-register and
[[Page 68486]]
register with the Commission shortly thereafter, would be unfair,
burdensome, and inconsistent with the purposes of section 203A.
Therefore, the Commission is proposing to exempt certain newly formed
advisers from the prohibition on Commission registration.
Under proposed rule 203A-2(d), an adviser with a reasonable
expectation that it will be eligible for Commission registration within
90 days after the date the adviser's registration becomes effective
would be permitted to register with the Commission. At the end of the
90-day period, the adviser would be required to file an amended
Schedule I. If the adviser indicates on the amended Schedule I that it
has not become eligible to register with the Commission, the adviser
would be required to file a Form ADV-W concurrently with the Schedule
I, thereby withdrawing from registration with the Commission. The
proposed exemption would be available only to advisers that are not
registered or required to be registered with either the states or the
Commission.
The Commission requests comment on the utility, scope, and
conditions of the proposed exemptions, including whether the exemptions
should require Commission registration for advisers meeting the
exemptive criteria. Are there other classes of advisers that the
Commission should exempt because their prohibition from registering
with the Commission would be unfair, a burden on interstate commerce,
or otherwise inconsistent with the purposes of section 203A? Comment is
also requested whether the 90-day period is adequate or whether it
should be longer.
E. Investment Advisers Not Regulated or Required To Be Regulated by
States
Under section 203A(a)(1) of the Advisers Act, advisers that are not
regulated or required to be regulated as investment advisers in the
state 57 in which they have their principal office and place of
business must register with the Commission regardless of the amount of
assets they have under management.58 This provision makes clear
that the Commission will retain regulatory responsibility for advisers
with a principal office and place of business in states that have not
enacted investment adviser statutes, and for foreign advisers doing
business in the United States. The Coordination Act does not, however,
provide an explanation of when an adviser is ``regulated or required to
be regulated'' as an investment adviser, nor does it define ``principal
office or place of business.''
---------------------------------------------------------------------------
\57\ The term ``state'' is defined in section 202(a)(19) of the
Advisers Act [15 USC 80b-2(a)(19)] to include the District of
Columbia, Puerto Rico, the Virgin Islands, and any other possession
of the United States.
\58\ 15 USC 80b-3A(a)(1).
---------------------------------------------------------------------------
1. ``Regulated or Required To Be Regulated''
Although the phrase ``regulated or required to be regulated'' is
used in section 203A(a)(1), the legislative history of this provision
suggests that Congress equated regulation by a state with registration
with the state.59 This interpretation seems appropriate since an
adviser exempt from registering under a state statute typically is
subject only to the anti-fraud provisions of the state statute and not
to substantive regulatory provisions. Accordingly, the Commission
proposes to interpret section 203A(a)(1) as requiring any person who
meets the definition of investment adviser in section 202(a)(11) of the
Advisers Act (and that is not otherwise exempt from registration by
section 203(b) of the Act) 60 to register with the Commission if
the person has a principal office and place of business in a state that
has an investment adviser statute, but is not required to be registered
(and, in fact, is not registered) under that statute. The person may
not be required to register with the state as a result of an exemption
from registration or an exception from the definition of ``investment
adviser'' in that state's statute.61
---------------------------------------------------------------------------
\59\ Senate Report at 4 (``The Commission will continue to
supervise all advisers that are based in a state that does not
register investment advisers.'').
\60\ 15 USC 80b-3(b). Section 203(b) exempts from registration
(i) any adviser whose clients are all residents of the state within
which the adviser maintains its principal office and place of
business, and that does not furnish advice or issue reports with
respect to securities listed or admitted to unlisted trading
privileges on any national securities exchange (the ``intrastate''
exemption); (ii) any adviser whose only clients are insurance
companies (the ``insurance company'' exemption); (iii) any adviser
that, among other things, does not hold itself out generally to the
public as an adviser and during the course of the preceding twelve
months had fewer than fifteen clients (the ``small adviser''
exemption); (iv) any adviser that is a charitable organization and
that provides advice only to other charitable organizations (the
``charitable adviser'' exemption, added by section 5 of the
Philanthropy Protection Act of 1995, Pub. L. 104-62, 109 Stat. 682,
685 (1995) (codified in scattered sections of 15 U.S.C.)); and (v)
any adviser that provides advice solely to church plans (the
``church plan adviser'' exemption, added by section 508(d) of the
1996 Act).
\61\ For example, a lawyer who provides discretionary advisory
services as a ``bona fide fiduciary'' may not be required to
register as an investment adviser under Massachusetts law. Unless
the lawyer's performance of such services is solely incidental to
the practice of law (within the meaning of section 202(a)(11)(B) of
the Advisers Act), the lawyer would likely be required to register
under the Advisers Act even if the lawyer provides such services
with respect to less than $25 million of assets. Compare Mass. Ann.
Laws ch. 110A, section 401(m) (1996) with section 202(a)(11)(B) of
the Advisers Act [15 USC 80b-2(a)(11)(B)].
---------------------------------------------------------------------------
One effect of this proposed interpretation would be that all
advisers will be regulated either by the Commission or the states,
except for advisers that are exempt from registration under both the
Advisers Act and state statutes. Another effect would be that some
advisers a state has determined not to regulate would be registered
with the Commission even though their operations may be very limited.
The Commission requests comment whether it should recommend that
Congress amend section 203A(a)(1) to prohibit an adviser from
registering with the Commission if it has its principal office and
place of business in a state that has enacted an investment adviser
statute (regardless of whether that statute requires the adviser to
register).
``Principal Office and Place of Business''
Currently, advisers are required to identify their principal place
of business in response to Item 2A of Form ADV. Form ADV does not,
however, define the term principal place of business. Because of the
added regulatory significance of the determination of the state in
which the adviser has its principal place of business, the Commission
is proposing to define the term ``principal office and place of
business'' to mean the ``executive office of the investment adviser
from which the officers, partners, or managers of the investment
adviser direct, control, and coordinate the activities of the
investment adviser.'' 62
---------------------------------------------------------------------------
\62\ Paragraph (c) of proposed rule 203A-3.
---------------------------------------------------------------------------
2. F. Persons Who Act on Behalf of Investment Advisers
In addition to preempting state law with respect to investment
advisers that are registered with the Commission, the Coordination Act
preempts state law with respect to ``supervised persons'' of
Commission-registered advisers.63 The Coordination Act defines a
supervised person 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.'' 64 Thus,
the definition of supervised person parallels the traditional
Commission view that persons performing advisory services on behalf of
an adviser are not required to
[[Page 68487]]
separately register.65 The definition of supervised person
includes a person whose status is an ``employee,'' as well as a person
who provides advice on behalf of the adviser pursuant to a contract, as
long as the person is under the supervision and control of the
adviser.66
---------------------------------------------------------------------------
\63\ Section 203A(b).
\64\ Section 202(a)(25).
\65\ Persons who perform investment advisory services on behalf
of, and under the supervision and control of, a registered adviser
are not required to separately register as investment advisers. See,
e.g., Abid Mansoor (pub. avail. Feb. 5, 1992); Corinne E. Wood (pub.
avail. Apr. 17, 1986); The Burney Company (pub. avail. Feb. 7,
1977). Persons who provide advice on behalf of persons excepted from
the definition of investment adviser in section 202(a)(11) are
likewise excepted from the definition of investment adviser. See
Robert S. Strevell (pub. avail. Apr. 29, 1985).
\66\ Senate Report at 4.
---------------------------------------------------------------------------
The Coordination Act, however, does preserve certain state laws
with respect to certain supervised persons of Commission-registered
advisers by providing that a ``[s]tate may license, register, or
otherwise qualify any investment adviser representative who has a place
of business located within that [s]tate.'' 67 The Coordination Act
does not define ``investment adviser representative,'' nor does it
describe what constitutes a ``place of business.'' In order to clarify
these terms and thus the scope of state preemption under the
Coordination Act, the Commission is proposing a rule defining these
terms.
---------------------------------------------------------------------------
\67\ Section 203A(b)(1)(A).
---------------------------------------------------------------------------
1. ``Investment Adviser Representative''
The Congressional committee reports provide no indication as to
which persons providing investment advice on behalf of Commission-
registered advisers Congress intended states to continue to register.
Testimony in support of preserving state authority over investment
adviser representatives, however, suggests that Congress intended to
permit state securities authorities to establish qualification
standards for investment adviser representatives in order to protect
individual, or ``retail,'' investors.68
---------------------------------------------------------------------------
\68\ The North American Securities Administrators Association
(``NASAA'') addressed this matter in its testimony before the Senate
committee.
Of particular concern to the states is the potential loss of
licensing authority over [investment adviser representatives]
associated with [advisory] firms operating out of small branch
offices nationwide. Typically, a small number of [investment adviser
representatives] operate out of each office providing, almost
exclusively, retail investment advisory services * * *. Because of
the local nature and retail clientele of these [representatives],
the states have a strong interest in maintaining oversight of them.
See Testimony of Dee R. Harris, President, NASAA, Senate Hearing
at 6-7.
NASAA recommends * * * requiring all supervised persons that
provide advice to retail clients to be licensed with the states
regardless of the size of their [advisory] firm. Supervised persons
would be exempt from state licensure if they do not solicit retail
business nor hold themselves out as providing investment advice to a
retail clientele.
See NASAA Recommendations Relating to S. 1815 and H.R. 3005
(July 8, 1996), at 1-2.
---------------------------------------------------------------------------
While the term ``investment adviser representative'' is used in
many states' laws, the Commission believes that it would be
inconsistent with the policies underlying the 1996 Act to be guided by
individual state's investment adviser statutes. Many states define
``investment adviser representative'' differently,69 and in ways
that reach persons who do not provide advice to retail investors (e.g.,
portfolio managers of mutual funds).70 In light of the many
provisions in the Coordination Act designed to promote uniformity of
regulation, and the decision of Congress to preempt state laws
regulating the offering of shares of investment companies,71 the
Commission does not believe that Congress intended the definition of
``investment adviser representative'' to incorporate state law. The
Commission thus concludes that Congress used the undefined term
``investment adviser representative'' with the expectation that the
Commission would use its existing rulemaking authority to define
it.72 The Commission is proposing to adopt a rule defining the
term ``investment adviser representative'' in a manner consistent with
the policy concerns that appear to have given rise to the exception
from the provisions of the Coordination Act that preempt state law with
respect to Commission-registered advisers and their supervised persons.
---------------------------------------------------------------------------
\69\ The investment adviser statutes of New Hampshire and New
Jersey define ``investment adviser representative'' to include any
person who is authorized to represent an investment adviser in
providing investment advice. See N.H. Rev. Stat. Ann. section 421-
B:2(II) (1991 & Supp. 1996). The investment adviser statutes of
Oklahoma, Oregon, and Virginia define ``investment adviser
representatives'' to include persons who prepare reports or analyses
concerning securities. See Okla. Stat Ann. tit. 71 section 2(l)
(Supp. 1997); Or. Rev. Stat. section 59.015(16)(a)(B) (1995); Va.
Code Ann. section 13.1-501(A) (1993).
\70\ See Unif. Sec. Act section 401(g) (1986 amendments)
(defining ``investment adviser representative'' to include any
person employed by or associated with an investment adviser, other
than clerical or ministerial personnel, who manages accounts or
portfolios of clients, or who determines which recommendations or
advice regarding securities should be given); Definitions and
Procedures for Investment Adviser Representatives and Branch Offices
(Order of West Virginia Deputy Commissioner of Securities, amended
eff. Oct. 11, 1995) (defining ``investment adviser representative''
to include clerical and ministerial employees).
\71\ See 1996 Act section 102 (amending section 18(b)(2) of the
Securities Act of 1933 [15 USC 77r(b)(2)] to preempt state law
requiring registration of securities issued by investment companies
that are registered or that have filed a registration statement with
the Commission); see also Senate Report at 6-7; House Report at 30-
31.
\72\ This conclusion is also suggested by the fact that,
although the drafters of section 203A had available to them two
terms--``person associated with an investment adviser'' and
``supervised person''--that could have been used to describe persons
the states would have authority to register, the drafters chose to
use neither term. ``Person associated with an investment adviser''
is defined in section 202(a)(17), and ``supervised person'' is
defined in section 202(a)(25) of the Advisers Act.
---------------------------------------------------------------------------
Proposed rule 203A-3(a) would define ``investment adviser
representative'' to be a ``supervised person'' of an investment
adviser, if a substantial portion of the business of the supervised
person is providing investment advice to clients who are natural
persons. The term therefore would exclude (and thereby preclude states
from registering) supervised persons who provide advice to investment
companies, businesses, educational institutions, charitable
institutions and other entities that are not natural persons.
Supervised persons who provide advice to natural persons, but who do
not ``on a regular basis solicit, meet with, or otherwise communicate
to clients'' also would be excepted from the definition.73 This
exception is intended to exclude personnel of an adviser who may be
involved in the formulation of investment advice given to natural
persons, but who are not directly involved in providing advice to (or
soliciting) clients. In addition, supervised persons who give only
impersonal advice would be excepted.74 This provision is intended
to exclude personnel who may be involved, for example, in preparing a
newsletter, providing general market timing advice, or preparing a list
of recommended purchases for inclusion on a web site.
---------------------------------------------------------------------------
\73\ Paragraph (a)(1)(i) of proposed rule 203A-3.
\74\ Paragraph (a)(1)(ii) of proposed rule 203A-3.
---------------------------------------------------------------------------
As discussed above, the definition of ``investment adviser
representative'' would include only those supervised persons a
``substantial portion'' of whose business is providing advice to
natural persons. A substantial portion of a supervised person's
business would be providing advice to natural persons if, during the
preceding twelve months, more than ten percent of the supervised
person's clients consisted of natural persons, or more than ten percent
of the assets under management by the adviser attributable to the
supervised person were assets of clients who are natural
persons.75 This provision is intended to permit representatives
who provide advisory services primarily to clients that are not natural
persons to accept so-called ``accommodation clients'' without being
required to register as investment adviser representatives
[[Page 68488]]
under state law.76 Comment is requested whether the criteria for
determining whether a substantial portion of an investment adviser
representative's business is providing advice to retail persons are
workable. If not, commenters are requested to provide alternatives.
---------------------------------------------------------------------------
\75\ Paragraph (a)(2)(ii) of proposed rule 203A-3.
\76\ The proposed exception would be available to all investment
adviser representatives, regardless of whether they hold themselves
out as providing advisory services to natural persons. Limiting this
exception to representatives that do not hold themselves out as
providing advisory services to natural persons would be a difficult
standard to apply, as representatives may not specify the type of
client to whom their advertisements and other communications are
directed.
---------------------------------------------------------------------------
The Commission notes that persons not falling within the definition
of ``investment adviser representative,'' while not subject to state
registration and qualification standards, would not be ``unregulated.''
Although the Commission does not separately register persons associated
with investment advisers, the Commission regulates their activities in
connection with the regulation of investment advisers. These persons
are subject to most of the provisions of the Advisers Act, either
directly, as persons associated with investment advisers, or
indirectly, as aiders and abettors.77
---------------------------------------------------------------------------
\77\ See sections 203 (d)-(f) of the Advisers Act [15 U.S.C.
80b-3 (d)-(f)].
---------------------------------------------------------------------------
Comment is requested on the proposed definition of ``investment
adviser representative,'' and whether the exclusions from the term (and
thus state registration requirements) are appropriate. Comment is
requested whether supervised persons a substantial portion of whose
business is providing services to natural persons who have a high net
worth or meet other indicia of financial sophistication should be
excepted from the definition.78 Should an investment adviser
representative that is dually-registered as a broker-dealer agent in a
state be excepted from the definition of ``investment adviser
representative''?
---------------------------------------------------------------------------
\78\ E.g., clients with whom an adviser may enter into an
advisory contract providing performance-based compensation under
rule 205-3 of the Advisers Act [17 CFR 275.205-3].
---------------------------------------------------------------------------
2. ``Place of Business''
While section 203A(b)(1)(A) preserves the ability of a state to
register and regulate ``investment adviser representatives'' of
Commission-registered advisers, the section limits a state's authority
to only those investment adviser representatives who have a ``place of
business'' within the state. The Coordination Act does not define the
phrase ``place of business.''
The Commission is proposing new rule 203A-3(b) to clarify that, for
purposes of section 203A(b)(1)(A), a place of business is any ``place
or office from which the investment adviser representative regularly
provides advisory services or otherwise solicits, meets with, or
communicates to clients.'' Under section 203A(b)(1)(A) and proposed
rule 203A-3(b), an investment adviser representative may be required to
register in multiple states if the adviser representative has multiple
places of business. A place of business need not be a formal office,
but it cannot be merely an office of an agent for service of process or
a mail box. A place of business may, however, include a hotel room,
temporarily rented office space, or even the home of a client, if the
adviser representative regularly provides advisory services or
solicits, meets with, or otherwise communicates to the client at that
location.
If, however, an investment adviser representative does not
regularly provide advisory services or otherwise solicit, meet with, or
communicate to clients at any place or office, proposed rule 203A-3(b)
would define the place of business of such investment adviser
representative to be the residence of each client. This provision is
designed to prevent itinerant investment adviser representatives from
claiming that they have no place of business and thus are not subject
to any state's registration or qualification requirements. As a
practical matter, therefore, an investment adviser representative
likely will designate at least one place or office in a state in which
he or she regularly communicates to clients as a place of business.
Comment is requested whether the proposed rule will provide clear
guidance for determining whether an investment adviser representative
has a place of business in a particular state. Comment is specifically
requested whether additional guidance or criteria would be appropriate
to address investment adviser representatives that provide services to
clients through electronic media.79
---------------------------------------------------------------------------
\79\ An investment adviser representative that provides
investment advisory services through a web site generally would be
considered to have its place of business at the physical location
where the representative typically conducts his or her web site-
related advisory business. For example, a representative works on a
computer at home in State X where he or she designs a web site that
solicits information from clients and evaluates the information
provided by clients in response to the site. The representative e-
mails its materials to a web server in State Y for posting on the
web. Under the rule, as proposed, the representative's place of
business would be considered to be in State X.
---------------------------------------------------------------------------
The Commission is aware that some have suggested that section
203A(b)(1)(A) could be interpreted to permit a state to require every
investment adviser representative to establish a place of business in
the state (such as the office of the Secretary of State) as a condition
of doing business in that state. Under this interpretation, every
investment adviser representative doing business in a state would be
potentially subject to the state's registration and qualification
requirements. The Commission does not believe that the place of
business clause should be interpreted in this manner. Interpreting
``place of business'' as the equivalent of ``doing business'' would
have the effect of nullifying the restriction that the inclusion of the
phrase ``place of business'' places on a state's authority to regulate
investment adviser representatives. In the Commission's view, Congress
could not have intended this result, or it would not have included the
place of business clause in section 203A(b)(1)(A).80
---------------------------------------------------------------------------
\80\ This interpretation would, therefore, violate the principal
of statutory interpretation that a statute is to be construed so as
to give effect to all its language. See, e.g., United States v.
Menasche, 348 U.S. 528, 538-39 (1955).
---------------------------------------------------------------------------
Moreover, this interpretation would nullify restrictions imposed by
Congress in the Coordination Act on the applicability of state adviser
laws to out-of-state advisers. In the Coordination Act, Congress
amended section 222 of the Advisers Act to create a national de minimis
standard that makes state investment adviser laws (other than
provisions prohibiting fraud) inapplicable to an adviser that has fewer
than six clients who are residents of the state and that does not have
a place of business in the state.81 Requiring an adviser to have a
place of business in any state in which the adviser has even a single
client (because it is doing business in the state), would render the
new national de minimis standard meaningless.
---------------------------------------------------------------------------
\81\ Section 222(d) of the Advisers Act [15 U.S.C. 80b-18a(d)];
see section II.G. of this Release.
---------------------------------------------------------------------------
3. Solicitors
Investment advisers frequently engage others to solicit clients on
their behalf. A solicitor is a ``person associated with an investment
adviser'' with respect to the adviser for which it solicits.82 An
adviser has an obligation to supervise its solicitors with respect to
activities performed on its behalf.83 Solicitation of clients,
however, may not involve providing investment advice on behalf
[[Page 68489]]
of the adviser, in which case the solicitor would not be a ``supervised
person'' of the adviser within the meaning of section 202(a)(25) of the
Advisers Act. The Commission believes, therefore, that section 203A(b)
of the Advisers Act does not generally preempt state regulation of a
solicitor for a Commission-registered adviser, unless the solicitor is
independently registered with the Commission as an investment adviser,
or is excepted from the definition of investment adviser in section
202(a)(11) of the Advisers Act.84
---------------------------------------------------------------------------
\82\ Investment Advisers Act Release No. 688 (July 12, 1979) [44
FR 42126 (July 18, 1979)] (adopting rule 206(4)-3). The release
noted that a solicitor for an adviser providing solely impersonal
advice is not necessarily a ``person associated with an investment
adviser.'' Id. at 42129 n.20.
\83\ Id. at 42129.
\84\ Rule 206(4)-3 under the Advisers Act [17 CFR 275.206(4)-3]
would, however, continue to govern cash payments by a Commission-
registered adviser to a solicitor.
---------------------------------------------------------------------------
G. National De Minimis Standard
The Coordination Act also amends the Advisers Act to add new
section 222(d), which makes state investment adviser statutes
inapplicable to advisers that (i) do not have a place of business in
the state and (ii) have fewer than six clients who are residents of
that state (``national de minimis standard'').85 The Commission
believes that the national de minimis standard was intended to ease the
regulatory burdens on advisers who may be uncertain as to when they are
subject to state registration requirements as a result, for example, of
a client moving to another state.86
---------------------------------------------------------------------------
\85\ Because state investment adviser statutes, including state
registration requirements, will be preempted with respect to
advisers registered with the Commission or excluded from the
definition of investment adviser under the Advisers Act, the
national de minimis standard affects only advisers subject to state
registration.
\86\ The legislative history of the Coordination Act does not
explain Congress' intent in adopting this national standard.
---------------------------------------------------------------------------
Most, but not all, state investment adviser statutes exempt
advisers that do not have a place of business in, and have a limited
number of clients that are residents of, the state.87 The maximum
number of clients an adviser may have before state registration is
required varies from state to state.88 Section 222(d) establishes
a national de minimis standard of five clients; a state may have a
higher, but not a lower, de minimis threshold.89
---------------------------------------------------------------------------
\87\ See, e.g., Unif. Sec. Act section 204(1)(iii) (1985).
Delaware, Massachusetts, and Texas, for example, do not have de
minimis provisions.
\88\ Compare N.Y. Gen. Bus. Law section 359-eee(1)(a)(5) (1996)
(forty clients) with Pa. Stat. Ann. tit. 70 section 1-102(j)(vii)
(1994) (four clients).
\89\ In this sense, although section 222(d) is entitled the
``national de minimis standard,'' the section actually establishes a
minimum threshold for state de minimis provisions, rather than a
uniform standard that must be applied by each state.
---------------------------------------------------------------------------
The term ``client'' is not defined in the Advisers Act, nor is it
generally defined in state investment adviser statutes or
regulations.90 The scope of a de minimis exemption or exclusion
may be broadened or narrowed, depending on who is determined to be a
``client.'' 91 In order to effect the intent of Congress to create
a uniform minimum de minimis threshold, the Commission is proposing a
new rule, rule 222-2, defining the term ``client'' for purposes of
section 222(d).92
---------------------------------------------------------------------------
\90\ Several states have addressed the issue of whether a
limited partnership should be treated as a single client of an
adviser for purposes of their state de minimis provisions. See,
e.g., D.C. Mun. Regs. tit. 17 section 1822 (1996); Ga. Comp. R. &
Regs. r. 590-4-8-.11 (1989); Pa. Bull., Miscellaneous
Interpretations--June 1986. Connecticut, however, appears to be the
only state that has adopted a detailed definition of ``client'' for
purposes of its de minimis provision. See Conn. Agencies Regs.
section 36b-31-3(d)(2)-(4) (1995).
\91\ For example, one state may treat a family as a single
client while another may require an adviser to count each family
member. Although both states may have a five client threshold for
registration, the actual thresholds are substantially different.
\92\ In addition, the Commission is proposing to adopt a rule
defining the terms ``place of business'' and ``principal place of
business'' for purposes of section 222. Proposed rule 222-1(a) would
define place of business in the same manner as proposed rule 203A-
3(b), except the term is applied to the adviser rather than the
supervised persons of the adviser. Proposed rule 222-1(b) would
define principal place of business in the same manner that proposed
rule 203A-3(c) would define ``principal office and place of
business.''
---------------------------------------------------------------------------
Proposed rule 222-2 would treat as a single client a natural person
and (i) any relative or spouse of the natural person sharing the same
principal residence, and (ii) all accounts of which such persons are
the sole primary beneficiaries.93 The proposed rule also would
treat as a single client a corporation, general partnership, trust
94 or other legal organization (other than a limited partnership)
that receives investment advice based on its investment objectives
rather than the objectives of its shareholders, partners, members, or
beneficial owners. A limited partnership would be counted as a single
client if it would be counted as a single client under rule 203(b)(3)-1
of the Advisers Act.95 Comment is requested on this definition of
``client.'' Are there other typical client relationships that the
proposed rule fails to address?
---------------------------------------------------------------------------
\93\ A joint account thus would be treated as a separate client
under the proposed rule unless the primary beneficiaries are family
members who share the natural person's principal residence. See
paragraphs (a)(1) and (a)(2) of proposed rule 222-2.
\94\ The Division of Investment Management has stated that where
several trusts share a common trustee, each trust generally should
be treated as a separate client for purposes of section 203(b)(3) of
the Advisers Act [15 USC 80b-3(b)(3)]. See OSIRIS Management (pub.
avail. Feb. 17, 1984); Philip Eiseman (pub. avail. July 22, 1976).
The Division also has stated that trusts with identical
beneficiaries could be treated as a single client. See OSIRIS
Management, supra; First Security Investment Management (pub. avail.
Mar. 25, 1985). Should the rule address these circumstances by
treating multiple legal entities with identical shareholders,
partners, members or beneficiaries as a single client?
\95\ 17 CFR 275.203(b)(3)-1 (providing a safe harbor to count a
limited partnership, as opposed to each limited partner, as a client
for purposes of section 203(b)(3) of the Advisers Act).
---------------------------------------------------------------------------
The Commission notes that the manner in which clients are counted
has significance under section 203(b)(3), which exempts from
registration with the Commission certain advisers having fewer than
fifteen clients during the course of the preceding twelve months.
Should the Commission adopt a single rule regarding the counting of
clients under both sections 203(b)(3) and 222(d)? If so, should the
Commission reconsider some of the provisions of rule 203(b)(3)-1, e.g,
the requirement that limited partnership interests be securities?
96 Since clients include foreign clients of an adviser,97
should the rule specifically address the status of foreign clients?
---------------------------------------------------------------------------
\96\ Rule 203(b)(3)-1(b)(2)(i) [17 CFR 203(b)(3)-1(b)(2)(i)].
\97\ Vocor International Holding S.A. (pub. avail. Apr. 9,
1990); Walter L. Stephens (pub. avail. Nov. 18, 1985).
---------------------------------------------------------------------------
H. Other Amendments to Advisers Act Rules
The Commission is proposing amendments to several rules under the
Advisers Act to reflect changes made by the Coordination Act.
1. Amendments to Form ADV; Elimination of Form ADV-S
As discussed above,98 the Commission is proposing to amend
Form ADV to add a new Schedule I, which would be substantially similar
to Form ADV-T.99 Pending future revisions of Form ADV, Schedule I
would be used by the Commission to screen applicants as to eligibility
for Commission registration. Schedule I would be required to be
included with all new registrations filed on or after April 9, 1997.
---------------------------------------------------------------------------
\98\ See section II.C.2. of this Release.
\99\ Schedule I is not attached to this Release.
---------------------------------------------------------------------------
The Commission is also proposing amendments to rule 204-1 to
require an adviser to file an amended Schedule I annually within 90
days of the end of the adviser's fiscal year.100 Like Form ADV-T,
Schedule I would require an adviser to declare whether it remains
eligible for Commission registration. Unlike Form ADV-T, however,
[[Page 68490]]
Schedule I would not operate as a request for withdrawal of the
adviser's registration from the Commission; rather, an adviser that
declares itself not eligible for Commission registration on Schedule I
would be required to withdraw from Commission registration by
accompanying the Schedule I with a Form ADV-W.101
---------------------------------------------------------------------------
\100\ 17 CFR 275.204-1. These amendments also establish uniform
updating requirements for Commission and state adviser
registrations. The Commission is proposing these updating
requirements in concurrence with NASAA.
\101\ A separate Form ADV-W would continue to be required, in
order to assure that the Commission staff is able to act promptly on
the withdrawal from registration. Subject to the proposed grace
period under rule 203A-1(c), failure to file the completed Form ADV-
W would subject an adviser to the commencement of proceedings to
cancel its registration.
---------------------------------------------------------------------------
If an annual amendment requirement to Form ADV is adopted, the
Commission will have no regulatory need for advisers to file Form ADV-
S, the annual report for advisers registered under the Advisers Act.
The Commission is therefore proposing to amend rule 204-1 to delete
references to Form ADV-S, and proposing to repeal Form ADV-S and amend
rule 279.3 to refer to Form ADV-T. Because the Commission expects to
require Form ADV-T to be filed on or before April 9, 1997, and that
filing will achieve the same purpose as Form ADV-S, the Commission is
issuing a separate release staying rule 204-1(c) and suspending the
requirement to file Form ADV-S.102
---------------------------------------------------------------------------
\102\ 17 CFR 275.204-1(c); see Investment Advisers Act Rel. No.
1602 (Dec. 20, 1996).
---------------------------------------------------------------------------
2. Rule 204-2--Books and Records
In light of the Congressional determination not to subject advisers
registered with the states to substantive federal regulatory
requirements after April 9, 1997, the Commission is proposing to amend
rule 204-2 to make the books and recordkeeping requirements of that
rule applicable only to advisers registered with the Commission.
Additionally, the Commission is proposing to amend rule 204-2 to
require advisers that register with the Commission after April 9, 1997
to preserve any books and records the adviser was previously required
to maintain under state law.103 These books and records would be
required to be maintained in the manner and for the period of time as
the other books and records required to be maintained under rule 204-
2(a).104
---------------------------------------------------------------------------
\103\ Proposed paragraph (k) of rule 204-2.
\104\ Under the proposed revisions, an adviser changing from
state to federal registration would count the period during which
the books and records were maintained under state law.
---------------------------------------------------------------------------
3. Rule 205-3--Performance Fee Arrangements
By its terms, section 205 prohibits all advisers, except those
exempt from registration under section 203(b), from entering into
advisory contracts in which the adviser would be compensated on the
basis of performance of client accounts.105 Therefore, advisers
prohibited from registering with the Commission after April 9, 1997
would still be subject to the limitations of section 205. Rule 205-3
provides an exemption from these limitations, but applies only to
advisers registered with the Commission. The Commission is proposing to
amend rule 205-3 to make this exemption available to all advisers,
including those registered only under state law after April 9, 1997.
---------------------------------------------------------------------------
\105\ Section 205(a)(1) [15 U.S.C. 80b-5(a)(1)]. Section 205(a)
states that ``[n]o investment adviser, unless exempt from
registration pursuant to section 203(b)'' may enter into, extend, or
renew any investment advisory contract that provides for
performance-based compensation. See Section . of this Release.
---------------------------------------------------------------------------
4. Rules 206(4)-1, 206(4)-2, and 206(4)-4--Anti-Fraud Rules
The Commission has adopted four rules pursuant to its authority
under section 206(4) to ``define, and prescribe means reasonably
designed to prevent * * * acts, practices, and courses of business
[that] are fraudulent, deceptive, or manipulative.'' 106 These
rules prohibit certain abusive advertising practices, govern the
adviser's custody of funds and securities of clients, address the
payment of cash to persons soliciting on behalf of the adviser, and
require certain disclosure to clients regarding the adviser's financial
condition and disciplinary history.107 Each of these rules, other
than the cash solicitation rule, applies to all advisers, regardless of
whether they are registered with the Commission. The Commission is
proposing to amend these rules to make them applicable only to advisers
registered (or required to be registered) with the Commission. By
proposing to exclude advisers not registered with the Commission from
these rules, the Commission is not suggesting that the practices
prohibited by these rules would not be prohibited by section 206 if
they were engaged in by an adviser not registered with the
Commission.108 Rather, the Commission recognizes that these rules
contain prophylactic provisions, and that the application of these
provisions to state-registered advisers may be more appropriately a
matter for state law.
---------------------------------------------------------------------------
\106\ 15 USC 80b-6(4).
\107\ See rules 206(4)-1 to -4 [17 CFR 275.206(4)-1 to -4].
\108\ The anti-fraud provisions of the Advisers Act will still
apply to state-registered advisers after April 9, 1997. See supra
note 17 and accompanying text.
---------------------------------------------------------------------------
I. Provisions of the Advisers Act that Continue to Apply to State-
Registered Investment Advisers
Several provisions of the Advisers Act would continue to apply to
advisers no longer registered with the Commission after April 9, 1997.
These include the Act's prohibitions on advisory contracts that (i)
contain certain performance fee arrangements, (ii) permit an assignment
of the advisory contract to be made without the consent of the client,
and (iii) fail to require an adviser that is a partnership to notify
clients of a change in the membership of the partnership.109 In
addition, advisers subject to state registration would continue to be
subject to the Advisers Act's requirement to establish, maintain, and
enforce written procedures reasonably designed to prevent the misuse of
material nonpublic information.110 Comment is requested whether
the Commission should recommend that Congress amend the Act in order to
make all or some of these provisions inapplicable to advisers either
(i) not registered with the Commission, or (ii) prohibited from
registering with the Commission pursuant to section 203A(a)(1) of the
Advisers Act.
---------------------------------------------------------------------------
\109\ Section 205(a)(1)-(3) of the Act [15 U.S.C. 80b-5(a)(1)-
(3)].
\110\ Section 204A of the Act [15 USC 80b-4A].
---------------------------------------------------------------------------
III. General Request for Comments
Any interested persons wishing to submit written comments on the
rule and form changes that are the subject of this Release, to suggest
additional changes, or to submit comments on other matters that might
have an effect on the proposals contained in this Release, are
requested to do so.
IV. Cost/Benefit Analysis
The proposed rules would implement Congressional intent to
reallocate regulatory responsibilities for investment advisers between
the Commission and state securities authorities. The proposed rules
would impose some incidental burdens on investment advisers that would
be required to file Form ADV-T, and those advisers that would, on an
ongoing basis, be required to file Schedule I. Such burdens appear
necessary, however, in order to implement the Coordination Act.
Many of the proposed rules clarify provisions of the Coordination
Act and thereby permit investment advisers to more readily ascertain
their regulatory status and that of their supervised
[[Page 68491]]
persons. Other provisions grant exemptions and thereby reduce
regulatory burdens by (i) relieving advisers from the burden of having
to frequently register and then de-register with the Commission as a
result of changes in the amount of assets under management; and (ii)
exempting certain advisers from the prohibition against registration
and thereby preempting state law, the application of which would be
unfair, a burden on interstate commerce, and inconsistent with
Congressional intent in enacting the Coordination Act. The Commission
also is proposing to revise several of its rules that currently apply
to all investment advisers to make such rules applicable only to
advisers registered or required to be registered with the Commission.
The Commission anticipates that the implementation of the
Coordination Act will reduce the aggregate regulatory burden borne by
the investment advisory industry, but that the proposed rules
themselves are not expected to significantly affect compliance costs.
The Commission believes that the proposed rules would not impose
significant additional costs on investment advisers.
Comment is requested on the impact of the proposed rules on
individual investment advisers and the industry as a whole. Commenters
should submit data indicating the expected dollar impact of the
proposed rules on the revenues and expenses of investment advisers.
Comment is requested on the cost of filing Form ADV-T and Schedule I of
Form ADV. Commenters should submit data indicating the cost of filing
Form ADV-T and Schedule I of Form ADV. Commenters also should submit
data on the expected effects of the proposed rules on the customers of
investment advisers (such as the amount of fees paid).
For purposes of making determinations required by the Small
Business Regulatory Enforcement Fairness Act of 1996, the Commission is
requesting information regarding the potential impact of the proposed
rules on the economy on an annual basis. Commenters should provide
empirical data to support their views.
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 rules.
V. Summary of Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 USC 603 regarding proposed
rules 203A-1, 203A-2, 203A-3, 203A-4, 203A-5, 222-1, 222-2, and
proposed amendment to rules 204-1, 204-2, 205-3, 206(4)-1, 206(4)-2,
206(4)-4, and 279.3 under the Advisers Act. The following summarizes
the IRFA.
As set forth in greater detail in the IRFA, the Coordination Act
makes several amendments to the Advisers Act. The most significant of
these amendments reallocates federal and state responsibilities for the
regulation of investment advisers currently registered with the
Commission by limiting the application of federal law and preempting
certain state laws. The proposed rules and rule amendments are intended
to clarify these provisions of the Coordination Act and thereby assist
investment advisers in ascertaining their regulatory status as of April
9, 1997.
The proposed rules and rule amendments would reduce substantially
regulatory burdens on investment advisers that are small entities by
effecting the intent of Congress to reduce significantly the number of
small advisers that are subject to Commission regulation. The IRFA
indicates that the proposals would minimize certain regulatory burdens
for investment advisers, including small-entity investment advisers,
by, among other things, preventing advisers from being required to
frequently register and deregister with the Commission as a result of
changes in the amount of their assets under management.
An investment adviser generally is a small entity if it manages
assets of $50 million or less, in discretionary or non-discretionary
accounts, as of the end of its most recent fiscal year and does not
render other advisory services.111 The Commission estimates that
approximately 17,000 of the 22,500 advisers currently registered with
the Commission are small entities. Of these small-entity advisers, the
Commission estimates that approximately 800 will remain eligible for
Commission registration after April 9, 1997.112
---------------------------------------------------------------------------
\111\ Rule 275.0-7 [17 CFR 275.07].
\112\ The Commission estimates that most of the 16,200 (72
percent) advisers currently registered with the Commission that will
be ineligible for Commission registration after April 9, 1997 will
be small entities. Based on that estimate, the Commission
anticipates that approximately 800 small-entity advisers will remain
eligible for Commission registration after that date.
---------------------------------------------------------------------------
The proposed rules would require all Commission-registered
investment advisers to file new Form ADV-T no later than April 9, 1997.
The IRFA notes, however, that the Commission anticipates that as a
consequence of this one-time filing, approximately 72 percent of the
investment advisers currently registered with the Commission would no
longer be subject to federal investment adviser regulatory
requirements, including reporting and recordkeeping requirements. The
Commission believes that the incidental burden imposed by this one-time
filing requirement would be necessary in order to implement the
Coordination Act. The proposed amendments to rule 204-1 would require
all Commission-registered investment advisers to annually update new
Schedule I. The IRFA explains that because the Commission, by separate
release, is staying rule 204-1(c) under the Advisers Act and suspending
the current requirement that Commission-registered advisers annually
file Form ADV-S (and will eliminate this requirement if the proposed
rules and amendments are adopted), this new annual reporting
requirement should not be a significant additional burden on any small-
entity investment advisers that remain eligible for Commission
registration.
The IRFA further indicates that the proposed amendments to rule
204-2 would make the books and recordkeeping requirements of this rule
applicable only to advisers registered with the Commission, and so
would eliminate these recordkeeping requirements with respect to small
entities and other advisers that are not eligible for Commission
registration after April 9, 1997. The proposed amendments to this rule
would require advisers that register with the Commission after April 9,
1997 to preserve any books and records the adviser was previously
required to maintain under state law, but this requirement is not
expected to be a significant additional burden on advisers that
register with the Commission after April 9, 1997.
As explained further in the IRFA, the Commission has considered
significant alternatives to the proposed rules that would accomplish
the stated objective of implementing the provisions of the Coordination
Act that reallocate regulatory responsibility for investment advisers
between the Commission and the states. As a result, the Commission has
proposed to increase the threshold for Commission registration from $25
to $30 million of assets under management, and to provide an optional
exemption from the prohibition on registering with the Commission for
advisers having assets under management of between $25 and $30 million.
This optional exemption would give such advisers, including many small
entities, the flexibility to decide
[[Page 68492]]
when it would be best for them to transition between state and
Commission registration, and vise versa. The IRFA concludes that the
Commission believes that the rules and rule amendments, as proposed,
will not adversely affect small entities. Finally, the IRFA addresses
each of the other requirements set forth under 5 U.S.C. Sec. 603.
The Commission encourages the submission of comments with respect
to any aspect of the IRFA. Such comments will be considered in the
preparation of the Final Regulatory Flexibility Analysis, if the
proposed rules are adopted, and will be placed in the same public file
as comments on the proposed rules themselves. Cost-benefit information
reflected in the ``Cost/Benefit Analysis'' section of this Release also
is reflected in the IRFA. A copy of the IRFA may be obtained by
contacting Cynthia G. Pugh, Securities and Exchange Commission, 450 5th
Street, N.W., Mail Stop 10-2, Washington, D.C. 20549.
VI. Paperwork Reduction Act
Certain provisions of the proposed rules and rule amendments
contain ``collection of information'' requirements within the meaning
of the Paperwork Reduction Act of 1995 (44 USC 3501 et seq.), 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: ``Rule 203A-
2(d),'' ``Rule 203A-5 and Form ADV-T,'' ``Rule 203-1 and Form ADV,''
``Rule 204-1,'' and ``Rule 204-2,'' all under the Advisers Act. Form
ADV, rule 204-1, and rule 204-2, which the Commission is proposing to
amend, contain currently approved collections of information under OMB
control numbers 3235-0049, 3235-0048, and 3235-0278, respectively. The
proposed rules and rule amendments are necessary to implement recent
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.
Rule 203A-2(d)
Proposed rule 203A-2(d) contains two related collection of
information requirements. The collection of information would be
necessary to determine the eligibility of certain investment advisers
to rely on the proposed ``reasonable expectation'' exemption from the
prohibition on Commission registration, and to implement that
exemption. It is anticipated that this collection of information would
be found at 17 CFR 275.203A-2(d). An adviser relying on the exemption
provided by proposed rule 203A-2(d) would be required to file a short
written undertaking on Schedule E to Form ADV, indicating that the
adviser will withdraw from registration if on the 90th day after
registering with the Commission the adviser does not meet the
eligibility requirements for registration under section 203A of the
Advisers Act and rules thereunder. At the end of the 90-day period, the
adviser also would be required to file an amended Schedule I to Form
ADV. If the adviser indicates on the amended Schedule I that it has not
become eligible to register with the Commission, the adviser would be
required to file a Form ADV-W concurrently with the Schedule I, thereby
withdrawing its registration with the Commission. The likely
respondents to this information collection are newly formed investment
advisers that are not currently registered with the Commission or with
the states. The Commission estimates that there would be 100 such
respondents per year, and that each respondent would respond one time
per year. The weighted average total annual time burden for each
respondent is estimated to be 57.5 minutes. This figure is based upon
the following estimates: (i) 45 minutes for the approximately 90
advisers that advise registered investment companies, that do not need
to calculate assets under management to complete Schedule I, or that
need to calculate assets under management but do so as part of their
normal business operations; (ii) 2 hours for the approximately 10
advisers that must calculate assets under management for the sole
purpose of filing Schedule I; and (iii) 5 minutes for all respondents
to prepare the undertaking required on Schedule E to Form ADV. The
Commission estimates that the aggregate annual burden for all
respondents would be 95.83 hours. Providing this information would be
mandatory to qualify for the exemption under proposed rule 203A-2(d),
and responses would not be kept confidential.
Rule 203A-5 and Form ADV-T
Proposed rule 203A-5 and Form ADV-T contain collection of
information requirements. This collection of information is necessary
for the Commission to determine whether advisers meet the proposed
eligibility criteria for Commission registration set forth in section
203A of the Advisers Act and rules thereunder, and to provide for the
orderly withdrawal from Commission registration for advisers that are
no longer eligible. It is anticipated that this collection of
information would be found at 17 CFR 275.203A-5 and 17 CFR 279.3. Under
proposed rule 203A-5, all advisers registered with the Commission on
April 9, 1997 would be required to file a completed Form ADV-T no later
than that date. Form ADV-T would require each adviser to declare
whether it remains eligible for Commission registration. For an adviser
that declares itself not eligible for Commission registration, Form
ADV-T would serve as a request for withdrawal of the adviser's
registration as of April 9, 1997. The likely respondents to this
information collection are all investment advisers registered with the
Commission on April 9, 1997. The Commission estimates that there would
be 22,500 such respondents to this collection of information. Each
respondent would respond once. The weighted average annual time burden
for each respondent is estimated to be 53.33 minutes. This figure is
based upon the following estimates: (i) 45 minutes for the
approximately 20,000 advisers that advise registered investment
companies, that do not need to calculate assets under management to
complete Form ADV-T, or that need to calculate assets under management
but do so as part of their normal business operations; (ii) 2 hours for
the approximately 2,500 advisers that must calculate assets under
management for the sole purpose of filing Form ADV-T. The aggregate
annual burden for all 22,500 advisers is estimated to be 19,998 hours.
Providing the information would be mandatory, and responses would not
be kept confidential.
Rule 203-1 and Form ADV
Rule 203-1 and Form ADV, including the proposed new Schedule I to
Form ADV, contain information collection requirements. Form ADV is
required by rule 203-1 to be filed by every applicant for registration
with the Commission as an investment adviser, is mandatory, and
responses are not kept confidential. This collection of information is
found at 17 CFR 275.203-1 and 17 CFR 279.1. The Commission in the past
received approximately 3,500 applications for registration on Form ADV
in one year. The weighted average burden hours for completing Form ADV
is currently 9.0063, and the total annual burden hours currently
approved by OMB for this form is 31,522 hours.
The Commission is proposing to amend Form ADV to include a new
Schedule I. The Commission is not proposing to amend rule 203-1.
Schedule I would require an applicant
[[Page 68493]]
to declare whether it is eligible for Commission registration. This new
requirement is necessary for the Commission to determine whether
advisers meet the eligibility criteria for Commission registration set
forth in section 203A of the Advisers Act and rules thereunder. The
likely respondents to this information collection would be all
applicants for registration with the Commission after April 9, 1997.
Based on the Commission's experience in processing adviser
applications, and the percentage of applicants in the past without
assets under management, the Commission estimates that after April 9,
1997 the number of applicants for registration will decrease from
approximately 3,500 to between 500 and 1,000 annually. The weighted
average total annual time burden for each applicant to complete
Schedule I on average is estimated to be 52.5 minutes. This figure is
based upon the following estimates. Compliance with the requirement to
complete Schedule I imposes a total burden per applicant of
approximately 45 minutes for the approximately 90 percent of the
applicants that advise registered investment companies, that do not
need to calculate assets under management to complete Schedule I, or
that need to calculate assets under management but do so as a part of
their normal business operations. For the approximately 10 percent of
the applicants that must calculate assets under management for Schedule
I, however, this burden would be 2 hours. Providing this information
would be mandatory. Amending Form ADV to include new Schedule I is
estimated to increase the weighted average burden hours for applicants
completing Form ADV to 9.8813 hours. As a result of the new Schedule I,
together with the reduction of the number of investment advisers
registered with the Commission, the annual aggregate burden for all
respondents for completing amended Form ADV is estimated to be between
4,940.65 and 9,881.3 hours.
Rule 204-1
Rule 204-1, including the proposed amendment to the rule, includes
collection of information requirements. Rule 204-1 sets forth the
circumstances requiring the filing of an amendment to Form ADV, the
form that must be filed with the Commission to register as an
investment adviser. This collection of information is found at 17 CFR
275.204-1, is mandatory, and responses are not kept confidential. The
total annual burden currently approved by OMB for rule 204-1 is
approximately 21,438 hours for the 20,088 advisers registered with the
Commission in 1994.
The proposed amendments to rule 204-1 would require an adviser to
file an amended Schedule I to Form ADV annually within 90 days of the
end of the adviser's fiscal year. Schedule I would require an adviser
to declare whether it remains eligible for Commission registration. The
new requirement is necessary for the Commission to determine whether
advisers continue to meet the eligibility criteria for Commission
registration set forth in section 203A of the Advisers Act and rules
thereunder. The likely respondents to this information collection are
all investment advisers registered with the Commission after April 9,
1997. The Commission estimates that there would be 6,300 such
respondents to this collection of information (28% of the approximately
22,500 registered investment advisers as of April 9, 1997). Each
respondent would respond one time per year. The total annual time
burden for each respondent is estimated to be 52.14 minutes. This
figure is based upon the following estimates. Compliance with the
requirement to file an amended Schedule I would impose a total annual
burden per adviser of approximately 45 minutes for the approximately
5,700 advisers that advise registered investment companies, that do not
need to calculate assets under management to complete Schedule I, or
that need to calculate assets under management but do so as part of
their normal business operations. For the approximately 600 advisers
that must calculate assets under management for Schedule I, however,
this burden would be 2 hours. Providing the information would be
mandatory and responses would not be kept confidential. Based on the
Commission's experience under rule 204-1, and taking into account the
proposed new requirement to annually amend Schedule I, the Commission
estimates that each adviser eligible for Commission registration after
April 9, 1997 will respond to the information collection requirements
of rule 204-1, as proposed to be amended, an average of 1.5 times
annually. The Commission estimates that the annual aggregate burden for
all respondents to rule 204-1 will be 18,297.09 hours.
Rule 204-2
Section 204 of the Advisers Act provides that investment advisers
required to register with the Commission must make and keep for
prescribed periods such records, and furnish such copies thereof, and
make and disseminate such reports as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or for the
protection of investors. Rule 204-2 sets forth requirements for
keeping, maintaining and preserving specified books and records by
investment advisers. This collection of information is found at 17 CFR
275.204-2, is mandatory, is used by the Commission staff in its
oversight program, and generally is kept confidential. See section
210(b) of the Advisers Act [15 U.S.C. 80b-10(b)]. Currently, compliance
with the rule requires approximately 235.47 hours each year per
Commission-registered investment adviser, for a total of 5,180,340
hours for all 22,000 advisers registered last year.
The proposed amendments to rule 204-2 would clarify the application
of the rule's recordkeeping requirements to advisers that register with
the Commission after having been registered with the states. The
proposed amendments are necessary (i) to make the books and
recordkeeping requirements of that rule applicable only to advisers
registered with the Commission, and (ii) to clarify the rule's
application to investment advisers that transfer from state to
Commission registration after April 9, 1997. The Commission is
proposing to amend rule 204-2 to make the rule's books and
recordkeeping requirements applicable only to advisers registered with
the Commission after the Coordination Act's effective date. This
amendment would relieve the approximately 16,200 of the 22,500 advisers
currently registered that will not be eligible for Commission
registration after April 9, 1997 from the recordkeeping burdens imposed
by this rule.
The Commission is also proposing to amend rule 204-2 to require an
adviser that registers with the Commission after April 9, 1997 to
preserve any books and records that the adviser was previously required
to maintain under state law. These books and records would be required
to be maintained in the manner and for the period of time as the other
books and records required to be maintained under rule 204-2(a). This
collection of information would be found at 17 CFR 275.204-2. The
likely respondents to this information collection are all investment
advisers registered with the Commission after April 9, 1997. The
Commission estimates that there would be 6,300 such respondents to this
collection of information. Each respondent would retain records on an
ongoing basis. The total annual time burden for each respondent is
estimated to be 235.47 hours. The proposed amendments
[[Page 68494]]
would not change the burden last reported to the OMB. As a result of
the reduction of the number of investment advisers registered with the
Commission, the annual aggregate burden for all respondents to the
recordkeeping requirements under rule 204-2 is estimated to be
1,483,461 hours.
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 shall 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;
(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. S7-31-96. OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication, so
a comment to OMB is best assured of having its full affect if OMB
receives it within 30 days of publication.
VII. Statutory Authority
The Commission is proposing new rule 203A-1 pursuant to the
authority set forth in section 203A(a)(1)(A) [15 U.S.C. 80b-
3A(a)(1)(A)]; section 203A(c) [15 U.S.C. 80b-3A(c)]; and section 211(a)
[15 U.S.C. 80b-11(a))] of the Investment Advisers Act of 1940.
The Commission is proposing new rule 203A-2 pursuant to the
authority set forth in section 203A(c) of the Investment Advisers Act
of 1940 [15 U.S.C. 80b-3A(c)].
The Commission is proposing new rules 203A-3 and 203A-4 pursuant to
the authority set forth in section 211(a) of the Investment Advisers
Act of 1940 [15 U.S.C. 80b-11(a)].
The Commission is proposing new rule 203A-5 pursuant to the
authority set forth in sections 203(c)(1) and 204 of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1) and 80b-4].
The Commission is proposing amendments to rule 204-1 pursuant to
the authority set forth in section 204 of the Investment Advisers Act
of 1940 [15 U.S.C. 80b-4].
The Commission is proposing amendments to rule 204-2 pursuant to
the authority set forth in sections 204 and 206(4) of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-4 and 80b-6(4)].
The Commission is proposing amendments to rule 205-3 pursuant to
the authority set forth in section 206A of the Investment Advisers Act
of 1940 [15 U.S.C. 80b-6A].
The Commission is proposing amendments to rules 206(4)-1, 206(4)-2,
and 206(4)-4 pursuant to the authority set forth in section 206(4) of
the Investment Advisers Act of 1940 [15 U.S.C. 80b-6(4)].
The Commission is proposing new rules 222-1 and 222-2 pursuant to
the authority set forth in section 211(a) of the Investment Advisers
Act of 1940 [15 U.S.C. 80b-11(a)].
The Commission is proposing amendments to rule 279.3, new Form ADV-
T, and amendments to Form ADV pursuant to the authority set forth in
sections 203(c)(1) and 204 of the Investment Advisers Act of 1940 [15
U.S.C. 80b-3(c)(1) and 80b-4].
Text of Proposed Rules and Form
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
The authority citation for Part 275 is revised to read as follows:
Authority: 15 U.S.C. 80b-3, 80b-4, 80b-6(4), 80b-6A, 80b-11,
unless otherwise noted.
Section 275.203A-1 is also issued under 15 U.S.C. 80b-3A.
Section 275.203A-2 is also issued under 15 U.S.C. 80b-3A.
Section 275.204-2 is also issued under 15 U.S.C. 80b-6.
2. Sections 275.203A-1 through 275.203A-5 are added to read as
follows:
Sec. 275.203A-1 Eligibility for Commission registration.
(a) Threshold Increased to $30 Million of Assets Under Management.
No investment adviser that is registered or required to be registered
as an investment adviser in the State in which it maintains its
principal office and place of business shall register with the
Commission under section 203 of the Act (15 U.S.C. 80b-3), unless the
investment adviser:
(1) Has assets under management of not less than $30,000,000, as
reported on the Form ADV (17 CFR 279.1) of the investment adviser; or
(2) Is an investment adviser to an investment company registered
under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).
(b) Exemption for Investment Advisers Having Between $25 and $30
Million of Assets Under Management. Notwithstanding paragraph (a) of
this section, an investment adviser that is registered or required to
be registered as an investment adviser in the State in which it
maintains its principal office and place of business may register with
the Commission if the investment adviser has assets under management of
not less than $25,000,000 but not more than $30,000,000, as reported on
the Form ADV (17 CFR 279.1) of the investment adviser. This paragraph
(b) shall not apply to an investment adviser:
(1) To an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or
(2) That is exempted by Sec. 275.203A-2 from the prohibition in
section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) on registering with
the Commission.
Note to paragraphs (a) and (b). Paragraphs (a) and (b) together
make registration with the Commission optional for certain
investment advisers that have between $25 and $30 million of assets
under management. This option is not available to an investment
adviser that (1) is not registered or required to be registered in
the State in which it maintains its principal office and place of
business, (2) is an investment adviser to a registered investment
company, or (3) is exempted by Sec. 275.203A-2 from the prohibition
on registering with the Commission.
(c) Grace Period. An investment adviser registered with the
Commission, upon filing an amendment to Form ADV (17 CFR 279.1) that
indicates that it would be prohibited by section 203A(a) of the Act (15
U.S.C. 80b-3A(a)) from registering with the Commission shall be subject
to having its registration cancelled pursuant to section 203(h) of the
Act (15 U.S.C. 80b-3(h)), Provided,
[[Page 68495]]
That the Commission shall not commence any cancellation proceeding on
the basis of the amendment until the expiration of a period of not less
than 90 days from the date the amendment is received by the Commission.
Sec. 275.203A-2 Exemptions from prohibition on Commission
registration.
The prohibition of section 203A(a) of the Act (15 U.S.C. 80b-3A(a))
shall not apply to:
(a) Nationally Recognized Statistical Rating Organizations. An
investment adviser that is a nationally recognized statistical rating
organization, as that term is used in paragraphs (c)(2)(vi)(E), (F),
and (H) of Sec. 240.15c3-1 of this chapter.
(b)(1) Pension Consultants. An investment adviser that is a pension
consultant with respect to assets of plans having an aggregate value of
at least $50,000,000.
(2) An investment adviser is a pension consultant if the investment
adviser provides investment advice to:
(i) Any employee benefit plan described in section 1002(2) of the
Employee Retirement Income Security Act of 1974 (``ERISA'') (29 U.S.C.
1002(2));
(ii) Any governmental plan described in section 1002(32) of ERISA
(29 U.S.C. 1002(32));
(iii) Any church plan described in section 1002(33) of ERISA (29
U.S.C. 1002(33)); or
(iv) Any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees.
(3) In determining the aggregate value of assets of plans, only
that portion of a plan's assets for which the investment adviser
provided investment advice (including any advice with respect to the
selection of an investment adviser to manage such assets) may be
included. The value of assets shall be determined as of the date during
its most recent fiscal year that the investment adviser was last
engaged to provide investment advice to the plan with respect to those
assets.
(c) Investment Advisers Controlling, Controlled By or Under Common
Control with a Investment Adviser Registered with the Commission. An
investment adviser that controls, is controlled by, or is under common
control with, an investment adviser eligible to register, and
registered with, the Commission (``registered adviser''), provided that
the principal office and place of business of the adviser is the same
as that of the registered adviser. For purposes of this paragraph,
control means the power to direct or cause the direction of the
management or policies of an adviser, whether through ownership of
securities, by contract, or otherwise. Any person that directly or
indirectly has the right to vote 25 percent or more of the voting
securities or is entitled to 25 percent or more of the profits of an
adviser is presumed to control that adviser.
(d) Investment Advisers Expecting to Be Eligible for Commission
Registration Within 90 Days. An investment adviser that:
(1) Is not registered or required to be registered with the
Commission or a securities commissioner (or any agency or officer
performing like functions) of any State and has a reasonable
expectation that it would be eligible to register with the Commission
within 90 days after the date the investment adviser's registration
with the Commission becomes effective;
(2) Includes in Schedule E to its Form ADV (17 CFR 279.1) an
undertaking to withdraw from registration with the Commission if, on
the 90th day after the date the investment adviser's registration with
the Commission becomes effective, the investment adviser would be
prohibited by section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) from
registering with the Commission; and
(3) Within 90 days after the date the investment adviser's
registration with the Commission becomes effective, files an amendment
to Form ADV (17 CFR 279.1) revising Schedule I thereto and, if the
amendment indicates that the investment adviser would be prohibited by
section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) from registering with
the Commission, the amendment is accompanied by a completed Form ADV-W
(17 CFR 279.2) whereby it withdraws from registration with the
Commission.
Sec. 275.203A-3 Definitions.
For purposes of section 203A of the Act (15 U.S.C. 80b-3A) and
rules thereunder:
(a)(1) Investment adviser representative of an investment adviser
means a supervised person of the investment adviser if a substantial
portion of the business of the supervised person is providing
investment advice to clients who are natural persons. Notwithstanding
this paragraph, 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 to clients of the investment adviser; or
(ii) Provides only impersonal investment advice.
(2) For purposes of paragraph (a)(1) of this section:
(i) 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; and
(ii) A substantial portion of the business of a supervised person
is providing investment advice to clients who are natural persons if,
during the course of the preceding 12 months:
(A) Clients who are natural persons represented more than 10
percent of the clients of the supervised person; or
(B) Assets of clients who are natural persons represented more than
10 percent of the assets under management attributable to the
supervised person.
(b) Place of business of an investment adviser representative means
a place or office from which the investment adviser representative
regularly provides advisory services or otherwise solicits, meets with,
or communicates to clients, unless the investment adviser
representative does not regularly provide advisory services or
otherwise solicit, meet with, or communicate to clients at any place or
office, in which case the place of business of such investment adviser
representative will be the residence of each client.
(c) Principal office and place of business of an investment adviser
means the executive office of the investment adviser from which the
officers, partners, or managers of the investment adviser direct,
control, and coordinate the activities of the investment adviser.
Sec. 275.203A-4 Investment advisers registered with a State
securities commission.
The Commission shall not assert a violation of section 203 of the
Act (15 U.S.C. 80b-3) (or any provision of the Act to which an
investment adviser becomes subject upon registration under section 203
of the Act) for the failure of an investment adviser registered with
the securities commission (or any agency or office performing like
functions) in the State in which it has its principal office and place
of business to register with the Commission if the investment adviser
reasonably believes that it does not have assets under management of at
least $30,000,000 and is therefore prohibited from registering with the
Commission.
Sec. 275.203A-5 Transition rules.
(a) Every investment adviser registered with the Commission on
[[Page 68496]]
April 9, 1997 shall file a completed Form ADV-T (17 CFR 279.3) no later
than April 9, 1997.
(b) If an investment adviser registered with the Commission on
April 9, 1997 would be prohibited from registering with the Commission
under section 203A of the Act (15 U.S.C. 80b-3A), and is not otherwise
exempt from such prohibition, such investment adviser shall withdraw
from registration with the Commission on Form ADV-T (17 CFR 279.3).
(c)(1) Except as provided in paragraph (c)(2) of this section, an
investment adviser that indicates on Form ADV-T (17 CFR 279.3) that the
investment adviser withdraws from registration with the Commission
shall be deemed to have withdrawn from registration as of the later of:
(i) April 9, 1997; or
(ii) The date the investment adviser first files with the
Commission Form ADV-T or any amendment to Form ADV-T (17 CFR 279.3)
that indicates that the investment adviser withdraws from registration
with the Commission.
(2) If, prior to the effective date of the withdrawal from
registration of an investment adviser on Form ADV-T (17 CFR 279.3), the
Commission has instituted a proceeding pursuant to section 203(e) of
the Act (15 U.S.C. 80b-3(e)) to suspend or revoke registration, or a
proceeding pursuant to section 203(h) of the Act (15 U.S.C. 80b-3(h))
to impose terms or conditions upon withdrawal, the withdrawal from
registration shall not become effective except at such time and upon
such terms and conditions as the Commission deems necessary or
appropriate in the public interest or for the protection of investors.
3. Section 275.204-1 is revised to read as follows:
Sec. 275.204-1 Amendments to application for registration.
(a) Every investment adviser whose registration with the Commission
is effective on the last day of its fiscal year shall, within 90 days
of the end of its fiscal year, unless its registration has been
withdrawn, cancelled or revoked prior to that day, file:
(1) Schedule I of Form ADV (17 CFR 279.1);
(2) A balance sheet if the balance sheet is required by Item 14 of
Part II of Form ADV (17 CFR 279.1); and
(3) An executed page one of Part I of Form ADV (17 CFR 279.1).
(b) If the information contained in the response to Items 1, 2, 3,
4, 5, 8, 11, 13A, 13B, 14A and 14B of Part I of any application for
registration as an investment adviser, or in any amendment thereto,
becomes inaccurate for any reason, or if the information contained in
response to any question in Items 9 and 10 of Part I, all of Part II
(except Item 14), and all of Schedule H of any application for
registration as an investment adviser, or in any amendment thereto,
becomes inaccurate in a material manner, the investment adviser shall
promptly file an amendment on Form ADV (17 CFR 279.1) correcting the
information.
(c) For all other changes not designated in paragraph (b)(2) of
this section, an investment adviser shall file an amendment on Form ADV
(17 CFR 279.1) updating the information together with the amendments
required by paragraph (a) of this section.
4. Section 275.204-2 is amended by revising the introductory text
of paragraph (a) and adding paragraph (k) to read as follows:
Sec. 275.204-2 Books and records to be maintained by investment
advisers.
(a) Every investment adviser registered or required to be
registered under section 203 of the Act (15 U.S.C. 80b-3) shall make
and keep true, accurate and current the following books and records
relating to its investment advisory business:
* * * * *
(k) Every investment adviser that registers under section 203 of
the Act (15 U.S.C. 80b-3) after April 9, 1997 shall be required to
preserve in accordance with this section the books and records the
investment adviser had been required to maintain by the State in which
the investment adviser had its principal office and place of business
prior to registering with the Commission.
5. Section 275.205-3 is amended by revising the section heading and
paragraph (a) to read as follows:
Sec. 275.205-3 Exemption from the compensation prohibition of section
205(a)(1) for registered investment advisers.
(a) General. The provisions of section 205(a)(1) of the Act (15
U.S.C. 80b-5(a)(1)) shall not prohibit any investment adviser from
entering into, performing, renewing or extending an investment advisory
contract which provides for compensation to the investment adviser on
the basis of a share of the capital gains upon, or the capital
appreciation of, the funds, or any portion of the funds, of a client,
Provided, That all the conditions in this section are satisfied.
* * * * *
6. Section 275.206(4)-1 is amended by revising the introductory
text of paragraph (a) to read as follows:
Sec. 275.206(4)-1 Advertisements by investment advisers.
(a) It shall constitute a fraudulent, deceptive, or manipulative
act, practice or course of business within the meaning of section
206(4) of the Act (15 U.S.C. 80b-6(4)), for any investment adviser
registered or required to be registered under section 203 of the Act
(15 U.S.C. 80b-3), directly or indirectly, to publish, circulate or
distribute any advertisement:
* * * * *
7. Section 275.206(4)-2 is amended by revising the introductory
text of paragraph (a) to read as follows:
Sec. 275.206(4)-2 Custody or possession of funds or securities of
clients.
(a) It shall constitute a fraudulent, deceptive or manipulative
act, practice or course of business within the meaning of section
206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser
registered or required to be registered under section 203 of the Act
(15 U.S.C. 80b-3) who has custody or possession of any funds or
securities in which any client has any beneficial interest, to do any
act or take any action, directly or indirectly, with respect to any
such funds or securities, unless:
* * * * *
8. Section 275.206(4)-4 is amended by revising the introductory
text of paragraph (a) to read as follows:
Sec. 275.206(4)-4 Financial and disciplinary information that
investment advisers must disclose to clients.
(a) It shall constitute a fraudulent, deceptive, or manipulative
act, practice, or course of business within the meaning of section
206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser
registered or required to be registered under section 203 of the Act
(15 U.S.C. 80b-3) to fail to disclose to any client or prospective
client all material facts with respect to:
* * * * *
9. Sections 275.222-1 and 222-2 are added to read as follows:
Sec. 275.222-1 Definitions.
For purposes of section 222 (15 U.S.C. 80b-18a) of the Act:
(a) Place of business of an investment adviser means a place or
office from which the investment adviser regularly provides advisory
services or otherwise solicits, meets with, or communicates to clients,
but does not include a motor vehicle unless the motor vehicle is the
only place of business of the investment adviser; and
(b) Principal place of business of an investment adviser means the
executive office of the investment adviser from
[[Page 68497]]
which the officers, partners, or managers of the investment adviser
direct, control, and coordinate the activities of the investment
adviser.
Sec. 275.222-2 Definition of ``client'' for purposes of the national
de minimis standard.
For purposes of section 222(d)(2) of the Act (15 U.S.C. 80b-
18a(d)(2)), the following shall be deemed a single client:
(a) A natural person, and:
(1) Any relative, spouse, or relative of the spouse of that person
who has the same principal residence; and
(2) All accounts of which the natural person and the persons
referred to in paragraph (a)(1) of this section are the sole primary
beneficiaries;
(b) A corporation, general partnership, limited liability company,
trust, or any legal organization (other than a limited partnership)
that receives investment advice based on its investment objectives
rather than the individual investment objectives of its shareholders,
partners, members, or beneficial owners; and
(c) A limited partnership that would be counted as a single client
under Sec. 275.203(b)(3)-1.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
10. 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.
11. Section 279.3 and Form ADV-S are revised to read as follows:
Sec. 279.3 Form ADV-T, transition form for determining eligibility for
Commission registration.
This form shall be filed pursuant to Sec. 275.203A-5(a) of this
chapter by every investment adviser registered with the Commission on
April 9, 1997.
Note: The text of Form ADV-T (17 CFR 279.3) will not appear in
the Code of Federal Regulations.
12. By revising Instructions 2 and 7 of Form ADV (referenced in
Sec. 279.1), and by adding Instruction 10 to read as follows:
Note: The text of Form ADV (17 CFR 279.1) does not and the
amendments will not appear in the Code of Federal Regulations.
Form ADV
* * * * *
Form ADV Instructions
* * * * *
2. Organization
This Form contains two parts. Parts I and II are filed with the SEC
and the jurisdictions; Part II can generally be given to clients to
satisfy the brochure rule. The Form also contains the following
schedules:
Schedule A--for corporations;
Schedule B--for partnerships;
Schedule C--for entities that are not sole
proprietorships, partnerships or corporations (e.g., limited liability
companies and limited liability partnerships);
Schedule D--for reporting information about individuals
under Part I Item 12;
Schedule E--for continuing responses to Part I items;
Schedule F--for continuing responses to Part II items;
Schedule G--for the balance sheet required by Part II Item
14;
Schedule H--for satisfaction of the brochure rule by
sponsors of wrap fee programs; and
Schedule I--for reporting information related to
eligibility for SEC registration.
* * * * *
7. SEC Filings
Submit filings in triplicate to the Securities and
Exchange Commission, Washington, D.C. 20549. There is no fee for
amendments.
Non-residents--Rule 0-2 under the Investment Advisers Act
of 1940 (17 CFR 275.0-2) covers those non-resident persons named
anywhere in Form ADV that must file a consent to service of process and
a power of attorney. Rule 204-2(j) under the Investment Advisers Act of
1940 (17 CFR 275.204-2(j)) covers the notice of undertaking on books
and records non-residents must file with Form ADV.
Federal Information Law and Requirements--Investment
Advisers Act of 1940 Sections 203(c), 204, 206, and 211(a) authorize
the SEC to collect the information on this Form from applicants for
investment adviser registration. The information is used for regulatory
purposes, including deciding whether to grant registration. The SEC
maintains files of the information on this Form and makes it publicly
available. Only the Social Security Number, which aids in identifying
the applicant, is voluntary. The SEC may return as unacceptable Forms
that do not include all other information. By accepting this Form,
however, the SEC does not make a finding that it has been filled out or
submitted correctly. Intentional misstatements or omissions constitute
Federal criminal violations under 18 USC 1001 and 15 USC 80b-17.
* * * * *
10. Updating
Amendments to this form should be filed:
--Promptly for any changes in: Part I--Items 1, 2, 3, 4, 5, 8, 11, 13A,
13B, 14A, and 14B;
--Promptly for material changes in: Part I--Items 9 and 10, all items
of Part II except Item 14, and all Items of Schedule H;
--Within 90 days of the end of the fiscal year for the filing of
Schedule I and any other changes.
Note: Every investment adviser is required to file Schedule I no
later than 90 days after the end of its fiscal year.
* * * *
Dated: December 20, 1996.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
BILLING CODE 8010-01-P
[[Page 68498]]
[GRAPHIC] [TIFF OMITTED] TP27DE96.012
[[Page 68499]]
[GRAPHIC] [TIFF OMITTED] TP27DE96.013
[[Page 68500]]
[GRAPHIC] [TIFF OMITTED] TP27DE96.014
BILLING CODE 8010-01-C
[[Page 68501]]
Form ADV-T Instructions
Instruction 1
(a) This Form must be executed and filed in triplicate with the
Securities and Exchange Commission, Mail Stop A-2, Registrations and
Examinations, 450 Fifth Street, N.W., Washington, D.C. 20549. An
exact copy should be retained by the registrant. There is no fee for
filing this Form.
(b) All copies of the Form filed with the Commission shall be
executed with a manual signature in Part IV. One of the filed copies
must contain an original signature, the other two copies may contain
photocopied signatures. If the Form is filed by a sole proprietor,
it must be signed by the proprietor; if it is filed by a
partnership, it must be signed in the name of the partnership by a
general partner; if filed by an unincorporated organization or
association which is not a partnership, it must be signed in the
name of the organization or association by a duly authorized person
who directs or manages or who participates in the directing or
managing or its affairs; if filed by a corporation, it must be
signed in the name of the corporation by a principal officer duly
authorized. If signed by an officer of a corporation, organization,
or associations his or her title must be given.
(c) When amending this Form, complete the entire document and
circle the number or letter of any items being amended (i.e., if a
box is no longer being checked, circle the box to indicate that it
previously had been checked).
(d) A Form that is not prepared and executed in compliance with
applicable requirements may be returned as not acceptable for
filing. Acceptance of this Form, however, shall not constitute any
finding that it has been filed as required or that the information
submitted is true, correct, or complete.
(e) Failure to file this Form is a violation of rule 203A-5(a)
under the Investment Advisers Act of 1940, as amended (``Advisers
Act''). Additionally, failure to file this Form will result in the
taking of appropriate steps by the Commission to determine whether a
registrant is still in existence and is still engaged in business as
an investment adviser and may, therefore, lead the Commission to
order cancellation of a registrant's registration, pursuant to
section 203(h) of the Advisers Act.
(f) Unless the context clearly indicates otherwise, all terms
used in this Form have the same meaning as in the Advisers Act and
in the General Rules and Regulations of the Commission thereunder.
(g) Sections 203(c)(1) and 204 of the Advisers Act authorize the
Commission to collect the information on this Form from registrants.
The Commission will maintain files of the information on this Form
and will make the information publicly available.
Instruction 2
Registrant's principal office and place of business is the
executive office from which the officers, partners, or managers of
the registrant direct, control, and coordinate registrant's
activities. See rule 203A-3(c).
Instruction 3
Under the Advisers Act, a registrant whose principal office and
place of business (see Instruction 2) is in a State that does not
regulate the registrant as an investment adviser is eligible to
maintain its registration with the Commission, even if none of the
other criteria for SEC registration (e.g., $25 million of assets
under management) are met. Currently, these States are Colorado,
Iowa, Ohio, and Wyoming. In addition, a registrant whose principal
office and place of business is located in a country other than the
United States is eligible to maintain its registration with the
Commission. These registrants should check the box in item (a)(ii)
of Part II.
A registrant whose principal office and place of business is in
a State that regulates investment advisers, but that is excepted
from regulation or exempted from registration under that State's
investment adviser statute, is not ``registered'' as an investment
adviser in that State. Such a registrant is eligible to maintain its
registration with the Commission, and therefore should check the box
in item (a)(ii) of Party II.
Instruction 4
A registrant that controls, is controlled by, or is under common
control with, an investment adviser that is eligible to maintain its
registration with the Commission after April 9, 1997 (the ``eligible
adviser'') is eligible to maintain its registration with the
Commission if the principal office and place of business of the
registrant is the same as that of the eligible adviser. See rule
203A-2(c).
Instruction 5
If item (b) of Part II is checked, registrant's investment
adviser registration with the SEC will be withdrawn effective as of
the later of (i) April 9, 1997 or (ii) the date the registrant first
files this Form or any amendment to the Form that indicates that
registrant withdraws its registration.
Instruction 6
Under rule 203A-1(b), certain investment advisers that have
assets under management of not less than $25 million but nor more
than $30 million may (but are not required to) register with the
Commission. An adviser wishing (and eligible) to take advantage of
this option should check item (c) of Part II. This option is not
available to an adviser that is required to be registered with the
Commission regardless of the amount of its assets under management,
i.e., an adviser (i) to a registered investment company, (ii) that
is not registered (or required to be registered) as an investment
adviser in the State in which it maintains its principal office and
place of business (see Instruction 3), or (iii) that is exempted by
rule 203A-2 from the prohibition on registering with the Commission
(NRSROs, pension consultants, and certain advisers controlling,
controlled by, or under common control with SEC-registered
advisers).
Registrants wishing to withdraw their SEC registration by
checking item (c) of Part II must report their assets under
management in the Assets Under Management Worksheet in Part III. If
item (c) of part II is checked, registrant's investment adviser
registration with the SEC will be withdrawn effective as of the
later of (i) April 9, 1997 or (ii) the date registrant first files
this Form or any amendment to the Form that indicates that
registrant withdraws its registration.
Instruction 7
In determining the amount of assets the registrant has under
management, include the total value of securities portfolios with
respect to which the registrant provides continuous and regular
supervisory or management services.
(a) An account is a securities portfolio if at least 50% of the
total value of the account (less cash and cash equivalents) consists
of securities. Include securities portfolios that are: (i) family or
proprietary accounts (unless the registrant is a sole proprietor, in
which case the personal assets of the sole proprietor should be
excluded); (ii) accounts for which the registrant receives no
compensation for its services; and (iii) accounts of clients who are
not U.S. residents.
(b) Include the entire value of each securities portfolio for
which the registrant provides ``continuous and regular supervisory
or management services.''
(c) A registrant provides continuous and regular supervisory or
management services with respect to a securities portfolio if the
registrant (i) has discretionary authority over and (ii) provides
ongoing management or supervisory services with respect to the
portfolio.
Whether a registrant that provides ongoing management or
supervisory services on a non-discretionary basis provides
continuous and regular supervisory or management services is a
question of fact. The greater the registrant's ongoing
responsibilities, the more likely the adviser will be providing
continuous and regular supervisory or management services.
To assist registrants, the Commission is providing examples of
accounts that receive continuous and regular supervisory and
management services. These examples are not exclusive.
Accounts That Receive Continuous and Regular Supervisory and
Management Services
Accounts for which the adviser provides traditional
portfolio management services on a discretionary basis;
Accounts for which the adviser provides ongoing
management services, (i.e., is responsible for the selection of
which securities to buy and sell and when to buy and sell them)
without a grant of discretionary authority;
Accounts managed by other advisers (i) that the adviser
has been given a grant of discretionary authority to hire and
discharge on behalf of the client, and (ii) among which the adviser
has the authority to allocate and reallocate account assets; and
Accounts for which the adviser provides asset
allocation services by (i) continuously monitoring the needs of the
clients and the markets in which account assets are invested, and
(ii) allocating and reallocating account
[[Page 68502]]
assets to meet client objectives under a grant of discretionary
authority.
Accounts That do Not Receive Continuous and Regular Supervisory and
Management Services
Accounts for which the adviser provides only periodic
advice (no matter how frequent), e.g., an account for which the
adviser has prepared a financial plan which is periodically reviewed
and updated;
Accounts for which the adviser provides advice only on
a periodic basis or as a result of some market event or change in
client circumstances (even if the adviser has discretionary
authority), e.g., an account that is reviewed and adjusted on a
quarterly basis or upon client request;
Accounts for which adviser provides market timing
recommendations (to buy or sell) but does not manage on an ongoing
basis;
Accounts for which adviser provides impersonal advice,
e.g., market newsletter;
Accounts for which adviser provides only an initial
asset allocation, without continuous and regular monitoring and
reallocation; and
Accounts for which the registrant undertakes to monitor
the markets and apprise the client of any developments, or make
recommendations as to the reallocation of client assets upon any
developments.
(d) Determine the total amount of assets under management based
on the current market value as determined within 10 business days
prior to the date of filing this Form. Current market value should
be determined using the same methodology as the account value
reported to clients or calculated to determine fees for investment
advisory services
(e) Include only those accounts for which registrant provides
continuous and regular supervisory and management services as of the
date of filing this Form.
Instruction 8
The written statement required by item (c) of Part III should be
attached only if registrant does not have at least $25 million in
discretionary assets under management. For example, a registrant
that has $30 million of discretionary and $5 million of non-
discretionary assets under management would not be required to
attach the statement. A registrant that has $20 million of
discretionary and $5 million of non-discretionary assets under
management would attach a statement, but the statement would only be
required to describe the nature of the supervisory and management
services. provided to the $5 million of non-discretionary assets. A
registrant that has $20 million of discretionary and $5 million of
non-discretionary assets under management, but that is an adviser to
a registered investment company (and therefore has an additional
basis of eligibility for SEC registration) would not be required to
attach the statement.
[FR Doc. 96-32799 Filed 12-26-96; 8:45 am]
BILLING CODE 8010-01-P
