[Federal Register Volume 64, Number 24 (Friday, February 5, 1999)]
[Proposed Rules]
[Pages 5722-5725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2703]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-1787; File No. S7-2-99]
RIN 3235-AH60
Transition Rule for Ohio Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
publishing for comment a proposed rule under the Investment Advisers
Act of 1940 to assist investment advisers that will be subject to a new
Ohio investment adviser statute. The proposed rule would provide a
transition process for these investment advisers to change from
Commission to state registration.
DATES: Comments must be received on or before March 8, 1999.
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. S7-2-99; this file number
should be included on the subject line if E-mail is used. Comment
letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W. Washington,
D.C. 20549. Electronically submitted comment letters also will be
posted on the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Jeffrey O. Himstreet, Attorney, or
Arthur B. Laby, Special Counsel, at (202) 942-0716, Task Force on
Investment Adviser Regulation, Division of Investment Management,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop
5-6, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is publishing for comment
proposed rule 203A-6 [17 CFR 275.203A-6] and a proposed amendment to
Schedule I of Form ADV [17 CFR 279.1], both under the Investment
Advisers Act of 1940 [15 U.S.C. 80b] (``Advisers Act'' or ``Act'').
I. Background
Under the Advisers Act, as amended by the Investment Advisers
Supervision Coordination Act (``Coordination Act''),\1\ the Commission
has regulatory responsibility for investment advisers that have at
least $25 million of assets under management or advise a registered
investment company.\2\ The Commission also has regulatory
responsibility for advisers that have less than $25 million of assets
under management and have their principal place of business in a state
that has not enacted an investment adviser statute.\3\ At the time the
Coordination Act was adopted, Ohio was one of four states that did not
have an investment adviser statute.\4\ Recently, Ohio enacted
investment adviser legislation that will become effective by March 31,
1999.\5\
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\1\ Title III of the National Securities Markets Improvement Act
of 1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in
scattered sections of the United States Code).
\2\ Id.
\3\ See Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997)
[62 FR 28112 (May 22, 1997)] at II.E.1 (``Implementing Release'').
\4\ Colorado, Iowa and Wyoming also did not have investment
adviser statutes at the time Congress enacted the Coordination Act.
The Commission recently amended Schedule I to Form ADV necessitated
by the enactment of investment adviser statutes in both Colorado and
Iowa. Technical Changes to Schedule I to Form ADV, Investment
Advisers Act Release No. 1733A (Jan. 7, 1999).
\5\ H.B. 695, 122d Gen. Ass., Reg. Sess. (Ohio 1997-1998).
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The Commissioner of the Ohio Division of Securities has requested
that we create a transition process to assist in the implementation of
the Ohio law.\6\ The transition process would primarily affect
investment advisers that have their principal place of business in Ohio
and are eligible for Commission registration only because of the
location of their principal office and place of business (``smaller
Ohio advisers''). Absent a transition rule, the preemptive provisions
of the Coordination Act would prevent the Ohio Division of Securities
(and other state securities authorities) from requiring the
registration of smaller Ohio advisers until the advisers withdrew from
Commission registration or we canceled their registrations.\7\ To
assist the Ohio Division of Securities and to facilitate the transition
of regulatory responsibilities for smaller Ohio advisers, we are
proposing for public comment new rule 203A-6.
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\6\ See Letter from Thomas E. Geyer, Commissioner, Ohio Division
of Securities, dated September 25, 1998 (available in File No. S7-2-
99).
\7\ Section 203A(b) of the Act [15 U.S.C. 80b-3a(b)] preempts
state laws that would require the registration, qualification and
licensing of investment advisers registered with the Commission. See
Implementing Release, supra note 3 at II.H.1.
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II. Discussion
Under the proposed rule, new Ohio advisers (i.e., those advisers
that are not currently registered with the Commission) that would not
be eligible for Commission registration would register with the Ohio
Division of Securities on or after the effective date of Ohio's
implementing rules.\8\ Smaller Ohio advisers that are currently
registered with the Commission would switch over to registration with
the Ohio Division of Securities during a one year transition period.\9\
These advisers could withdraw their Commission registration at the time
they register with the Ohio Division of Securities, or by the end of
the transition period.\10\
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\8\ The Ohio Division of Securities estimates that its
implementing rules would be effective by March 31, 1999.
\9\ In addition, advisers ineligible for Commission registration
may be required to register with other state securities authorities.
See Section 222(d) of the Advisers Act [15 U.S.C. 80b-22(d)] (the
national de minimis standard). The timing of an investment adviser's
state registration obligations would be governed by state law.
\10\ Proposed rule 203A-6(b). We recognize that Ohio investment
advisers may be registered with, and regulated by, both the Ohio
Division of Securities and the Commission until the advisers
withdraw from Commission registration. During this time, Ohio
investment advisers may be subject to both federal and state
regulatory requirements. Ohio investment advisers no longer eligible
for Commission registration may withdraw from Commission
registration at any time and thus avoid dual regulation.
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With the enactment of the Ohio law, smaller Ohio advisers may no
longer rely on the location of their principal office and place of
business as a basis for Commission registration. The Commission
therefore is proposing to amend Schedule I by deleting the references
to Ohio from both Schedule I and the Instructions to Schedule I. As a
result of the proposed amendments to Schedule I, advisers would no
longer be able to claim eligibility for Commission registration based
on the location of their principal office and place of business in Ohio
and must withdraw from Commission registration, unless otherwise
eligible.\11\ The amendments to Schedule I would become effective on
December 31, 1999.
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\11\ The Commission is proposing to require smaller Ohio
advisers to withdraw from Commission registration by March 30, 2000.
Proposed rule 203A-6(b).
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III. General Request for Comment
Any interested persons wishing to submit written comments on the
proposed rule and form changes that are the subject of this release, to
suggest additional changes or submit comments on other matters that
might have an effect on the proposals described above, are requested to
do so. Commenters
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suggesting alternative approaches are encouraged to submit proposed
rule text.
For purposes of making determinations required by the Small
Business Regulatory Enforcement Fairness Act of 1996, discussed below,
the Commission also is requesting information regarding the potential
impact of the proposed rule and Schedule I amendment on the economy on
an annual basis. Commenters should provide empirical data to support
their views.
IV. Cost-Benefit Analysis
The proposed rule and form amendment are designed to facilitate the
transition of certain advisers from Commission to state registration.
This transition would further implement congressional intent to
reallocate regulatory responsibilities for investment advisers between
the Commission and state securities authorities.
Proposed rule 203A-6 would not have a significant effect on the
regulatory burden borne by investment advisers. The Coordination Act
imposes certain costs on advisers as a consequence of no longer being
registered with the Commission, and, at the same time, confers benefits
on these advisers, such as no longer requiring them to file amendments
to Form ADV with the Commission. The proposed rule does not alter these
burdens and benefits, but merely establishes a time by which advisers
are required to switch registrations from the Commission to the Ohio
Division of Securities.\12\ Advisers may withdraw from Commission
registration at any time and avoid any potential burdens associated
with the proposed rule.
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\12\ Under current rules, advisers that are no longer eligible
for Commission registration under section 203A(a) of the Act [15
U.S.C. 80b-3a(a)] must withdraw from registration within 90 days
after the date the adviser is required by rule 204-1(a) [17 CFR
275.204-1(a)]. See 17 CFR 279.1 (Schedule I, instruction 6).
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Comment is requested on any costs that may be imposed by the
proposed rule and form amendment. Commenters should submit data
indicating the cost of filing Schedule I to Form ADV and Form ADV-W.
Commenters also should submit data on the expected effects of the
proposed rule and form amendment on the customers of investment
advisers (such as the amount of fees paid).
Comment is requested on this cost-benefit analysis. Commenters are
requested to provide views and empirical data relating to any costs and
benefits associated with the proposed rule and form amendment.
V. Paperwork Reduction Act
The proposed amendments to Schedule I to Form ADV contains a
``collection of information'' within the meaning of the Paperwork
Reduction Act of 1995 [44 U.S.C. 3501 to 3520], and the Commission has
submitted them to the Office of Management and Budget in accordance
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection
of information is ``Schedule I to Form ADV,'' under the Advisers Act.
Schedule I to Form ADV contains a currently approved collection of
information under OMB control number 3235-0490. An agency may not
sponsor, conduct, or require response to an information collection
unless a currently valid OMB control number is displayed.
Each investment adviser must declare on Schedule I to Form ADV
whether it is eligible for Commission registration. The rules imposing
this collection of information are found at 17 CFR 275.203-1 and 17 CFR
279.1. Rule 204-1 [17 CFR 275.204-1] requires an investment adviser
registered with the Commission to file an amended Schedule I to Form
ADV annually within 90 days after the end of the investment adviser's
fiscal year. The Commission is proposing amendments to Schedule I only,
and not to Form ADV. The burdens associated with this filing are the
same as the burdens Form ADV-W imposes on all advisers withdrawing from
registration. The proposed withdrawal procedures impose no additional
paperwork burdens on advisers. The rule would create a March 30, 2000
deadline by which smaller Ohio advisers must withdraw from Commission
registration. Additionally, smaller Ohio advisers may withdraw from
Commission registration at any time prior to March 30, 2000 and not be
subject to the proposed rule.
Approximately 899 investment advisers with their principal office
in Ohio that are registered with the Commission would respond annually
to the information requirements of Schedule I. In addition, an
estimated 760 new advisers will file Schedule I to Form ADV annually,
approximately 83 of which are estimated to have their principal office
in Ohio. Of these 83 advisers, an estimated 72 will file Schedule I to
Form ADV an average of once a year, and the remaining 11 that rely on
the exemption provided by rule 203A-2(d) [17 CFR 275.203A-d] will file
Schedule I to Form ADV an average of twice each year. The Commission
would receive an estimated 993 total responses from investment advisers
with their principal office in Ohio.
The proposed form amendment will not materially alter the number of
burden hours for investment advisers with their principal office in
Ohio. An estimated 889 advisers with their principal office in Ohio
(90.5% of respondents, excluding the estimated ten advisers nationwide
expected to rely on the multi-state exemption) either do not need to
calculate assets under management to complete Schedule I or calculate
assets under management as part of their normal business operations.
The burden for these advisers would be 0.75 of an hour (unchanged from
previous estimate). For the estimated 93 investment advisers with their
principal office in Ohio that must calculate assets under management to
complete Schedule I (9.5% of respondents, excluding the estimated ten
advisers nationwide expected to rely on the multi-state exemption
provided by rule 203A-2(e) [17 CFR 275.203A-2(e)]), compliance with the
requirement to file an amended Schedule I would impose a total annual
burden for each investment adviser of approximately two hours
(unchanged from previous estimate). Schedule I to Form ADV therefore is
estimated to impose 852.75 total burden hours on advisers with their
principal office in Ohio. This estimate would likely remain constant
absent the proposed rule and form amendment.
The collection of information required by Schedule I is mandatory,
and responses are not kept confidential.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to (i) evaluate whether the proposed collections of
information are necessary for the proper performance of the functions
of the agency, including whether the information will have practical
utility; (ii) evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information; (iii) enhance the
quality, utility, and clarity of the information to be collected; and
(iv) minimize the burden of the collections of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and also should send a copy of their comments to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street,
N.W., Stop
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6-9, Washington, D.C. 20549 with reference to File No. S7-2-99. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication. A comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.
VI. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding proposed
rule 203A-6 and amendment to Schedule I to Form ADV. The following
summarizes the IRFA.
The IRFA sets forth the statutory authority for the proposed rule
and amendment to Schedule I. The IRFA also discusses the effect of the
proposed rule and form amendment on small entities. For the purposes of
the Advisers Act and the Regulatory Flexibility Act, an investment
adviser, under Commission rules, generally is a small entity if (i) it
has assets under management of $25 million or less reported on its most
recent Schedule I to Form ADV [17 CFR 279.1]; (ii) it does not have
total assets of $5 million or more on the last day of the most recent
fiscal year; and (iii) it is not in a control relationship with another
investment adviser that is not a small entity.\13\
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\13\ Rule 0-7 [17 CFR 275.0-7].
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The Commission estimates that approximately 1,000 Commission-
registered advisers are small entities. Approximately 540 of these
small entities have their principal office in Ohio. As explained in the
IRFA, the majority of these advisers are smaller Ohio advisers that
will be required by the Coordination Act to withdraw from Commission
registration and register with the various state securities
authorities. Absent Commission rulemaking, the Coordination Act will
require smaller Ohio advisers to withdraw from Commission registration
after the Ohio law is effective. Relatively few small entities thus
would be affected by the proposed rule.
The IRFA states that the proposed rule amendments would impose no
new reporting or recordkeeping requirements and would eliminate certain
other requirements. The proposed rule would, however, create a deadline
for complying with an existing requirement. Smaller Ohio advisers no
longer eligible for Commission registration would be required to
withdraw from Commission registration by March 30, 2000. These advisers
will no longer be required to file an amended Schedule I with the
Commission each year, or the other annual updates to Form ADV.
The proposed rule and rule amendment will not materially alter the
time required for investment advisers to comply with these rules.\14\
The proposed rule and form amendment also are necessary to implement
the Coordination Act with respect to smaller Ohio advisers. The IRFA
states that the burden to investment advisers subject to the rule
should be outweighed by the benefits to the investment advisers subject
to the proposed rule and form amendment.
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\14\ Currently, investment advisers that are required to
withdraw from Commission registration because they are no longer
eligible under section 203A(a) of the Act [15 U.S.C. 80b-3a(a)] are
required to withdraw from registration within 90 days after the date
the adviser's Schedule I was required by rule 204-1(a) [17 CFR
275.204-1(a)] to have been filed with the Commission. See Schedule
I, instruction 6 [17 CFR 279.1].
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There are no rules that duplicate, overlap, or conflict with, the
proposed rule amendments.
The IRFA discusses the various alternatives considered by the
Commission in connection with the proposed rule and form amendment that
might minimize the effect on small entities, including (a) the
establishment of differing compliance or reporting requirements or
timetables that take into account resources available to small
entities; (b) the clarification, consolidation, or simplification of
compliance and reporting requirements under the proposed rule for small
entities; (c) the use of performance rather than design standards; and
(d) an exemption from coverage of the proposed rule, or any part of the
proposed rule, for small entities.
As stated in the IRFA, it would be inconsistent with the
Coordination Act to exempt small entities from the proposed rule and
form amendment. This determination was made after taking into account
the resources available to small entities and the potential burden that
could be placed on investment advisers that may no longer be eligible
for Commission registration. It does not appear feasible to establish
different reporting or compliance requirements or to further clarify,
consolidate or simplify the reporting or compliance requirements. The
proposed rule and form amendment, as proposed, would not adversely
affect small entities. The proposed rule and form amendment, instead,
include regulatory alternatives that minimize the effect on small
entities.
The IRFA includes information concerning the solicitation of
comments with respect to the IRFA generally, and in particular, the
number of small entities that would be affected by the proposed rule
and form amendment. A copy of the IRFA may be obtained by contacting
Jeffrey O. Himstreet, Securities and Exchange Commission, 450 5th
Street, N.W., Mail Stop 5-6, Washington, D.C. 20549.
VII. Statutory Authority
The Commission is proposing new rule 203A-6 pursuant to the
authority set forth in section 203(h) [15 U.S.C. 80b-3(h)]; 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 amendments to Form ADV pursuant to the
authority set forth in section 203(c)(1) [15 U.S.C. 80b-3(c)(1)]; and
section 204 [15 U.S.C. 80b-4] of the Investment Advisers Act of 1940.
Text of Proposed Rule and Form Amendments
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements; Securities.
For the reasons discussed in the preamble, the Commission proposes
to amend Title 17, Chapter II of the Code of Regulations as follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1. The authority citation for Part 275 continues to read in part as
follows:
Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.
* * * * *
2. Section 275.203A-6 is added to read as follows:
Sec. 275.203A-6 Transition period for Ohio investment advisers.
(a) Ohio authority. Notwithstanding section 203A(b) of the Act [15
U.S.C. 80b-3a(b)], the Ohio Revised Code, sections 1707.01 to 1707.99,
is effective with respect to an investment adviser registered with the
Commission that, but for having its principal office and place of
business in Ohio, would be prohibited from registering with the
Commission under section 203A of the Act [15 U.S.C. 80b-3a].
(b) Withdrawal required. Every investment adviser that is
registered with the Commission solely because its principal office and
place of business is located in Ohio must withdraw from Commission
registration by March 30, 2000.
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PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
3. 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.
4. By amending Schedule I to Form ADV (referenced in Sec. 279.1) to
remove all references to ``Ohio'' and by amending the Instructions to
Schedule I to Form ADV (referenced in Sec. 279.1) to remove all
references to ``Ohio''.
Note: The text of Schedule I to Form ADV [Sec. 279.1] does not
and the amendments will not appear in the Code of Federal
Regulations.
Dated: January 29, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2703 Filed 2-4-99; 8:45 am]
BILLING CODE 8010-01-U
