[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Rules and Regulations]
[Pages 28112-28151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13284]



[[Page 28111]]

_______________________________________________________________________

Part II





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Parts 275 and 279



Rules Implementing Amendments to the Investment Advisers Act of 1940; 
Final Rule

  Federal Register / Vol. 62, No. 99 / Thursday, May 22, 1997 / Rules 
and Regulations  

[[Page 28112]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-1633, File No. S7-31-96]
RIN 3235-AH07


Rules Implementing Amendments to the Investment Advisers Act of 
1940

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

-----------------------------------------------------------------------

SUMMARY: The Commission is adopting new rules and rule amendments under 
the Investment Advisers Act of 1940 (``Advisers Act'') to implement 
provisions of the Investment Advisers Supervision Coordination Act 
(``Coordination Act'') that reallocate regulatory responsibilities for 
investment advisers between the Commission and the states. The rules 
establish the process by which certain advisers will withdraw from 
Commission registration, exempt certain advisers from the prohibition 
on Commission registration, and define certain terms. The Commission 
also is amending several rules under the Advisers Act to reflect the 
changes made by the Coordination Act. The rules and rule amendments are 
intended to clarify provisions of the Coordination Act and assist 
investment advisers in ascertaining their regulatory status.

EFFECTIVE DATES: July 8, 1997, except for Sec. 275.203A-2, which will 
become effective on July 21, 1997. See section iii of this Release.

FOR FURTHER INFORMATION CONTACT: Catherine M. Saadeh, Staff Attorney, 
or Cynthia G. Pugh, Staff Attorney, at (202) 942-0691, Task Force on 
Investment Adviser Regulation, Division of Investment Management, Stop 
10-2, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549. The Commission has placed a list of frequently 
asked questions and answers about Form ADV-T and the changes in the 
regulation of investment advisers on the Commission's Internet web 
site. This list is located at http://www.sec.gov/rules/othern/
advfaq.htm. The Commission staff will update these questions and 
answers from time to time. The Commission urges interested persons with 
access to the World Wide Web to review these questions and answers 
before contacting Commission staff.

SUPPLEMENTARY INFORMATION: The Commission is adopting new rules 203A-1, 
203A-2, 203A-3, 203A-4, 203A-5, 222-1, and 222-2 (17 CFR 275.203A-1, 
275.203A-2, 275.203A-3, 275.203A-4, 275.203A-5, 275.222-1, and 275.222-
2), and amendments to rules 203(b)(3)-1, 204-1, 204-2, 205-3, 206(3)-2, 
206(4)-1, 206(4)-2, 206(4)-3, and 206(4)-4 (17 CFR 275.203(b)(3)-1, 
275.204-1, 275.204-2, 275.205-3, 275.206(3)-2, 275.206(4)-1, 
275.206(4)-2, 275.206(4)-3, and 275.206(4)-4), and Form ADV (17 CFR 
279.1) under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1) (the 
``Advisers Act'' or the ``Act''). The Commission is rescinding Form 
ADV-S (17 CFR 279.3) under the Advisers Act.

Table of Contents

Executive Summary
I. Background
II. Discussion
A. Form ADV-T
B. Assets Under Management
    1. Securities Portfolios
    2. Continuous and Regular Supervisory or Management Services
    3. Safe Harbor for State-Registered Investment Advisers
    4. Valuation and Reporting of Securities Portfolios
C. Transitions Between State and Commission Registration
    1. Transition from Commission to State Registration
    a. Annual Reporting of Continued Eligibility
    b. 90-Day Grace Period
    c. Cancellation of Commission Registration
    2. Transition from State to Commission Registration
    a. The $5 Million ``Window''
    b. Registration with the Commission
D. Exemptions from Prohibition on Registration with the Commission
    1. Nationally Recognized Statistical Rating Organizations
    2. Pension Consultants
    3. Certain Affiliated Investment Advisers
    4. Investment Advisers With Reasonable Expectation of 
Eligibility
    5. Advisers to ERISA Plans
E. Investment Advisers Not Regulated or Required to be Regulated by 
States
    1. ``Regulated or Required to be Regulated''
    2. ``Principal Office and Place of Business''
F. Persons Who Act on Behalf of Investment Advisers
    1. ``Investment Adviser Representative''
    a. Retail Clients
    b. Accommodation Clients
    c. Supervised Persons Providing Indirect or Impersonal Advice
    d. Dually Registered Investment Adviser Representatives
    e. Solicitors
    2. ``Place of Business''
G. National De Minimis Standard
H. Scope of State Authority Over Commission-Registered Investment 
Advisers
    1. Preemption of State Regulatory Authority
    2. Preservation of State Anti-Fraud Authority
I. Other Amendments to Advisers Act Rules
    1. Amendments to Form ADV; Elimination of Form ADV-S
    2. Rule 204-2--Books and Records
    3. Rule 205-3--Performance Fee Arrangements
    4. Rule 206(3)-2--Agency Cross Transactions
    5. Rules 206(4)-1, 206(4)-2, and 206(4)-4--Anti-Fraud Rules
III. Effective Dates
IV. Paperwork Reduction Act
V. Cost/Benefit Analysis
VI. Summary of Regulatory Flexibility Analysis
VII. Statutory Authority
    Text of Rules and Forms
    Appendix A: Form ADV-T
    Appendix B: Schedule I to Form ADV

Executive Summary

    The Commission is adopting rules and rule amendments to implement 
certain provisions of the Investment Advisers Supervision Coordination 
Act. The Coordination Act amended the Advisers Act to, among other 
things, reallocate the responsibilities for regulating investment 
advisers (``investment advisers'' or ``advisers'') between the 
Commission and the securities regulatory authorities of the states. 
Generally, the Coordination Act provides for Commission regulation of 
advisers with $25 million or more of assets under management, and state 
regulation of advisers with less than $25 million of assets under 
management. The rules and rule amendments:
     Establish the process by which advisers that are currently 
registered with the Commission determine their status as Commission-or 
state-registered advisers after July 8, 1997, the effective date of the 
Coordination Act;
     Amend Form ADV to require advisers to report annually to 
the Commission information relevant to their status as Commission-
registered advisers;
     Relieve advisers of the burden of frequently having to 
register and then de-register with the Commission as a result of 
changes in the amount of their assets under management;
     Provide certain exemptions from the prohibition on 
registration with the Commission;
     Define certain terms used in the Coordination Act, 
including ``investment adviser representative,'' ``principal office and 
place of business,'' and ``place of business''; and
     Clarify how advisers should count clients for purposes of 
both the new national de minimis exemption from state regulation and 
the federal de minimis exemption from Commission registration.

[[Page 28113]]

I. Background

    On October 11, 1996, President Clinton signed into law the National 
Securities Markets Improvement Act of 1996 (``1996 Act'').1 
Title III of the 1996 Act, the Coordination Act, makes several 
amendments to the Advisers Act. The most significant of these 
amendments reallocates federal and state responsibilities for the 
regulation of the approximately 23,350 investment advisers currently 
registered with the Commission.2 These amendments will 
become effective on July 8, 1997.3
---------------------------------------------------------------------------

    \1\ Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in 
scattered sections of the United States Code).
    \2\ Other amendments made by the 1996 Act to the Advisers Act 
include revisions to (i) section 205 (15 U.S.C. 80b-5) to create 
additional exceptions to the Advisers Act's limitations on 
performance fee arrangements, (ii) section 222 (15 U.S.C. 80b-18a) 
to impose certain uniformity requirements on state investment 
adviser laws (see infra section II. G of this Release), (iii) 
section 203(e) (15 U.S.C. 80b-3(e)) to permit the Commission to deny 
or revoke the registration of any person convicted of any felony (or 
of any adviser associated with such a person), and (iv) section 
203(b) (15 U.S.C. 80b-3(b)) to exempt from registration certain 
advisers to church employee pension plans. See sections 210, 304, 
305(a), and 508(d) of the 1996 Act.
    \3\ See section 308(a) of the Coordination Act. The effective 
date of the Coordination Act was originally April 9, 1997. On March 
31, 1997, President Clinton signed into law Pub. L. 105-8, which 
extended the effective date of the Coordination Act to July 8, 1997. 
See 111 Stat. 15 (1997).
---------------------------------------------------------------------------

    The reallocation of regulatory responsibilities grew out of a 
number of Congressional concerns regarding the regulation of investment 
advisers. Congress was concerned that the Commission's resources are 
inadequate to supervise the activities of the growing number of 
investment advisers registered with the Commission, many of which are 
small, locally operated, financial planning firms.4 Congress 
concluded that if the overlapping regulatory responsibilities of the 
Commission and the states were divided by making the states primarily 
responsible for smaller advisory firms and the Commission primarily 
responsible for larger firms, the regulatory resources of the 
Commission and the states could be put to better, more efficient 
use.5
---------------------------------------------------------------------------

    \4\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-4 (1996) 
(hereinafter Senate Report). The number of investment advisers 
registered with the Commission increased dramatically from 5,680 in 
1980 to approximately 23,350 today. By 1995, the Commission was able 
to examine smaller advisers on a routine basis on average only once 
every 44 years. See The Securities Investment Promotion Act of 1996: 
Hearing on S. 1815 Before the Senate Comm. on Banking, Housing, and 
Urban Affairs, 104th Cong., 2d Sess. 36 (1996) (hereinafter Senate 
Hearing) (testimony of Arthur Levitt, Chairman, SEC).
    \5\ See Senate Report, supra note 4, at 3-4.
---------------------------------------------------------------------------

    Congress also was concerned with the cost imposed on investment 
advisers and their clients by overlapping, and in some cases, 
duplicative, regulation.6 In addition to the Commission, 
forty-six states regulate the activities of investment advisers under 
state investment adviser statutes.7 States generally have 
asserted jurisdiction over investment advisers that ``transact 
business'' in their state.8 Consequently, many large 
advisers operating nationally have been subject to the differing laws 
of many states. Industry participants strongly asserted that compliance 
with differing state laws has imposed significant regulatory burdens on 
these large advisers.9 Congress intended to reduce these 
burdens by subjecting large advisers to a single regulatory program 
administered by the Commission.10
---------------------------------------------------------------------------

    \6\ Id. at 2.
    \7\ The District of Columbia, Guam, and Puerto Rico also have 
enacted statutes regulating investment advisers. See D.C. Code Ann. 
sections 2-2631 to -2651 (1994); 22 Guam Code Ann. sections 46201-
46206 (1995); P.R. Laws Ann. tit. 10, sections 861-864 (1976). The 
four states that currently do not have investment adviser statutes 
are Colorado, Iowa, Ohio, and Wyoming.
    \8\ See, e.g., Unif. Sec. Act section 201(c) (1988); Ark. Code 
Ann. section 23-42-301(c) (Michie Supp. 1995); Md. Code Ann., Corps 
& Ass'ns section 11-401(b) (1993).
    \9\ See Senate Hearing, supra note 4, at 153 (Testimony of Mark 
D. Tomasko, Executive Vice President, Investment Counsel Association 
of America, Inc.) (``In some (advisory) firms, there are one or more 
persons whose sole job is to work on State registrations and 
requirements.'').
    \10\ See Senate Report, supra note 4, at 2.
---------------------------------------------------------------------------

    The Coordination Act reallocates regulatory responsibilities over 
advisers by limiting the application of federal law and preempting 
certain state laws. Under new section 203A(a) of the Advisers 
Act,11 an investment adviser that is regulated or required 
to be regulated as an investment adviser in the state in which it 
maintains its principal office and place of business is prohibited from 
registering with the Commission unless the adviser (i) has assets under 
management of not less than $25 million (or such higher amount as the 
Commission may, by rule, deem appropriate), or (ii) is an adviser to an 
investment company registered under the Investment Company Act of 1940 
(the ``Investment Company Act'').12 The Commission is 
authorized to deny registration to any applicant that does not meet the 
criteria for Commission registration,13 and is directed to 
cancel the registration of any adviser that no longer meets the 
criteria for registration.14
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 80b-3A(a).
    \12\ 15 U.S.C. 80a. Any person that is an investment adviser to 
an investment company under section 2(a)(20) of the Investment 
Company Act (15 U.S.C. 80a-2(a)(20)), including a ``sub-adviser,'' 
is eligible to register with the Commission, regardless of the 
amount of assets under management.
    \13\ Section 203(c) of the Advisers Act (15 U.S.C. 80b-3(c)).
    \14\ Section 203(h) of the Advisers Act (15 U.S.C. 80b-3(h)).
---------------------------------------------------------------------------

    On December 20, 1996, the Commission proposed rules and rule 
amendments to implement the Coordination Act.15 The proposed 
rules would establish the process by which advisers no longer eligible 
to register with the Commission would withdraw from Commission 
registration, exempt certain advisers from the prohibition on 
Commission registration, and define certain terms used in the 
Coordination Act. The Commission also proposed to amend several rules 
under the Advisers Act to reflect the changes made by the Coordination 
Act.
---------------------------------------------------------------------------

    \15\ Rules Implementing Amendments to the Investment Advisers 
Act of 1940, Investment Advisers Act Rel. No. 1601 (Dec. 20, 1996) 
(61 FR 68480 (Dec. 27, 1996)) (``Proposing Release'').
---------------------------------------------------------------------------

    The Commission received 105 comment letters in response to the 
proposal, most of which were from investment advisers and their trade 
groups and counsel (hereinafter collectively referred to as 
``investment adviser commenters''). Twenty-six comment letters were 
received from state securities regulators (hereinafter referred to as 
``states''), including the North American Securities Administrators 
Association, Inc. (``NASAA'').16
---------------------------------------------------------------------------

    \16\ NASAA represents the 50 U.S. state securities agencies 
responsible for the administration of state securities laws, also 
known as ``blue sky laws.''
---------------------------------------------------------------------------

    In preparing these implementing rules for adoption, the Commission 
has been guided by the language of the Coordination Act and the policy 
considerations that led to its enactment. The Commission does not 
believe that it would be appropriate or within its proper authority to 
revisit policy decisions made by Congress, as some commenters appear to 
have suggested.

II. Discussion

    The Commission is adopting several rules implementing the 
provisions of the Coordination Act designed to reallocate the 
regulatory responsibilities for investment advisers between the 
Commission and the states.

A. Form ADV-T

    Approximately 23,350 investment advisers currently are registered 
with the Commission. Based on information provided by these advisers, 
the Commission estimates that more than two-thirds of them would not be 
eligible to register with the Commission after July 8, 1997. These 
advisers must withdraw from registration or their registrations will be 
subject to

[[Page 28114]]

cancellation.17 To allow the Commission to determine each 
adviser's status under the Advisers Act, as amended by the Coordination 
Act, and to provide for the orderly withdrawal from Commission 
registration of advisers that are no longer eligible, the Commission 
proposed a transition rule, rule 203A-5.18 Among other 
things, rule 203A-5 would require all Commission-registered advisers to 
make a one-time filing of a new form, Form ADV-T. The Commission is 
adopting the rule and the form largely as proposed.19 
Paragraph (a) of rule 203A-5 requires all advisers registered with the 
Commission on July 8, 1997 to file a completed Form ADV-T with the 
Commission no later than that date.20 Form ADV-T contains 
instructions designed to assist an adviser in determining whether it 
meets the criteria for Commission registration set forth in the 
Coordination Act and the exemptive rules adopted by the 
Commission.21 Form ADV-T requires each adviser to indicate 
whether it remains eligible for Commission registration. For an adviser 
that indicates that it is not eligible for Commission registration, 
filing of Form ADV-T serves as the adviser's request for withdrawal 
from registration as of July 8, 1997.22 An adviser that does 
not return the form or that fails to withdraw voluntarily from 
Commission registration if no longer eligible will be subject to having 
its registration canceled pursuant to section 203(h).23
---------------------------------------------------------------------------

    \17\ See supra note 14 and accompanying text.
    \18\ See Proposing Release at section II.A.
    \19\ 17 CFR 275.203A-5; 17 CFR 279.3.
    \20\ 17 CFR 275.203A-5(a). Although Form ADV-T will not be 
effective until July 8, 1997, advisers may file Form ADV-T prior to 
that date. The registrations of advisers that indicate on Form ADV-T 
that they are no longer eligible to be registered with the 
Commission will not be withdrawn until July 8, 1997. See rule 203A-
5(c)(1) (17 CFR 275.203A-5(c)(1)).
    \21\ See infra sections II.B, II.D, and II.E of this Release.
    \22\ See rule 203A-5(c) (17 CFR 275.203A-5(c)); Instruction 6 to 
Form ADV-T. An adviser that indicates that it is not eligible for 
Commission registration on Form ADV-T is not required to file 
separately Form ADV-W (17 CFR 279.2) to withdraw from registration 
with the Commission. Commission-registered advisers seeking to 
withdraw their state registrations should contact their state 
regulators. The Commission will provide NASAA with a copy of each 
Form ADV-T filed with the Commission.
    \23\ See Instruction 1(f) to Form ADV-T.
---------------------------------------------------------------------------

    Form ADV-T is attached as Appendix A to this Release. Shortly after 
the publication of this Release, the Commission will mail a copy of 
Form ADV-T to each investment adviser registered with the Commission. 
In addition to a copy of Form ADV-T, each adviser will receive pre-
printed address labels that will assist the Commission in processing 
the forms. The Commission asks advisers to return the Form ADV-T they 
receive in the mail using these pre-printed labels.

B. Assets Under Management

    In most cases, the amount of assets an adviser has under management 
will determine whether the adviser will be registered with the 
Commission or the states. Section 203A(a)(2) of the Advisers Act 
defines ``assets under management'' as the ``securities portfolios'' 
with respect to which an investment adviser provides ``continuous and 
regular supervisory or management services.'' 24 Form ADV-T 
contains instructions that clarify when an account is a ``securities 
portfolio,'' what services constitute ``continuous and regular 
supervisory or management services,'' and the appropriate method of 
valuing the account.25
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 80b-3A(a)(2).
    \25\ Instruction 8 to Form ADV-T. Several commenters believed 
that the proposed three-step process for determining assets under 
management was unnecessarily complex. Each step, however, is 
contemplated by section 203A(a), which limits assets under 
management to ``securities portfolios'' with respect to which the 
adviser provides ``continuous and regular supervisory or management 
services,'' and requires that the amount of assets under management 
equal or exceed $25 million for Commission registration.
---------------------------------------------------------------------------

1. Securities Portfolios
    The Commission proposed an instruction to Form ADV-T to define a 
``securities portfolio'' as any account at least fifty percent of the 
total value of which consists of securities.26 Some 
commenters argued that the fifty percent test was too low and suggested 
a higher percentage, such as eighty percent. The Commission believes 
that Congress used the term ``securities portfolio'' to refer to the 
types of accounts typically managed by investment advisers, which 
include investments other than securities. The Commission believes that 
an account fifty percent of the total value of which consists of 
securities may be fairly characterized as a securities portfolio, and 
is adopting the fifty percent test substantially as 
proposed.27
---------------------------------------------------------------------------

    \26\ See Proposing Release at section II.B.1.
    \27\ Instruction 8(a) to Form ADV-T. Real estate, commodities, 
and collectibles are not securities, and therefore should not be 
included as securities in determining whether an account meets the 
fifty percent test.
---------------------------------------------------------------------------

    Because advisers in the normal course of business maintain portions 
of client accounts in cash, the Commission proposed that cash and cash 
equivalents be excluded by an adviser in determining whether an account 
is a securities portfolio.28 Two commenters expressed 
concern that, under the proposal, if securities in a client's account 
were converted to cash to create a defensive investment position, and 
the remaining investments in the account were held, for example, in 
real estate, the account would not be deemed to be a securities 
portfolio. Such a result, one commenter pointed out, seemed at odds 
with the purpose of excluding cash when determining whether an account 
is a securities portfolio. To avoid such a result, the Commission has 
revised the instruction to permit an adviser to treat cash and cash 
equivalents as securities for the purpose of determining whether an 
account is a securities portfolio.29
---------------------------------------------------------------------------

    \28\ See Proposing Release at section II.B.1.
    \29\ See Instruction 8(a). ``Cash equivalents'' include bank 
deposits, certificates of deposit, bankers acceptances, and similar 
bank instruments. Instruction 8(a) permits, but does not require, 
cash and cash equivalents to be treated as securities. Because cash 
and cash equivalents typically comprise a small component of most 
advisory accounts, the Commission believes that allowing advisers to 
treat these items as securities will not have a significant effect 
on the number of advisers that are eligible to register with the 
Commission.
---------------------------------------------------------------------------

2. Continuous and Regular Supervisory or Management Services
    The Commission proposed to provide guidance in an instruction to 
Form ADV-T for determining whether an adviser provides an account with 
``continuous and regular supervisory or management services'' within 
the meaning of section 203A(a)(2). As proposed, the instruction 
provided several examples of advisory arrangements and drew conclusions 
whether the accounts were provided with continuous and regular 
supervisory or management services. Commenters requested that the 
Commission provide greater clarity in the instruction, disagreed with 
some of the conclusions the Commission drew, and provided the 
Commission with examples of additional arrangements that would and 
would not receive continuous and regular supervisory or management 
services.
    The Commission has redrafted the instruction in light of the 
commenters' suggestions. As adopted, Instruction 8(c) to Form ADV-T 
sets forth general criteria, lists certain factors that should be 
considered in determining whether the criteria apply to an account, and 
provides examples designed to apply those criteria and factors. This 
approach should be more helpful to advisers in determining whether an 
account is provided continuous and regular supervisory or management 
services.
    Instruction 8(c) states that accounts over which an adviser has 
discretionary authority and for which it provides ongoing supervisory 
or management services receive continuous and regular

[[Page 28115]]

supervisory or management services. The Commission expects that most 
discretionary accounts would meet this standard. In addition, a limited 
number of non-discretionary advisory arrangements may receive 
continuous and regular supervisory or management services, but only if 
the adviser ``has an ongoing responsibility to select or make 
recommendations, based upon the needs of the client, as to specific 
securities or other investments the account may purchase or sell and, 
if such recommendations are accepted by the client, is responsible for 
arranging or effecting the purchase or sale.'' 30 Thus, an 
advisory relationship under which the adviser does not have 
discretionary authority must assign to the adviser other 
responsibilities typically associated with a discretionary 
account.31
---------------------------------------------------------------------------

    \30\ See Instruction 8(c).
    \31\ To enable the Commission to evaluate the claims of advisers 
relying on the non-discretionary management of assets as the basis 
of eligibility to remain registered with the Commission, Form ADV-T 
requires these advisers to append a written statement explaining the 
nature of the non-discretionary supervisory or management services. 
See Part III, Item (c) of Form ADV-T; Instruction 9 to Form ADV-T.
---------------------------------------------------------------------------

    Instruction 8(c) provides three factors that advisers should use 
(and which the Commission will use) in applying these general 
principles. These factors are the terms of the advisory contract, the 
form of compensation, and the management practice of the adviser. No 
single factor is determinative. For example, advisers that provide 
portfolio management services are typically compensated on the basis of 
a percentage of the amount of assets under management averaged over 
some period of time. The use of this type of a compensation arrangement 
would tend to suggest that the account receives continuous and regular 
supervisory or management services, although a different compensation 
arrangement would not preclude that conclusion.
3. Safe Harbor for State-Registered Investment Advisers
    The Commission recognizes that section 203A(a)(2) does not and the 
instructions to Form ADV-T do not provide a ``bright line'' test as to 
whether a particular arrangement involves the provision of continuous 
and regular supervisory or management services. The Commission, 
therefore, is adopting rule 203A-4, which provides a safe harbor from 
Commission registration for an adviser that is registered with a state 
securities authority (rather than the Commission) based on a reasonable 
belief that it is not required to register with the Commission because 
it does not have sufficient assets under management.32 
Commenters strongly supported the rule's adoption.
---------------------------------------------------------------------------

    \32\ 17 CFR 275.203A-4.
---------------------------------------------------------------------------

    Under rule 203A-4, the Commission will not assert a violation of 
the Advisers Act for failure to register with the Commission (or to 
comply with the provisions of the Advisers Act to which an adviser is 
subject if required to register) if the adviser reasonably believes 
that it does not have sufficient assets under management (at least $30 
million) and is therefore not required to register with the 
Commission.33 This safe harbor is available only to an 
adviser that is registered with the state in which it has its principal 
office and place of business.
---------------------------------------------------------------------------

    \33\ As discussed infra, the Commission is increasing the $25 
million assets under management threshold for mandatory Commission 
registration to $30 million, and providing an optional exemption 
from the prohibition on registering with the Commission for advisers 
having between $25 and $30 million of assets under management. See 
infra section II.C.2.a of this Release.
---------------------------------------------------------------------------

4. Valuation and Reporting of Securities Portfolios
    Under a proposed instruction to Form ADV-T, once an adviser has 
determined that an account is a ``securities portfolio'' that receives 
``continuous and regular supervisory or management services,'' the 
entire value of the account would be included in determining the amount 
of the adviser's assets under management. Several commenters objected 
to this approach, arguing that only the value of securities should be 
included as assets under management. The Commission believes that 
including only the value of securities would be inconsistent with 
section 203A(a)(2), which requires that ``securities portfolios,'' not 
``securities,'' be included in assets under management. The use of the 
term ``securities portfolios'' rather than ``securities'' suggests that 
once an account is determined to be a securities portfolio, all assets 
in the account should be included as assets under 
management.34
---------------------------------------------------------------------------

    \34\ In addition, the Commission believes that a requirement 
that advisers segregate the securities components of an account 
principally consisting of securities holdings would be unnecessarily 
burdensome.
---------------------------------------------------------------------------

    The Commission is aware that in some cases an adviser may have 
responsibility for an account only a portion of which receives 
continuous and regular supervisory or management services. As adopted, 
Instruction 8(b) to Form ADV-T provides that only the portion of a 
securities portfolio that receives continuous and regular supervisory 
or management services may be included as part of the adviser's assets 
under management.
    Under a proposed instruction to Form ADV-T, the value of a 
securities portfolio would be determined as of a date no more than ten 
business days before the filing of Form ADV-T. Several commenters said 
that more time was needed because some advisers obtain information on 
the value of client accounts from third parties that provide the 
information on a monthly or quarterly basis.35 To provide 
advisers with greater flexibility, the Commission has revised the 
instruction so that the value of securities portfolios may be 
determined as of a date no more than 90 days prior to the date Form 
ADV-T is filed with the Commission.36
---------------------------------------------------------------------------

    \35\ Other commenters noted that additional time may be needed 
to value illiquid securities, closely-held businesses, and other 
difficult-to-value assets.
    \36\ Instruction 8(d) to Form ADV-T. Instruction 8(d) does not 
require all the assets in a securities portfolio to be valued as of 
the same date. An adviser, however, may not select the dates for 
valuation of assets so as to maximize (or minimize) the value of the 
adviser's assets under management. An amount determined by such a 
method would not, in the Commission's view, reflect the adviser's 
actual assets under management.
---------------------------------------------------------------------------

    The Commission proposed that the method by which the accounts are 
valued for purposes of determining assets under management be the same 
as that used to value the accounts for purposes of client reporting or 
to determine fees for investment advisory services. Commenters 
supported this proposal, which the Commission is adopting substantially 
as proposed.37
---------------------------------------------------------------------------

    \37\ See Instruction 8(d).
---------------------------------------------------------------------------

C. Transitions Between State and Commission Registration

    The Coordination Act contemplates that a state-registered adviser 
whose assets under management increase to $25 million will withdraw its 
state registration and register with the Commission. Conversely, an 
adviser whose assets under management decrease below $25 million will 
withdraw its Commission registration and register with a state (or 
states). The Commission proposed to use its rulemaking authority under 
the Advisers Act, as amended, to reduce the regulatory burdens that may 
be caused by these transitions.38
---------------------------------------------------------------------------

    \38\ See Proposing Release at section II.C.
---------------------------------------------------------------------------

1. Transition From Commission to State Registration
    a. Annual reporting of continued eligibility. The Commission is 
amending Form ADV by adding new Schedule I (``eye'') that requires 
advisers to report

[[Page 28116]]

information on an ongoing basis similar to that reported on Form ADV-
T.39 Schedule I will be used both to determine whether new 
applicants are eligible for Commission registration, and to determine 
whether advisers registered with the Commission continue to be eligible 
for such registration. Schedule I must be updated annually, within 90 
days after the end of the adviser's fiscal year.40
---------------------------------------------------------------------------

    \39\ Schedule I is attached to this Release as Appendix B. For a 
discussion of the reporting requirements of Form ADV-T, see supra 
sections II.A and II.B and of this Release.
    \40\ Rule 204-1(a)(1) (17 CFR 275.204-1(a)(1)). As amended, rule 
204-1(a) (17 CFR 275.204-1(a) requires advisers to amend Form ADV 
annually, regardless of whether data reported on the form changes. 
This annual amendment replaces Form ADV-S, which the Commission is 
rescinding. Because Form ADV-S is being rescinded, advisers are no 
longer required to file the written disclosure statement 
(``brochure'') required by rule 204-3 (17 CFR 275.204-3) with the 
Commission. The brochure, however, must be maintained as part of the 
adviser's books and records, and the Commission will continue to 
review these brochures during investment adviser examinations.
---------------------------------------------------------------------------

    The Commission proposed to require advisers to determine and report 
their assets under management annually in order to reduce the frequency 
with which advisers are required to change regulators as a result of a 
decrease in the amount of assets they have under 
management.41 Under the proposal, an adviser whose assets 
under management fell below $25 million would not be required to report 
this event until after the end of its fiscal year (and not at all 
unless its assets under management remained below $25 million at the 
time it filed its Schedule I). Some state commenters asserted that an 
adviser should be required to withdraw its Commission registration 
promptly when its assets under management decrease below $25 million, 
or decrease by some percentage below $25 million. The Commission 
believes that these approaches could result in some advisers changing 
regulators too frequently, and is adopting the annual reporting 
requirement as proposed.42
---------------------------------------------------------------------------

    \41\ See Proposing Release at section II.C.2.
    \42\ Commission data suggests that most advisers that will 
remain registered with the Commission have assets under management 
well in excess of $25 million. It is likely that only a few advisers 
each year will be required to move from Commission to state 
registration as a result of a decrease of assets under management, 
and thus few advisers will be registered temporarily with the 
Commission prior to reporting a reduced amount of assets under 
management on Schedule I.
---------------------------------------------------------------------------

    Under rule 204-1(a), a Commission-registered adviser must evaluate 
and report its continued eligibility for Commission registration once a 
year. An adviser that reports that it is no longer eligible must 
withdraw its registration within the 90-day grace period provided by 
rule 203A-1(c), discussed below, or be subject to a cancellation 
proceeding under section 203(h).43
---------------------------------------------------------------------------

    \43\ 17 CFR 275.203A-1(c). See Instruction 6 to Schedule I. An 
adviser may withdraw from Commission registration as soon as it is 
no longer eligible to maintain its registration with the Commission, 
or it may wait until filing its annual Schedule I to withdraw. An 
adviser who becomes ineligible for Commission registration for 
reasons other than the amount of its assets under management also is 
permitted to wait until filing its annual Schedule I to withdraw.
---------------------------------------------------------------------------

    b. 90-day grace period. An adviser that withdraws from Commission 
registration will be subject to the registration requirements of one or 
more states. To allow such an adviser sufficient time to register under 
applicable state statutes, the Commission proposed to provide a ``grace 
period'' of 90 days after the date the adviser files its Schedule I 
indicating that it would not be eligible for Commission 
registration.44 Several commenters argued that 90 days was 
insufficient, while a number of state commenters requested that the 90-
day period be shortened, asserting that state registration generally is 
effected quickly.
---------------------------------------------------------------------------

    \44\ See Proposing Release at section II.C.2. The Commission did 
not propose a similar grace period in connection with the filing of 
Form ADV-T. The Commission presumes that an adviser not eligible to 
maintain its registration with the Commission on July 8, 1997 would 
already be registered with the appropriate state or states at the 
time of filing Form ADV-T. See Proposing Release at note 43.
---------------------------------------------------------------------------

    In light of these conflicting views, the Commission is adopting the 
90-day grace period substantially as proposed.45 A shorter 
period may not provide advisers with sufficient time to comply with the 
registration requirements of multiple states, particularly where the 
adviser must change its business practices or ensure that its employees 
prepare for and pass qualification examinations. On the other hand, a 
longer period may be unnecessary because, as a result of the annual 
determination of eligibility discussed above, a withdrawing adviser 
usually will have more than 90 days to come into compliance with state 
law. The Commission will monitor the operation of the rule and, if 
necessary, will shorten or lengthen the grace period.
---------------------------------------------------------------------------

    \45\ Rule 203A-1(c). The Commission is adopting rule 203A-1(c) 
with a slight revision. Under the rule as proposed, the grace period 
would have run from the date on which the adviser filed its Schedule 
I to indicate that it was no longer eligible to maintain its 
registration. As adopted, however, the grace period begins to run on 
the date on which the adviser was obligated by rule 204-1(a) to file 
such amendment. Thus, an adviser could not extend the grace period 
by failing to timely file Schedule I.
---------------------------------------------------------------------------

    c. Cancellation of Commission registration. Upon the expiration of 
the grace period, the Commission may institute proceedings to cancel 
the adviser's registration if it has not yet been 
withdrawn.46 As provided under the Advisers Act, the adviser 
will be given notice and an opportunity to show why its registration 
should not be cancelled.47 Upon a showing by the adviser 
that it requires additional time to comply with state registration 
requirements, the Commission may stay the cancellation proceeding for a 
reasonable period, provided that the adviser has made a good faith 
effort to meet the registration requirements of state law and complied 
in good faith with the obligation to update Schedule I.
---------------------------------------------------------------------------

    \46\ If the adviser amends Schedule I during the grace period to 
report that it once again has become eligible for Commission 
registration (for example, because the amount of its assets under 
management increased since the adviser filed its Schedule I), the 
Commission will not institute cancellation proceedings.
    \47\ See section 211(c) of the Advisers Act (15 U.S.C. 80b-
21(c)); rule 0-5 (17 CFR 275.0-5).
---------------------------------------------------------------------------

2. Transition From State to Commission Registration
    a. The $5 million ``window''. The Commission proposed to make 
Commission registration optional for an adviser having between $25 and 
$30 million of assets under management.48 The proposed rule 
would permit such an adviser to determine whether and when to change 
from state to Commission registration. In order to avoid having to de-
register shortly after registering with the Commission, an adviser 
reaching the $25 million assets under management threshold could defer 
registration with the Commission. The adviser would not be required to 
register with the Commission until its assets under management reached 
$30 million, and would not be subject to Commission cancellation of its 
registration until its assets under management had fallen below $25 
million.
---------------------------------------------------------------------------

    \48\ See Proposing Release at section II.C.1.
---------------------------------------------------------------------------

    Most commenters supported the proposed rule as providing useful 
flexibility, although some commenters urged that the ``window'' be 
increased from $5 to $10 million. The Commission is adopting the rule 
as proposed, but will monitor its operation.49 If the $5 
million window proves to be inadequate to prevent transient 
registration, the Commission will consider expanding the provision.
---------------------------------------------------------------------------

    \49\ Rule 203A-1 (a), (b) (17 CFR 275.203A-1 (a), (b)).
---------------------------------------------------------------------------

    b. Registration with the Commission. Under the proposal, a state-
registered adviser would have been required to register with the 
Commission promptly when the adviser's assets under

[[Page 28117]]

management reached $30 million.50 In response to the 
suggestion of several commenters, the Commission is adopting paragraph 
(d) to rule 203A-1 to make the transition from state to Commission 
registration parallel with the transition from Commission to state 
registration.51
---------------------------------------------------------------------------

    \50\ See Proposing Release at section II.C.1.
    \51\ Rule 203A-1(d) (17 CFR 275.203A-1(d)). Rule 203A-1(d) does 
not affect the operation of the $5 million window. An adviser that 
has between $25 and $30 million of assets under management is 
permitted, but not required, to register with the Commission. Such 
an adviser may register with the Commission at any time. Rule 203A-
1(d) addresses only the question of when an adviser is required to 
register with the Commission.
---------------------------------------------------------------------------

    Under rule 203A-1(d), certain advisers whose assets under 
management grow to $30 million may (but are not required to) postpone 
Commission registration until 90 days after the date the adviser is 
required to report $30 million or more of assets under management to 
its state securities authority.52 If, however, the assets of 
an adviser relying on the rule are less than $30 million when it 
registers with the Commission, the adviser's application for 
registration would not be made effective.
---------------------------------------------------------------------------

    \52\ Rule 203A-1(d) is available only to advisers that are 
registered in a state that requires Schedule I (or a substantially 
similar form or rule) to be filed and annually updated. An adviser 
not registered in such a state must register promptly with the 
Commission upon reaching $30 million of assets under management. 
Rule 203A-1(d) is not available to an adviser whose eligibility for 
registration is based on becoming an adviser to an investment 
company or becoming eligible for one of the exemptions provided by 
rule 203A-2 (17 CFR 275.203A-2). See section II.D of this Release.
---------------------------------------------------------------------------

D. Exemptions From Prohibition on Registration With the Commission

    Section 203A(c) of the Advisers Act 53 authorizes the 
Commission to exempt advisers from the prohibition on Commission 
registration if the prohibition would be ``unfair, a burden on 
interstate commerce, or otherwise inconsistent with the purposes'' of 
section 203A of the Act.54 Pursuant to this authority, the 
Commission proposed a new rule, rule 203A-2, that would exempt from the 
prohibition on Commission registration four types of advisers that 
otherwise would not be eligible for Commission registration. The 
Commission is adopting rule 203A-2 substantially as proposed. An 
adviser that meets the conditions of a rule 203A-2 exemption is 
required by section 203 of the Advisers Act to register with the 
Commission, unless it qualifies for an exemption from registration 
under section 203(b) of the Act.55
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 80b-3A(c).
    \54\ 15 U.S.C. 80b-3A.
    \55\ 15 U.S.C. 80b-3, 80b-3(b).
---------------------------------------------------------------------------

1. Nationally Recognized Statistical Rating Organizations
    The Commission proposed to exempt from the prohibition on 
Commission registration ``nationally recognized statistical rating 
organizations'' (``NRSROs''), commonly referred to as rating agencies, 
which are registered with the Commission as investment 
advisers.56 The Proposing Release explained that, while 
NRSROs do not themselves have assets under management, their activities 
have a significant effect on the national securities markets and the 
operation of federal securities laws. All commenters addressing this 
exemption supported it, and the Commission is adopting the exemption as 
proposed.57
---------------------------------------------------------------------------

    \56\ See Proposing Release at section II.D.1.
    \57\ Rule 203A-2(a) (17 CFR 275.203A-2(a)).
---------------------------------------------------------------------------

2. Pension Consultants
    The Commission proposed to exempt from the prohibition on 
Commission registration pension consultants that provide investment 
advice to employee benefit plans with respect to assets having an 
aggregate value of at least $50 million during the adviser's last 
fiscal year.58 Pension consultants provide various advisory 
services to plans and plan fiduciaries, including assistance in 
selecting and monitoring investment advisers that manage assets of such 
plans, but may not themselves have assets under management. In the 
Proposing Release, the Commission explained that the activities of 
pension consultants have a direct effect on the management of billions 
of dollars of plan assets, and that it would be inconsistent with the 
purposes of the Coordination Act for these advisers to be regulated by 
the states, rather than by the Commission.
---------------------------------------------------------------------------

    \58\ See Proposing Release at section II.D.2.
---------------------------------------------------------------------------

    Most commenters addressing this exemption supported it, and the 
Commission is adopting the exemption substantially as 
proposed.59 Several commenters raised questions, however, as 
to the scope of the exemption. The exemption is available to advisers 
that provide advice to employee benefit plans--not to plan 
participants. An adviser that provides advice to plan participants 
(e.g., regarding the allocation of the participant's contributions in 
an employee directed defined contribution plan) would not be eligible 
for the exemption unless the adviser also provides advice to employee 
benefit plans with respect to $50 million of plan assets.60 
The advice, for example, could concern the funding of a defined benefit 
plan or the selection of funding vehicles for a defined contribution 
plan, but would have to be provided to the plan or the plan 
fiduciary.61
---------------------------------------------------------------------------

    \59\ Rule 203A-2(b) (17 CFR 275.203A-2(b)). The proposed rule 
would have exempted pension consultants to employee benefit plans, 
governmental plans, and church plans, each as defined in the 
Employee Retirement Income Security Act of 1974 (``ERISA'') (29 
U.S.C. 1001), as well as ``(a)ny plan established and maintained by 
a state, its political subdivisions, or any agency or 
instrumentality of a state or its political subdivisions for the 
benefit of its employees.'' The Commission has withdrawn this latter 
category in response to a comment noting that these plans come 
within ERISA's definition of ``governmental plan.'' The deletion of 
this category does not affect the scope of the exemption.
    \60\ Although the Coordination Act provides a $25 million 
threshold for Commission registration, the Commission is adopting a 
$50 million threshold for the pension consultant exemption. This 
higher threshold reflects the fact that a pension consultant has 
substantially less control over client assets than an adviser that 
has assets under management. A higher threshold is necessary to 
demonstrate that a pension consultant's activities have an effect on 
national markets.
    \61\ In determining the aggregate value of advised assets, the 
adviser may include only that portion of a plan's assets for which 
the adviser provided investment advice (including any advice with 
respect to the selection of an investment adviser to manage the 
assets). The value of assets must be determined as of the date 
during the adviser's most recently completed fiscal year that the 
adviser was last employed or retained by contract to provide 
investment advice to the plan or plan fiduciary with respect to 
those assets. See rule 203A-2(b)(3) (17 CFR 275.203A-2(b)(3)).
---------------------------------------------------------------------------

    Several commenters requested clarification whether the exemption 
would apply to an investment adviser that provides advisory services to 
pension plans, but not with respect to ``securities portfolios'' of 
those plans. These commenters are (or represent) firms that provide 
advice to plans regarding large real estate investments that are held 
both directly and indirectly through real estate investment trusts or 
other investment vehicles. Many of these firms provide advice with 
respect to plan assets worth hundreds of millions of dollars and are 
clearly ``large'' enterprises whose activities have an effect on 
national markets. As used in rule 203A-2(b), the term ``assets of 
plans'' is not limited to securities portfolios, and thus such 
investment advisers are eligible for the exemption.
3. Certain Affiliated Investment Advisers
    The Commission proposed to exempt from the prohibition on 
Commission registration advisers that are affiliated with a Commission-
registered adviser if the principal office and place of business of the 
affiliate is the same as

[[Page 28118]]

that of the registered adviser.62 In proposing the 
exemption, the Commission explained that when the activities of 
affiliated advisers are centrally managed, subjecting them to different 
regulatory schemes would be burdensome and inefficient.
---------------------------------------------------------------------------

    \62\ See Proposing Release at section II.D.3.
---------------------------------------------------------------------------

    Most commenters that addressed this exemption supported it, stating 
that Commission registration of affiliated advisers would be more 
efficient. Many, however, urged that the availability of the exemption 
not be limited to advisers having the same principal office. In 
particular, some commenters suggested that the exemption be expanded to 
permit Commission registration of affiliated advisers whose compliance 
or books and records systems are integrated with those of a Commission-
registered adviser.
    The Commission is not expanding the exemption as suggested because 
it is concerned that such an expansion could result in Commission 
registration of a large number of small, locally operated advisers, 
which Congress intended to be registered with the states.63 
The Commission understands that, as a result, some advisers whose 
operations are integrated with those of a Commission-registered adviser 
will be prohibited from registering with the Commission.64 
The Commission will entertain requests for exemptive relief from these 
advisers on a case-by-case basis under section 203A(c), and may 
consider expanding the exemption if experience suggests expansion would 
be appropriate.
---------------------------------------------------------------------------

    \63\ This could occur as a result of the National Association of 
Securities Dealers' (``NASD'') requirement that its member broker-
dealer firms supervise and keep books and records regarding certain 
private securities transactions of their registered representatives 
who also are registered individually as investment advisers. See 
NASD Notice to Members No. 94-44 (May 1994); see also NASD Notice to 
Members No. 96-33 (May 1996). Many of these broker-dealer firms are 
themselves registered investment advisers that will remain eligible 
for Commission registration after July 8, 1997. In some cases, a 
firm's registered representatives form a large network of 
individually registered investment advisers that use a broker-dealer 
firm to effect certain securities transactions on behalf of advisory 
clients. A broker-dealer firm's compliance with the obligation to 
supervise both its own trades and those that are effected through 
unaffiliated broker-dealers may result in its control of these 
registered advisers. Under the commenters' suggested approach, this 
control, together with the books and records the NASD requires, 
might qualify each individually registered adviser for the 
exemption, even though each such adviser has only a small, local 
business and would not otherwise be eligible for Commission 
registration.
    \64\ Of course, an adviser may choose to register its affiliates 
under its registration as a single registrant. If the adviser and 
its affiliates have aggregate assets under management of $25 million 
or more, the registrant would meet the threshold for Commission 
registration, regardless of whether the operations of the adviser 
and the affiliates are integrated.
---------------------------------------------------------------------------

    Under rule 203A-2(c) as adopted, an adviser that controls, is 
controlled by, or is under common control with an adviser eligible to 
register (and in fact registered) with the Commission must register 
with the Commission if the two advisers have the same principal office 
and place of business.65 The rule defines ``control'' as the 
power to direct or cause the direction of the management or policies of 
an adviser, whether through ownership of securities, by contract, or 
otherwise.66
---------------------------------------------------------------------------

    \65\ 17 CFR 275.203A-2(c). The definition of principal office 
and place of business in rule 203A-3(c) (17 CFR 275.203A-3(c)) 
applies to this rule. See infra section II.E.2 of this Release. The 
Commission will consider a Commission-registered adviser and an 
affiliated adviser to have the same principal office and place of 
business if the principal office of the affiliate is in the 
proximate geographic area as the principal office of the registered 
adviser.
    \66\ In the Proposing Release, the Commission explained that by 
proposing rule 203A-2(c), it did not intend to suggest that an 
advisory firm may reorganize its operations in order to circumvent 
the requirements of the Advisers Act. See Proposing Release at note 
54. Thus, for example, an adviser may not avoid application of the 
Advisers Act by creating a state-registered affiliate that is not 
separately and independently organized.
---------------------------------------------------------------------------

4. Investment Advisers With Reasonable Expectation of Eligibility
    The Commission proposed an exemption to permit a newly formed 
adviser to register with the Commission at the time of its formation if 
the adviser has a reasonable expectation that within 90 days it will 
become eligible for Commission registration.67 All 
commenters addressing this exemption supported it. Many, however, urged 
the Commission to give newly formed advisers a longer period than 90 
days to become eligible for Commission registration. Some pointed out 
that even if the start-up adviser has obtained commitments from 
prospective clients for more than $25 million of assets, it may take 
more than 90 days for clients (particularly institutional clients) to 
transfer their assets to the adviser. To address this concern, the rule 
as adopted allows for a period of 120 days.68
---------------------------------------------------------------------------

    \67\ See Proposing Release at section II.D.4.
    \68\ Rule 203A-2(d) (17 CFR 275.203A-2(d)). Some commenters also 
asked for clarification as to what constitutes a ``reasonable 
expectation.'' In proposing the exemption, the Commission 
anticipated that it would be used primarily by persons who start 
their own advisory firms after having been employed by or affiliated 
with other advisers, and that have received an indication from 
clients with substantial assets that they will transfer those assets 
to the management of the newly formed adviser. In such a case, an 
adviser would have a ``reasonable expectation'' that it would become 
eligible for Commission registration in the prescribed time. Other 
circumstances, however, also could support an adviser's reasonable 
expectation of becoming eligible.
---------------------------------------------------------------------------

    Under rule 203A-2(d), an adviser is exempt from the prohibition on 
Commission registration if, at the time of registration, it is not 
registered (or required to be registered) with the Commission or any 
state and has a reasonable expectation that it would be eligible for 
Commission registration within 120 days after the date its registration 
becomes effective.69 At the end of the 120-day period, the 
adviser is required to file an amended Schedule I.70 If the 
adviser indicates on the amended Schedule I that it has not become 
eligible to register with the Commission (e.g., it does not have at 
least $25 million of assets under management), the adviser is required 
to file a Form ADV-W concurrently with the Schedule I, thereby 
withdrawing from registration with the Commission.71
---------------------------------------------------------------------------

    \69\ The requirement that the adviser not be registered or 
required to be registered with the Commission or any state is 
designed to ensure that the exemption is available only to start-up 
advisers. This requirement must be met at the time the adviser 
registers with the Commission. Rule 203A-2(d)(1) (17 CFR 275.203A-
2(d)(1)). A newly formed adviser that registers with the Commission 
in reliance on this exemption, however, subsequently may register 
with a state or states during the 120-day period in anticipation of 
failing to become eligible for Commission registration.
    \70\ Rule 203A-2(d)(3) (17 CFR 275.203A-2(d)(3)).
    \71\ Id. When registering with the Commission, an adviser 
relying on this exemption must include on Schedule E to Form ADV an 
undertaking to withdraw from registration if, at the end of the 120-
day period, the adviser would be prohibited from registering with 
the Commission. Rule 203A-2(d)(2) (17 CFR 275.203A-2(d)(2)). An 
adviser required by rule 203A-2(d)(3) to withdraw from Commission 
registration at the end of the 120-day period will not have 
available the additional 90-day grace period provided by rule 203A-
1(c) in which to effect the appropriate state registrations.
---------------------------------------------------------------------------

5. Advisers to ERISA Plans
    Many investment advisers provide advice to employee benefit plans 
governed by the Employee Retirement Income Security Act of 1974 
(``ERISA''). ERISA protects a plan's named fiduciary from liability for 
the individual decisions of an investment manager appointed by the 
fiduciary to manage the plan's assets.72 The term investment 
manager is defined by ERISA to include certain investment advisers 
registered under the Advisers Act, as well as certain banks and 
insurance companies.73 Although the Coordination Act amended 
ERISA to include state-

[[Page 28119]]

 registered investment advisers as investment managers, that amendment 
expires two years after enactment, on October 11, 1998.74
---------------------------------------------------------------------------

    \72\ Section 405(d)(1) of ERISA (29 U.S.C. 1105(d)(1)). See 29 
CFR 2509.75-8 (Department of Labor regulations providing 
interpretative guidance on ability of plan fiduciaries to delegate 
management and control of plan assets to other persons under ERISA).
    \73\ Section 3(38) of ERISA (29 U.S.C. 1002(38)). See 29 CFR 
2509.75-5 (Department of Labor regulations providing interpretative 
guidance on definition of ``investment manager'' under ERISA).
    \74\ Section 308(b) of the Coordination Act.
---------------------------------------------------------------------------

    Several commenters urged the Commission to use its authority under 
the Coordination Act to exempt advisers that manage accounts subject to 
ERISA. These commenters expressed concern that unless they were 
permitted to remain registered with the Commission, they effectively 
would be denied the ability to manage ERISA accounts and would be 
harmed competitively.
    Although the Commission shares these commenters' concerns, the 
Commission believes such an exemption would be inconsistent with the 
purposes of the Coordination Act and outside the scope of the 
Commission's authority. As described above, the grant of exemptive 
authority in section 203A(c) was designed to permit Commission 
registration of advisers that are larger, national firms, but do not 
have $25 million of assets under management. An exemptive rule 
conditioned solely on the management of assets of accounts subject to 
ERISA could exempt a large number of small, locally operated 
advisers.75 In the Commission's view, in order for such a 
rule not to be anti-competitive, the rule would have to exempt all 
advisers that propose to serve clients regulated under ERISA. If not, 
the rule would preclude advisers from entering that market. Thus, such 
an exemption could result in most smaller advisers remaining registered 
with the Commission--completely frustrating a principal purpose of the 
Coordination Act.76
---------------------------------------------------------------------------

    \75\ To reflect Congress' intent that the Commission regulate 
only large, national advisers, the Commission's exemption for 
pension consultants is conditioned on the pension consultant's 
management of over $50 million of plan assets. See supra note 60.
    \76\ The Commission also believes its authority to exempt 
advisers to ERISA plans is circumscribed by the express 
Congressional determination that the amendment to ERISA provided in 
the Coordination Act expire after two years.
---------------------------------------------------------------------------

    On April 7, 1997, Chairman Levitt wrote to the leadership of the 
Congressional committees with jurisdiction over ERISA, urging that 
legislation be enacted eliminating the ``sunset'' provision in the 
Coordination Act, thus making permanent the amendment of ERISA that 
permits state-registered advisers to serve as investment 
managers.77
---------------------------------------------------------------------------

    \77\ Letters from Arthur Levitt, Chairman, SEC (Apr. 7, 1997) to 
The Honorable James M. Jeffords, Chairman, Committee on Labor and 
Human Resources, U.S. Senate, and The Honorable William F. Goodling, 
Chairman, Committee on Education and the Work Force, U.S. House of 
Representatives (available in SEC File No. S7-31-96).
---------------------------------------------------------------------------

E. Investment Advisers Not Regulated or Required To Be Regulated by 
States

    Under section 203A(a)(1) of the Advisers Act, advisers that are not 
regulated or required to be regulated as investment advisers in the 
state in which they have their principal office and place of business 
must register with the Commission regardless of the amount of assets 
they have under management.78 This provision makes clear 
that the Commission will retain regulatory responsibility for an 
adviser with a principal office and place of business in a state that 
has not enacted an investment adviser statute,79 and for 
foreign advisers doing business in the United States. The Coordination 
Act, however, does not provide an explanation of when an adviser is 
``regulated or required to be regulated'' as an investment adviser, nor 
does it define ``principal office and place of business.''
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 80b-3A(a)(1). The term ``state'' is defined in 
section 202(a)(19) of the Advisers Act (15 U.S.C. 80b-2(a)(19)) to 
include the District of Columbia, Puerto Rico, the Virgin Islands, 
and any other possession of the United States.
    \79\ As discussed supra note 7, Colorado, Iowa, Ohio, and 
Wyoming currently do not have investment adviser statutes.
---------------------------------------------------------------------------

1. ``Regulated or Required To Be Regulated''
    Under the proposal, the Commission would have interpreted the 
phrase ``regulated or required to be regulated'' in section 203A(a)(1) 
to mean ``registered'' with a state.80 Under this 
interpretation, an investment adviser exempt from registration with the 
state in which it has its principal office and place of business would 
be eligible for registration with the Commission, even if it has less 
than $25 million of assets under management.
---------------------------------------------------------------------------

    \80\ See Proposing Release at section II.E.1.
---------------------------------------------------------------------------

    Most commenters that addressed this issue, including several state 
commenters, supported the Commission's proposed interpretation. These 
commenters expressed concern that an alternative interpretation under 
which an adviser would be deemed ``regulated'' by a state if that state 
has in effect an investment adviser statute would result in a 
regulatory ``gap'' that leaves clients of advisers exempt from state 
registration and below the threshold for Commission registration at 
risk. Two commenters, however, objected to the proposed interpretation. 
One of these commenters argued that the proposed interpretation would 
be inconsistent with the goal of the Coordination Act, which was to 
make the Commission primarily responsible for larger advisers with 
national businesses and the state primarily responsible for smaller 
advisers. This commenter also disagreed with the reading of the 
legislative history of the Coordination Act reflected in the Proposing 
Release. According to the commenter, the legislative history supports 
the view that all advisers with a principal office in a state that has 
enacted a statute regulating advisers are prohibited from registering 
with the Commission if they do not meet the criteria for Commission 
registration.
    These comments have caused the Commission to reconsider its 
proposed interpretation. As discussed above, the legislative history of 
the Coordination Act makes clear that Congress intended the 
Coordination Act to result in the Commission regulating larger advisers 
and the states regulating smaller advisers.81 The proposed 
interpretation, however, would result in the Commission being 
responsible for a large number of very small advisers that are not 
registered under state law because they qualify for state de minimis 
exemptions. It would be inconsistent with the purposes of the 
Coordination Act for the Commission to retain responsibility for 
advisers whose business activities states have determined are so 
limited that they do not warrant their regulatory attention. The 
proposed interpretation also would seem to frustrate the purpose of the 
Coordination Act to limit significantly the number of advisers 
registered with the Commission, since it would permit a substantial 
number of very small advisers to remain registered with the 
Commission.82
---------------------------------------------------------------------------

    \81\ See supra notes 4 and 5 and accompanying text.
    \82\ One commenter stated that it believes that there are 600 
such advisers in New York alone. The proposed interpretation also 
seems inconsistent with the goal of the Coordination Act to reduce 
regulatory burdens, since it could require a start-up adviser to 
first register with the Commission, then move to state registration 
as it outgrows the state de minimis exemption, and later, if it 
continues to grow, return to Commission registration.
---------------------------------------------------------------------------

    The Commission believes a better interpretation of section 
203A(a)(1) is that an adviser is ``regulated or required to be 
regulated'' in the state in which it has its principal office and place 
of business if that state has enacted an investment adviser 
statute.83 Such a state has asserted its interest in 
regulating investment advisers. While a state may provide for 
exemptions from its registration requirements or exceptions to its 
definition of investment adviser, it does not thereby delegate 
regulatory responsibility for

[[Page 28120]]

such advisers to the Commission.84 Upon reconsideration, the 
Commission believes the Coordination Act's legislative history supports 
this position.85
---------------------------------------------------------------------------

    \83\ See supra note 7 and accompanying text.
    \84\ If a state repeals its investment adviser statute, the 
Commission will assume regulatory responsibility for all investment 
advisers with a principal office and place of business in that 
state.
    \85\ The Senate Report explains that the Commission ``will 
continue to supervise all advisers that are based in a state that 
does not register investment advisers.'' Senate Report, supra note 
4, at 4. The Proposing Release and a number of commenters cited this 
sentence for the proposition that an adviser is regulated by a state 
if it is registered with that state. See Proposing Release at note 
59 and accompanying text. In context, however, it appears that the 
sentence means that the Commission will retain regulatory 
responsibility for small advisers in states that do not register any 
advisers.
---------------------------------------------------------------------------

    State commenters supporting the Commission's proposed 
interpretation argued that Congress intended to eliminate regulatory 
overlap, not to create a regulatory ``gap'' in which some advisers are 
left unregulated. Even under the proposed interpretation, however, 
advisers that qualify for registration exemptions under both federal 
and state law would continue to be unregulated, and thus it is 
difficult to draw any conclusions from the fact that some advisers will 
not be registered. To the extent there is a ``gap,'' the Commission 
believes that it is more consistent with the Coordination Act for the 
gap to be closed by the states, which are given primary responsibility 
for regulating advisers that are not eligible for Commission 
registration.
2. ``Principal Office and Place of Business''
    The Commission is adopting, as proposed, a new rule to define the 
term ``principal office and place of business'' to mean the ``executive 
office of the investment adviser from which the officers, partners, or 
managers of the investment adviser direct, control, and coordinate the 
activities of the investment adviser.'' 86
---------------------------------------------------------------------------

    \86\ Rule 203A-3(c).
---------------------------------------------------------------------------

 F. Persons Who Act on Behalf of Investment Advisers

    In addition to preempting state law with respect to investment 
advisers registered with the Commission, the Coordination Act preempts 
state law with respect to their ``supervised persons.'' 87 A 
supervised person is defined as any ``partner, officer, director * * *, 
or employee of an investment adviser, or other person who provides 
investment advice on behalf of the investment adviser and is subject to 
the supervision and control of the investment adviser.'' 88
---------------------------------------------------------------------------

    \87\ Section 203A(b)(1)(A) of the Advisers Act [15 U.S.C. 80b-
3A(b)(1)(A)].
    \88\ Section 202(a)(25) of the Advisers Act (15 U.S.C. 80b-
2(a)(25)).
---------------------------------------------------------------------------

    The Coordination Act preserves certain state laws with respect to 
certain supervised persons of Commission-registered advisers by 
providing that a ``State may license, register, or otherwise qualify 
any investment adviser representative who has a place of business 
located within that State.'' 89 The Coordination Act does 
not define ``investment adviser representative,'' nor does it describe 
what constitutes a ``place of business.'' In order to provide 
clarification, the Commission is adopting definitions of these terms. 
The Commission also is providing guidance as to the status of 
solicitors for Commission-registered advisers.
---------------------------------------------------------------------------

    \89\ Section 203A(b)(1)(A).
---------------------------------------------------------------------------

1. ``Investment Adviser Representative''
    Rule 203A-3(a), as adopted, defines the term ``investment adviser 
representative'' to mean a supervised person more than ten percent of 
whose clients are natural persons.90 Natural persons who 
have at least $500,000 under management with the adviser 
representative's investment advisory firm immediately after entering 
into the advisory contract with the firm, or who the advisory firm 
reasonably believes have a net worth in excess of $1 million (together 
with assets held jointly with a spouse) immediately prior to entering 
into the advisory contract, are not counted towards the ten percent 
threshold.91 Supervised persons who do not, on a regular 
basis, solicit, meet with, or otherwise communicate with clients of the 
investment adviser, or who provide only impersonal investment advice, 
are excluded from the definition of investment adviser 
representative.92
---------------------------------------------------------------------------

    \90\ 17 CFR 203A-3(a).
    \91\ Rule 203A-3(a)(3)(i) (17 CFR 275.203A-3(a)(3)(i)). See 
infra notes 110-112 and accompanying text.
    \92\ Rule 203A-3(a)(2) (17 CFR 275.203A-3(a)(2)). See infra 
section of this Release.
---------------------------------------------------------------------------

    The Commission received extensive comment on the proposed 
definition of investment adviser representative. Most investment 
adviser commenters asserted that it was important for the Commission to 
adopt a single definition of the term in order to effect the purpose of 
Congress in creating a more uniform, rational system of adviser 
regulation. NASAA and most of the states opposed the adoption of any 
Commission definition, arguing that (i) the Commission has no authority 
to define the term, (ii) Congress intended for the states to define the 
term, and (iii) the states have already defined the term.
    There is no contemporaneous legislative history explaining what 
Congress meant by the term investment adviser representative in section 
203A(b)(1)(A).93 The definition of investment adviser 
representative varies substantially from state to state.94 
As a result, the incorporation of state law would conflict with one of 
the primary goals of the Coordination Act, which is to promote 
uniformity of regulation.95 Likewise, the incorporation of 
state law would be at odds with Congress' determination to preempt 
state laws regulating the offering of mutual fund shares,96 
as state investment adviser representative definitions generally 
encompass persons who provide

[[Page 28121]]

advisory services to mutual funds.97 Incorporation of state 
law also would be inconsistent with Congress' intention to limit the 
application of state law to at least some supervised persons. If a 
state adopted a sufficiently broad definition of the term investment 
adviser representative, the Coordination Act would have no preemptive 
effect, since all supervised persons would be subject to state 
licensing, registration, or qualification (hereinafter, ``state 
qualification requirements.'') 98
---------------------------------------------------------------------------

    \93\ The House bill, H.R. 3005, 104th Cong., 2d Sess. (1996), 
did not, in its original form, address the regulation of investment 
advisers. The Senate bill, which is the source of the Coordination 
Act, preempted state qualification requirements with respect to 
Commission-registered advisers and, as originally introduced, their 
employees. See S. 1815, 104th Cong., 2d Sess. section 103 (1996). 
The provision preserving state authority over investment adviser 
representatives was added by the conference committee. The ``Joint 
Explanatory Statement of the Committee of Conference,'' however, 
states only that ``[t]he Managers agreed to include certain 
amendments to the Investment Advisers Act of 1940 to eliminate 
duplication, promote efficiency, and protect investors.'' H.R. Conf. 
Rep. No. 864, 104th Cong., 2d Sess. 41 (1996), reprinted in 1996 
U.S.C.C.A.N. 3920, 3922. The debates in Congress that preceded final 
adoption of the bill reported by the conference committee note only 
that the states were given authority under the bill to continue to 
regulate ``investment adviser representatives.'' 142 Cong. Rec. 
H12,047-01, H12,050 (daily ed. Sept. 28, 1996) (statement of Rep. 
Markey) (``At the same time, we agreed that the States should 
continue to have authority to license the individual representatives 
of investment advisers.'').
    \94\ Although most states that require registration of 
investment adviser representatives have patterned their definition 
of investment adviser representative on the NASAA model definition, 
see Unif. Sec. Act section 401(g) (1986), many have modified this 
definition, both legislatively and administratively, to include, for 
example, any person: who holds himself out as an investment adviser 
(Md. Code Ann., Corps & Ass'ns section 11-101(g)(vii) (1993)); who 
deals directly with clients of the investment adviser (Arkansas Blue 
Sky Rule 102.01); or who prepares reports or analyses concerning 
securities (Okla. Stat. Ann. tit. 71 section 2(l) (West Supp. 1997); 
Va. Code Ann. section 13.1-501(A) (1993); Definitions and Procedures 
for Investment Advisor Representatives and Branch Offices (Order of 
Deputy Commissioner of Securities, West Virginia Securities 
Division, May 25, 1993, amended eff. Oct. 11, 1995)).
    \95\ See Senate Report, supra note 4, at 4 (``Larger advisers, 
with national businesses, should be * * * subject to national 
rules.'').
    \96\ See 1996 Act section 102 (amending section 18(b)(2) of the 
Securities Act of 1933 [(15 USC 77r(b)(2)] to preempt state laws 
requiring registration of securities issued by investment companies 
that are registered or that have filed a registration statement with 
the Commission); Senate Report, supra note 4, at 6-7; H. Rep. No. 
622, 104th Cong., 2d Sess. 30-31 (1996) [hereinafter House Report].
    \97\ The NASAA model definition of investment adviser 
representative includes any employee (except clerical or ministerial 
personnel) of an investment adviser who ``manages accounts or 
portfolios of clients.'' See Unif. Sec. Act section 401(g)(2) 
(1986). Most states that define investment adviser representative 
include this provision in their definitions. See, e.g., Md. Code 
Ann., Corps. & Ass'ns, section 11-101(g)(1)(v) (1993); Mass. Gen. 
Laws Ann. ch. 110A, section 401(n) (West Supp. 1996); Nev. Rev. 
Stat. section 90.278(1)(d) (Michie Supp. 1995).
    \98\ Thus, such a definition would have the effect of reading 
out of the Coordination Act the provision in section 203A(b)(1)(A) 
preempting state qualification requirements as to supervised persons 
of Commission-registered advisers, violating the principle of 
statutory interpretation that a statute is to be construed so as to 
give effect to all of its language. See, e.g., United States v. 
Menasche, 348 U.S. 528, 538-39 (1955).
---------------------------------------------------------------------------

    The Coordination Act does not contain any direction to incorporate 
state law. In light of the many provisions in the 1996 Act designed to 
promote uniformity of regulation, the decision of Congress to preempt 
state mutual fund regulation, and the preemptive language used by 
Congress, the Commission does not believe that Congress intended the 
definition of investment adviser representative to incorporate state 
law. Rather, the Commission believes that Congress left the term 
investment adviser representative undefined with the expectation that 
the Commission would use its rulemaking authority to define the term.
    The Commission's authority to adopt a rule classifying certain 
supervised persons as investment adviser representatives is 
clear.99 The ambiguities created by Congress' use of the 
undefined term investment adviser representative make it important that 
the Commission, as the federal agency charged with administering the 
Advisers Act, define the term so that the substantial uncertainties and 
costly disputes likely to occur in the absence of such a definition may 
be avoided.100 Only by adopting a uniform, national 
definition of investment adviser representative can Congress' intent to 
``delineate more clearly the securities law responsibilities of federal 
and state governments'' be achieved.101
---------------------------------------------------------------------------

    \99\ Section 211(a) of the advisers Act (15 USC 80b-21(a)) 
authorizes the Commission to adopt rules ``as are necessary or 
appropriate to the exercise of the functions and powers conferred 
upon the Commission'' in the Advisers Act and to ``classify persons 
and matters within its jurisdiction and prescribe different 
requirements for different classes of persons or matters.'' Section 
202(a)(17) of the Advisers Act (15 U.S.C. 80b-2(a)(17)) authorizes 
the Commission to adopt rules that ``classify, for the purposes of 
any portion * * * of (the Advisers Act), persons, including 
employees controlled by an investment adviser'' (emphasis added).
    \100\ Even if the Commission did not have the explicit grants of 
rulemaking authority discussed supra in note 99, the Supreme Court 
has recognized that regulatory agencies have authority to adopt 
rules to fill any gap left, implicitly or explicitly, by Congress, 
see Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 
Inc., 467 U.S. 837, 843-44 (1984), and that agency rulemaking may 
preempt state law, see City of New York v. Federal Communications 
Commission, 486 U.S. 57, 63-64 (1988). The Commission notes that 
Congress specifically anticipated that Commission rulemaking would 
preempt state law. Section 203A(c) permits the Commission to exempt 
advisers from the prohibition on Commission registration, thereby 
preempting state law with respect to the exempted advisers.
    \101\ See Senate Report, supra note 4, at 2.
---------------------------------------------------------------------------

    a. Retail clients. As discussed above, Congressional committee 
reports provide no indication as to which persons providing investment 
advice on behalf of Commission-registered advisers Congress intended 
states to continue to register.102 Therefore, in developing 
its proposed definition, the Commission examined testimony Congress 
received in support of preserving state authority over investment 
adviser representatives of Commission-registered 
advisers.103 Testimony offered by NASAA urged Congress to 
permit states to establish qualification standards for investment 
adviser representatives to protect ``retail'' investors.104 
The Commission assumed that this testimony persuaded Congress to 
preserve state authority over such persons, and proposed to define the 
term investment adviser representative in a manner consistent with the 
policy concerns expressed in the testimony.105
---------------------------------------------------------------------------

    \102\ See supra note 93.
    \103\ See Proposing Release at note 68 and accompanying text.
    \104\ See Senate Hearing, supra note 4, at 125 (testimony of Dee 
R. Harris, President, NASAA). See also id. at 178 (statement of 
Steven M.H. Wallman, Commissioner, SEC (``My concern is with the 
treatment of associated persons of (investment adviser) firms who 
provide advice to retail customers.'' (emphasis in original))).
    \105\ See Proposing Release at section II.F.1.
---------------------------------------------------------------------------

    Under the proposed definition, investment adviser representative 
would mean a supervised person of an investment adviser, if a 
substantial portion of the business of the supervised person is 
providing investment advice to clients who are natural persons. The 
proposed definition thus drew a distinction between natural persons, 
whom the Commission considered to be ``retail investors,'' and 
investment companies, businesses, educational institutions, charitable 
institutions, and other types of clients. Under the proposed 
definition, most investment adviser representatives who provide advice 
primarily to natural persons would be subject to state qualification 
requirements.
    Commenters were divided over whether the definition should 
distinguish between retail and other types of clients. Many state 
commenters opposed this distinction, arguing there was no basis in the 
Coordination Act or its legislative history for limiting state 
oversight to adviser representatives that serve retail 
clients.106 Many of these commenters referred to the example 
of an adviser representative who provides advisory services to small 
businesses as the type of supervised person that should be subject to 
state qualification requirements. In contrast, many investment adviser 
commenters supported the distinction, arguing that it was consistent 
with the legislative history cited by the Commission in the Proposing 
Release. Several of these commenters also urged the Commission to treat 
certain ``high net worth'' clients as institutional clients.
---------------------------------------------------------------------------

    \106\ Some of these commenters asserted that the Commission 
mischaracterized the intent of NASAA in referring to ``retail'' 
investors in its testimony. The Commission, however, did not base 
the proposed rule on the intent of NASAA in giving its testimony, 
but rather, on what the members of the Senate committee receiving 
NASAA's testimony (and the other members of Congress reviewing the 
legislative record) are reasonably likely to have believed NASAA's 
position was at the time of its testimony.
---------------------------------------------------------------------------

    The Commission continues to believe that it is consistent with the 
intent of Congress as reflected in the structure and purpose of the 
Coordination Act to distinguish between retail and other clients in 
defining the term investment adviser representative. While there are 
other possible criteria for distinguishing retail clients from other 
clients,107 the Commission believes that treating natural 
persons as retail clients is consistent with the Coordination Act and 
has the advantage of simplicity and ease of 
administration.108
---------------------------------------------------------------------------

    \107\ Dictionaries typically define ``retail'' as the sale in 
small quantities to consumers. See, e.g., Webster's II New Riverside 
University Dictionary 1003 (1994). Such a definition is not helpful 
in this context because, depending on who is viewed as the 
``consumer'' of the advice, it leads to a conclusion either that all 
businesses are retail clients (because they are obtaining advice for 
their own portfolios), or that no businesses are retail clients 
(because the ultimate beneficiaries of the advice are the owners of 
the businesses).
    \108\ Requiring adviser representatives to determine whether a 
client is a ``small business'' would complicate the definition and 
create uncertainty as to the applicability of state qualification 
requirements. If small businesses were treated as retail persons, 
adviser representatives presumably would have to obtain income 
statements and/or balance sheets from their small business clients, 
and might be required to determine whether the income or assets of a 
small business client should be aggregated with the client's parent 
or affiliate in order to determine whether state qualification 
requirements apply.

---------------------------------------------------------------------------

[[Page 28122]]

    Although small businesses may not be familiar with investing, they 
must be familiar with selecting qualified service providers, suppliers, 
and other parties with which they contract as a part of their 
businesses. Small businesses will receive a brochure setting forth the 
business and educational background of prospective advisers and will 
have the opportunity to make an informed decision whether the advisers 
are qualified.109 Because adviser representatives providing 
advice to small businesses also typically provide advice to individual 
investors, it is unlikely that the Commission's decision to treat only 
natural persons as retail clients will have a significant effect on the 
number of adviser representatives subject to state qualification 
requirements.
---------------------------------------------------------------------------

    \109\ Rule 204-3 requires Commission-registered investment 
advisers to provide existing and prospective clients with a written 
disclosure statement describing the adviser's services and fees, 
investment methods and strategies, and education and business 
background, as well as other information. See Part II of Form ADV.
---------------------------------------------------------------------------

    As suggested by several commenters, the Commission is modifying the 
rule to permit adviser representatives to exclude certain ``high net 
worth'' individuals from treatment as natural persons. Under the rule, 
high net worth individuals are those with whom the Commission permits 
advisers to enter into a ``performance fee contract.'' 110 
Because of their wealth, financial knowledge, and experience, the 
Commission has presumed that these individuals are less dependent on 
the protections of the provisions of the Advisers Act that prohibit 
such fee arrangements.111 The Commission believes that such 
individuals similarly do not need the protections of state 
qualification requirements. Because of the historical treatment of 
wealthy and sophisticated individuals under the federal securities 
laws, Congress reasonably could have expected these persons not to be 
considered retail investors.112
---------------------------------------------------------------------------

    \110\ See rule 205-3 (17 CFR 275.205-3).
    \111\ See Investment Advisers Act Rel. No. 966 (Nov. 14, 1985) 
(50 FR 48556 (Nov. 26, 1985)) (adopting rule 205-3). Rule 205-3 
permits a registered investment adviser to be compensated on the 
basis of a share of the capital gains on or capital appreciation of 
client assets. See infra section II.I.3 of this Release. 
Compensation of this type is prohibited by section 205(a)(1) of the 
Advisers Act (15 U.S.C. 80b-5(a)(1)) with certain limited 
exceptions.
    \112\ This conclusion is supported by the determination by 
Congress in section 205(e) of the Advisers Act (15 U.S.C. 80b-5(e)) 
to broaden the authority of the Commission to permit advisers to 
enter into performance fee contracts with these persons.
---------------------------------------------------------------------------

    b. Accommodation clients. The Commission proposed to include in the 
definition of investment adviser representative only those supervised 
persons a ``substantial portion'' of whose business is providing advice 
to natural persons.113 A substantial portion of a supervised 
person's business would be providing advice to natural persons if, 
during the preceding twelve months, more than ten percent of the 
supervised person's clients consisted of natural persons, or more than 
ten percent of the assets under management by the adviser attributable 
to the supervised person were assets of clients who are natural persons 
(the ``ten percent allowance'').
---------------------------------------------------------------------------

    \113\ See Proposing Release at section II.F.1.
---------------------------------------------------------------------------

    Most commenters that addressed the proposed ten percent allowance 
supported it. Some investment adviser commenters urged the Commission 
to increase the allowance to 25 percent. The Commission is adopting the 
ten percent allowance substantially as proposed. The Commission 
believes that increasing the allowance to 25 percent could result in 
supervised persons accepting natural person clients on more than just 
an accommodation basis. The Commission notes, however, that the 
exclusion of certain high net worth individuals from the ten percent 
allowance likely will have the effect of expanding the number of 
accommodation clients an adviser representative may 
accept.114
---------------------------------------------------------------------------

    \114\ See supra notes 110-112 and accompanying text.
---------------------------------------------------------------------------

    Under the proposed rule, the ten percent allowance would have been 
measured either by reference to assets under management attributable to 
the supervised person (``asset test'') or by reference to clients of 
the supervised person (``client test''). Commenters believed that these 
tests were too complicated and that the client test alone was 
sufficient. No commenters came forth, as the Commission had requested, 
with suggestions for making the asset test workable.115 The 
Commission is not adopting the asset test, but is concerned that, as a 
result, an adviser representative who works on one or a few 
institutional or business client accounts may not be able to accept any 
accommodation clients because, if she did, more than 10 percent of her 
clients would consist of natural persons. The Commission directs the 
staff to work with investment advisers whose adviser representatives 
may be so affected. If a workable method of addressing this concern is 
developed, the Commission will revise the definition of investment 
adviser representative.
---------------------------------------------------------------------------

    \115\ For example, an asset test would have to provide guidance 
on how to attribute assets managed by the adviser to a particular 
supervised person.
---------------------------------------------------------------------------

    The Commission also has revised the method of measuring the ten 
percent allowance. As proposed, the allowance would have been measured 
over the previous twelve month period. The Commission believes that the 
proposed approach is too complicated and would inappropriately delay 
the applicability of state qualification requirements.116 As 
adopted, therefore, the rule requires a supervised person to determine 
compliance with the ten percent allowance at all times, with respect to 
current clients.117
---------------------------------------------------------------------------

    \116\ For example, a supervised person who previously provided 
advisory services exclusively to institutional clients and who is 
reassigned to retail clients could not have been required, under the 
proposed rule, to comply with state qualification requirements for 
up to a year after being reassigned to retail clients, because the 
supervised person would not have been deemed to be an investment 
adviser representative until retail clients represented 10 percent 
of his clientele over a 12 month period. Conversely, an investment 
adviser representative who previously provided advice to retail 
clients and who is reassigned to institutional clients could have 
been required to continue to meet state qualification requirements 
even though she no longer had retail clients, because under the 
proposed rule, she would have continued to be an investment adviser 
representative until retail clients represented less than 10 percent 
of her clientele over a 12 month period.
    \117\ Rule 203A-3(a)(1) (17 CFR 275.203A-3(a)(1)). The client 
test is measured with respect to all of an adviser representative's 
clients nationwide. Supervised persons may rely on the definition of 
``client'' in rule 203(b)(3)-1 (17 CFR 275.203(b)(3)-1) for the 
purpose of counting clients, except that supervised persons need not 
count clients that are not U.S. residents. Rule 203A-3(a)(4) (17 CFR 
275.203A-3(a)(4)).
---------------------------------------------------------------------------

    The Commission recognizes that some advisory firms consider each 
person to whom the firm provides advisory services to be a client only 
of the firm and not of any individual supervised person. The Commission 
believes that such an approach would be inconsistent with the 
Coordination Act, and thus a client also should be treated as a client 
of a supervised person if the supervised person has substantial 
responsibilities with respect to the client's account or communicates 
advice to the client. If more than one supervised person provides 
advice to a client, the client should be attributed to each supervised 
person.
    c. Supervised persons providing indirect or impersonal advice. The

[[Page 28123]]

Commission also is adopting an exception from the definition of 
investment adviser representative for supervised persons who provide 
advice to natural persons, but who do not ``on a regular basis solicit, 
meet with, or otherwise communicate with clients.'' 118 This 
exception excludes from state qualification requirements personnel of 
an adviser who may be involved in the formulation of investment advice 
given to natural persons, but who are not directly involved in 
providing advice to (or soliciting) clients. In addition, the 
Commission is excepting supervised persons who give only impersonal 
investment advice.119 This provision excludes personnel who 
may be involved, for example, in preparing a newsletter, providing 
general market timing advice, or preparing a list of recommended 
purchases for inclusion on a web site. No commenters specifically 
addressed these provisions, which are being adopted substantially as 
proposed.
---------------------------------------------------------------------------

    \118\ Rule 203A-3(a)(2)(i) (17 CFR 275.203A-3(a)(2)(i)).
    \119\ Rule 203A-3(a)(2)(ii) (17 CFR 275.203A-3(a)(2)(ii)).
---------------------------------------------------------------------------

    d. Dually registered investment adviser representatives. The 
Proposing Release requested comment whether an investment adviser 
representative that is dually registered as a broker-dealer agent in a 
state should be excepted from the definition of investment adviser 
representative.120 A number of investment adviser commenters 
expressed support for such an exception, arguing that state investment 
adviser representative registration of registered broker-dealer agents 
is redundant. Many state and other commenters strongly opposed such an 
exception, asserting that it would be inappropriate to treat investment 
adviser representatives and broker-dealer agents the same since they 
perform different functions, are subject to different state examination 
requirements,121 and are governed by different regulations 
and fiduciary standards. The Commission agrees, and the rule, as 
adopted, provides no exception for dually registered broker-dealer 
agents.
---------------------------------------------------------------------------

    \120\ See Proposing Release at section II.F.1.
    \121\ The Commission notes, however, that many states accept a 
person's receiving a passing grade on a broker-dealer agent 
examination in lieu of an investment adviser representative 
examination to satisfy state investment adviser representative 
qualification requirements. For example, many states accept passage 
of Series 63 (NASAA Uniform State Law Exam) and Series 7 (General 
Securities Representative Exam) in lieu of investment adviser 
representative examinations. See, e.g., Ala. Admin. Code r. 830-X-
3-.08(4); Or. Admin. R. 441-175-120(4) (1994).
---------------------------------------------------------------------------

    e. Solicitors. In the Proposing Release, the Coordination Act was 
interpreted as not generally preempting state regulation of solicitors 
for Commission-registered advisers.122 Several commenters 
disagreed with this interpretation and asserted that if a solicitor is 
an employee of the adviser for which he or she solicits, the 
Coordination Act preempts state law unless the solicitor is an 
investment adviser representative. The Commission agrees, and is 
revising this interpretation.
---------------------------------------------------------------------------

    \122\ See Proposing Release at section II.F.3. For a description 
of solicitors' activities, see Investment Advisers Act Rel. No. 688 
(July 12, 1979) (44 FR 42126 (July 18, 1979)) (adopting rule 206(4)-
3 (17 CFR 275.206(4)-3), the cash solicitation rule).
---------------------------------------------------------------------------

    Section 203A(b) preempts state regulation of ``supervised persons'' 
of Commission-registered advisers, except those who are investment 
adviser representatives. Whether a solicitor for a Commission-
registered adviser is subject to state qualification requirements thus 
turns, first, on whether the solicitor is a supervised person, and 
second, on whether he or she is an investment adviser representative. A 
supervised person is defined in section 202(a)(25) to be (i) any 
partner, officer, director (or other person occupying a similar status 
or performing similar functions), or employee of an investment adviser, 
or (ii) any other person who provides investment advice on behalf of 
the investment adviser and is subject to the supervision and control of 
the investment adviser. Because solicitation of clients may not involve 
providing investment advice on behalf of the adviser, the status of a 
solicitor as a supervised person will depend on the whether the 
solicitor is a ``partner, officer, director, or employee'' of the 
adviser, or an ``other person.'' 123
---------------------------------------------------------------------------

    \123\ In the Proposing Release, the Commission interpreted the 
``provides investment advice on behalf of'' limitation in section 
202(a)(25) as applying to all categories of persons in the 
definition of supervised persons. Upon reconsideration, the 
Commission believes that this limitation should be applied only to 
``other persons,'' and not to persons who are ``partners, officers, 
directors, or employees.'' As one commenter pointed out, in a draft 
of the Coordination Act that preceded the one in which the 
definition of ``supervised person'' was added, state investment 
adviser regulations would have been preempted as to all employees of 
a Commission-registered adviser. The definition of ``supervised 
person'' and the ``other persons who provide investment advice'' 
language were added not to limit the types of employees of 
Commission-registered advisers exempted from state qualification 
requirements, but to include persons who may not be employees but 
assume a similar function (e.g., independent contractors). See 
Senate Report, supra note 4, at 4.
---------------------------------------------------------------------------

    A solicitor who is a partner, officer, director, or employee of a 
Commission-registered adviser is a supervised person, and is subject to 
state qualification requirements only if the solicitor is an investment 
adviser representative under rule 203A-3(a). A third-party solicitor 
for a Commission-registered adviser (i.e., a solicitor who is not a 
partner, officer, director, or employee of the adviser) is not a 
supervised person unless the solicitor provides investment advice on 
behalf of the investment adviser and is subject to the supervision and 
control of the adviser. 124 Thus, a third-party solicitor 
will be subject to state qualification requirements to the extent state 
investment adviser statutes apply to solicitors. 125 In some 
cases, a solicitor may solicit on behalf of both a state-registered 
adviser and a Commission-registered adviser. The Commission believes 
that the Coordination Act does not preempt states from subjecting such 
a solicitor to state qualification requirements.
---------------------------------------------------------------------------

    \124\ Regardless of whether a solicitor is a ``supervised 
person,'' a solicitor is a ``person associated with an investment 
adviser'' with respect to the adviser for which he or she solicits. 
See section 202(a)(17). The adviser, therefore, has an obligation to 
supervise its solicitors with respect to activities performed on its 
behalf. See Investment Advisers Act Rel. No. 688, supra note . A 
solicitor for an adviser providing solely impersonal advice is not 
necessarily a ``person associated with an investment adviser.'' See 
Investment Advisers Act Rel. No. 688, supra note 122, at note 20.
    \125\ See, e.g., Ala. Code section 8-6-2(19)(d) (1975); Idaho 
Code section 30-1402(14)(d) (Michie Supp. 1995) (defining investment 
adviser representative to include certain persons associated with an 
investment adviser that solicit for the sale of investment advisory 
services). Rule 206(4)-3 will continue to govern cash payments by a 
Commission-registered adviser to a solicitor who is subject to state 
qualification requirements.
---------------------------------------------------------------------------

2. ``Place of Business''
    While section 203A(b)(1)(A) preserves the ability of a state to 
license, register, or otherwise qualify investment adviser 
representatives of Commission-registered advisers, the section limits a 
state's authority to only those investment adviser representatives who 
have a ``place of business'' within the state. The Commission proposed 
to clarify that, for purposes of section 203A(b)(1)(A), a place of 
business is any place or office from which the investment adviser 
representative regularly provides advisory services or otherwise 
solicits, meets with, or communicates to clients.126
---------------------------------------------------------------------------

    \126\ See Proposing Release at section II.F.2.
---------------------------------------------------------------------------

    Most commenters, while supporting the adoption of a Commission rule 
clarifying the term place of business, criticized the proposed 
definition as too vague. Investment adviser commenters

[[Page 28124]]

were concerned with the uncertainty the use of the term ``regularly'' 
would create. They also were concerned that, as a result of the 
uncertainty, they would find it difficult to ensure compliance by their 
supervised persons with state qualification requirements. State 
commenters were concerned that they would find it difficult to enforce 
state qualification requirements because states would be required to 
prove that advice had been given on a regular basis at a particular 
place. The Commission has revised the definition of place of business 
to address these concerns.
    As adopted, rule 203A-3(b) defines a place of business of an 
investment adviser representative to mean (i) an office at which the 
investment adviser representative regularly provides investment 
advisory services, solicits, meets with, or otherwise communicates with 
clients, and (ii) any other location that is held out to the general 
public as a location at which the investment adviser representative 
provides investment advisory services, solicits, meets with, or 
otherwise communicates with clients.127 For the purposes of 
rule 203A-3(b), an adviser representative would be considered to hold 
himself out to the general public as having a location at which he 
conducts advisory business by, for example, publishing information in a 
professional directory or a telephone listing, or distributing 
advertisements, business cards, stationery, or similar communications 
that identify the location as one at which the adviser representative 
is or will be available to meet or communicate with 
clients.128
---------------------------------------------------------------------------

    \127\ 17 CFR 275.203A-3(b). In response to a number of comments, 
the Commission is not adopting the ``itinerant representative'' 
provision contained in the proposed definition that would have 
deemed the residence of each client to be the place of business of 
an adviser representative that did not regularly provide advisory 
services in any location. That provision is unnecessary under the 
revised rule.
    \128\ An adviser representative who sends a letter to certain 
existing clients indicating, for example, that she will be in their 
area and available for a meeting would not have held out the 
location of the proposed meeting to the general public for purposes 
of rule 203A-3(b)(2) (17 CFR 275.203A-3(b)(2)). Similarly, an 
adviser representative that communicates to a defined group under 
the terms of an advisory contract the location at which she will be 
available would not be holding herself out to the general public for 
purposes of rule 203A-3(b)(2). For example, in the case of a 
national organization that engages an adviser to provide advisory 
services to its members, an adviser representative who communicates 
its availability at a certain location to the members (even though 
those individuals may not yet be clients) would not be holding 
himself out to the general public.
---------------------------------------------------------------------------

    The definition encompasses permanent and temporary offices as well 
as other locations at which an adviser representative may provide 
advisory services, such as a hotel or auditorium.129 Whether 
an adviser representative will be subject to the qualification 
requirements of a state in which the hotel or auditorium is located 
will turn on whether the adviser representative has let it generally be 
known that he or she will conduct advisory business at the location, 
rather than on the frequency with which the adviser representative 
conducts advisory business there. This definition should provide a 
clearer and more enforceable standard for determining when state 
qualification requirements are triggered.
---------------------------------------------------------------------------

    \129\ The following example discusses the application of the 
rule to an investment adviser representative who provides investment 
advisory services through an Internet web site to clients in many 
states: An adviser representative uses a computer at his home or an 
office in State W where he prepares material to be placed on the web 
site or distributed over the Internet (but where he does not 
``regularly provide investment advisory services, solicit, meet 
with, or otherwise communicate with clients''). He also maintains an 
office in State X where he evaluates the information provided by 
clients and provides information in response to clients. The adviser 
representative's web site advertises the representative's physical 
office in State Y where the representative meets clients. The 
adviser representative e-mails its materials to a web server in 
State Z for posting on the web and has a post office box or an agent 
in State B to whom clients are instructed to mail checks. Under the 
rule, the adviser representative would have places of business in 
State X (the state in which he has an office for purposes of the 
rule) and State Y (the state in which he holds himself out as 
conducting his advisory business), but not in any other state.
---------------------------------------------------------------------------

G. National De Minimis Standard

    The Coordination Act amends the Advisers Act to add new section 
222(d), which makes state investment adviser statutes inapplicable to 
advisers that do not have a place of business in the state and have 
fewer than six clients who are residents of that state (the ``national 
de minimis standard'').130 The Commission proposed a new 
rule to define the term ``client'' for purposes of section 
222(d).131
---------------------------------------------------------------------------

    \130\ 15 U.S.C. 80b-18a(d).
    \131\ See Proposing Release at section II.G.
---------------------------------------------------------------------------

    The proposed rule would treat as a single client a natural person 
and (i) any relative, spouse, or relative of the spouse of the natural 
person sharing the same principal residence, and (ii) all accounts of 
which the natural person and such persons are the sole primary 
beneficiaries. The proposed rule also would treat as a single client a 
corporation, general partnership, limited liability company, trust, or 
other legal organization (other than a limited partnership) that 
receives investment advice based on its investment objectives rather 
than the objectives of its shareholders, partners, members, or 
beneficial owners. Under the proposal, a limited partnership would be 
counted as a single client if it would be counted as a single client 
under rule 203(b)(3)-1.132
---------------------------------------------------------------------------

    \132\ At the time of the Proposing Release, rule 203(b)(3)-1 
provided a safe harbor to count a limited partnership, as opposed to 
each limited partner, as a client for purposes of section 203(b)(3) 
of the Advisers Act (15 U.S.C. 80b-3(b)(3)). As discussed infra, the 
Commission is amending rule 203(b)(3)-1 to address additional client 
relationships.
---------------------------------------------------------------------------

    Commenters stated the Commission's definition of the term 
``client'' would provide needed uniformity under the national de 
minimis standard. The Commission is adopting a rule defining the term 
client, but is making several modifications from the 
proposal.133 As suggested by commenters, the final rule also 
treats as a single client a natural person and (i) that person's minor 
children (whether or not they share the natural person's principal 
residence), and (ii) all trusts of which the natural person and/or any 
relative or spouse of that person sharing the same principal residence 
(or any minor children of that person) are the only primary 
beneficiaries. The rule also treats as a single client two or more 
corporations, partnerships, or other legal organizations that each 
receive investment advice based on the organization's investment 
objectives and have identical shareholders, partners, or 
beneficiaries.134 Under the rule, any person for whom an 
investment adviser provides investment advisory services without 
compensation is not deemed to be a client.135
---------------------------------------------------------------------------

    \133\ See rule 203(b)(3)-1. The Commission also is adopting rule 
222-1 (17 CFR 275.222-1), which defines other terms used in section 
222. Rule 222-1(a) (17 CFR 275.222-1(a)) defines place of business 
in the same manner as rule 203A-3(b), except that the term is 
applied to investment advisers rather than investment adviser 
representatives. Rule 222-1(b) (17 CFR 275.222-1(b)) defines 
principal place of business in the same manner that rule 203A-3(c) 
defines principal office and place of business. See supra sections 
II.F.2 and II.E.2 of this Release.
    \134\ This provision codifies the Division's interpretative 
position that trusts with identical beneficiaries could be treated 
as a single client. See OSIRIS Management, Inc. (pub. avail. Feb. 
17, 1984). The final rule does not require that the beneficial 
owners have identical ownership interests in each legal 
organization. An adviser could not avoid registration, however, by 
arranging nominal common ownership. See section 208(d) (15 U.S.C. 
80b-8(d)) (which makes it unlawful generally for any person to do 
indirectly any act which it would be unlawful for that person to do 
directly under the Advisers Act or rules thereunder).
    \135\ The adviser, however, has all of the fiduciary obligations 
with respect to such a client that it has with respect to a paying 
client. In addition, if the assets of such an account are held in a 
securities portfolio with respect to which the adviser provides 
continuous and regular supervisory or management services, those 
assets must be included in the determination of the adviser's assets 
under management. See infra section II.B.1 of this Release. The 
Commission intends that the term ``compensation,'' as used in the 
rule, have the same meaning as the term used in section 202(a)(11) 
of the Advisers Act (15 U.S.C. 80b-2(a)(11)). See Applicability of 
the Investment Advisers Act to Financial Planners, Pension 
Consultants, and Other Persons Who Provide Investment Advisory 
Services as a Component of Other Services, Investment Advisers Act 
Rel. No. 1092 (Oct. 8, 1987) (52 FR 38400 (Oct. 16, 1987)), in which 
the Division explained that ``compensation'' includes any economic 
benefit, whether or not in the form of an advisory fee, and that it 
need not be paid directly, but can be provided by a third party.

---------------------------------------------------------------------------

[[Page 28125]]

    Section 203(b)(3), the federal de minimis provision, exempts from 
registration with the Commission certain advisers having fewer than 
fifteen clients during the preceding twelve months. Rule 203(b)(3)-1 
provides a safe harbor permitting the general partner or other 
investment adviser to a limited partnership to count the partnership, 
rather than each limited partner, as the client for purposes of section 
203(b)(3). The Proposing Release requested comment whether the 
Commission should adopt one definition of ``client'' for purposes of 
both section 222 and section 203(b)(3) and if so, whether certain 
provisions of rule 203(b)(3)-1 should be revised.136 
Commenters favored the adoption of one definition of ``client'' to 
resolve open questions and provide consistency under both sections.
---------------------------------------------------------------------------

    \136\ See Proposing Release at note 96 and accompanying text.
---------------------------------------------------------------------------

    The Commission agrees that one definition has advantages and 
therefore is amending rule 203(b)(3)-1 to create one definition of the 
term ``client'' for purposes of sections 203(b)(3) and 
222(d).137 In taking this action, the Commission has 
modified certain provisions of rule 203(b)(3)-1 that were not 
consistent with proposed rule 222-2's treatment of other legal 
organizations.138 The Commission does not expect these 
changes to affect the scope of the relief that has been provided by 
rule 203(b)(3)-1. The Commission also has modified the proposed rule to 
incorporate the safe harbor approach of rule 203(b)(3)-1. As a safe 
harbor, the final rule is not intended to specify the exclusive method 
for determining who may be treated as a single client for purposes of 
sections 203(b)(3) and 222(d).139 In addition, the final 
rule clarifies the treatment of foreign clients for purposes of section 
203(b)(3).140
---------------------------------------------------------------------------

    \137\ Rule 222-2 (17 CFR 275.222-2), as adopted, provides that 
for purposes of section 222(d)(2) of the Act, an adviser may rely 
upon the definition of client provided by rule 203(b)(3)-1.
    \138\ Rule 203(b)(3)-1, as amended, no longer contains a 
requirement that the limited partnership interests be securities.
    \139\ Where a client relationship involving multiple persons 
does not come within the rule, the question of whether it may 
appropriately be treated as a single client must be determined on 
the basis of the facts and circumstances involved. In light of the 
inherently factual nature of such determinations, the Commission and 
its staff generally will not entertain requests for interpretive 
advice with respect to client relationships that do not come within 
rule 203(b)(3)-1.
    \140\ 17 CFR 275.203(b)(3)-1(b)(5). The rule provides that, for 
purposes of section 203(b)(3), an adviser with its principal office 
and place of business outside the United States must count only 
clients that are United States residents. An adviser with its 
principal office and place of business in the United States must 
count all clients, regardless of their place of residence. See 
generally Vocor International Holding S.A. (pub. avail. Apr. 9, 
1990). Clients that are not United States residents need not be 
counted for purposes of section 222(d), since the availability of 
the national de minimis standard turns on the number of clients who 
are residents of the state in question.
---------------------------------------------------------------------------

    Finally, the Commission wishes to emphasize that rules 203(b)(3)-1 
and 222-2define the term ``client'' only for purposes of counting 
clients under sections 203(b)(3) and 222(d). Persons that are grouped 
together for purposes of those sections may be required to be treated 
as separate clients for other purposes under the Advisers Act (and 
state investment adviser statutes).

H. Scope of State Authority Over Commission-Registered Investment 
Advisers

1. Preemption of State Regulatory Authority
    The Coordination Act gives the Commission primary responsibility to 
regulate advisers that remain registered with the Commission by 
preempting state regulation of those advisers. New section 203A(b)(1) 
of the Advisers Act provides that ``(n)o law of any State * * * 
requiring the registration, licensing, or qualification as an 
investment adviser shall apply to any [adviser registered with the 
Commission]. * * * '' 141 States retain authority over 
Commission-registered advisers under state investment adviser statutes 
to investigate and bring enforcement actions with respect to fraud or 
deceit against an investment adviser or a person associated with an 
investment adviser; to require filings, for notice purposes only, of 
documents filed with the Commission; and to require payment of state 
filing, registration, and licensing fees.142
---------------------------------------------------------------------------

    \141\ 15 U.S.C. 80b-3A(b)(1).
    \142\ See section 203A(b)(2) of the Advisers Act (15 U.S.C. 80b-
3A(b)(2)); section 307(a), (b) of the Coordination Act.
---------------------------------------------------------------------------

    The Proposing Release stated the Commission's view that section 
203A(b) preempts not only a state's specific registration, licensing, 
or qualification requirements, but all regulatory requirements imposed 
by state law on Commission-registered advisers relating to their 
advisory activities or services, except those provisions that are 
specifically preserved by the Coordination Act.143 As a 
result, the Commission concluded that state regulatory provisions, such 
as those that establish recordkeeping, disclosure, and capital 
requirements, will no longer apply to advisers registered with the 
Commission.144
---------------------------------------------------------------------------

    \143\ See Proposing Release at note 20 and accompanying text.
    \144\ See Proposing Release at note 21 and accompanying text.
---------------------------------------------------------------------------

    The Commission received extensive comment on its interpretation of 
the scope of state preemption. Investment adviser commenters strongly 
favored the interpretation, while NASAA and many of the state 
commenters argued that the interpretation should be narrowed 
substantially. NASAA asserted that because the Coordination Act 
preempts only state registration requirements, only state regulatory 
requirements that ``flow from'' state registration are 
preempted.145
---------------------------------------------------------------------------

    \145\ Several state commenters asserted that, under the 
Commission's interpretation of the preemption provision, the 
Coordination Act would violate the Tenth Amendment's command that 
powers not delegated to the federal government by the Constitution 
are reserved to the states. This argument appears to confuse the 
scope of preemption (about which some of the commenters and the 
Commission disagree) with the constitutional authority of Congress 
(and the delegated authority of the Commission) to exclusively 
regulate investment advisers registered with the Commission. Section 
203A(b) does nothing more than preempt certain state laws regulating 
Commission-registered advisers. The Supreme Court has made clear 
that the displacement of state law under a federal regulatory scheme 
does not violate the Tenth Amendment, provided that it is based on a 
valid exercise of Congress' constitutional powers such as those 
arising under the Commerce Clause. ``(T)he Federal Government may 
displace state regulation even though this serves to `curtail or 
prohibit the States' prerogatives to make legislative choices 
respecting subjects the States may consider important.'' Federal 
Energy Regulatory Commission v. Mississippi, 456 U.S. 742, 759 
(1982) (quoting Hodel v. Virginia Surface Mining & Reclamation 
Ass'n, Inc., 452 U.S. 264, 290 (1981)). No commenter suggested that 
Congress exceeded its Commerce Clause authority in passing the 
Coordination Act. See, e.g., section 201 of the Advisers Act (15 
U.S.C. 80b-1) (express findings of the effects of investment 
advisory activities on interstate commerce).
---------------------------------------------------------------------------

    The Commission continues to believe that the Coordination Act 
broadly preempts state investment adviser statutes with respect to 
Commission-registered advisers. While the language of section 
203A(b)(1) is not necessarily clear on its face and is susceptible to 
different readings,146 in the

[[Page 28126]]

Commission's judgment the legislative history of the Coordination Act 
strongly supports broad preemption. Congress intended that Commission-
registered advisers no longer be subject to ``overlapping'' state and 
federal regulation,147 but instead be subject to uniform 
``national rules.''148 Under NASAA's narrower 
interpretation, however, multiple, non-uniform state regulation of 
Commission-registered advisers would be preserved. Moreover, the effect 
of the preemption provisions of the Coordination Act could be severely 
weakened, if not nullified, if a state were to impose regulatory 
requirements on advisers not subject to state registration, but who may 
be transacting business in the state.149
---------------------------------------------------------------------------

    \146\ NASAA interprets the language ``[n]o law of any State * * 
* requiring the registration, licensing, or qualification'' as 
restrictive (i.e., meaning ``no state law that requires * * *''), 
while the Commission interprets the same language as descriptive 
(i.e., ``no state law, which requires * * *'').
    \147\ Senate Report, supra note 4, at 3-4.
    \148\ Id. at 4.
    \149\ This process could lead to Commission-registered advisers 
being subject to a less uniform scheme of regulation than state 
advisers, since states are expressly precluded by section 222 (b) 
and (c) of the Advisers Act (15 U.S.C. 80b-18a (b), (c)) from 
enforcing non-uniform books and records and financial responsibility 
rules with respect to state-registered advisers, but not with 
respect to Commission-registered advisers.
    In its comment letter, NASAA cited Cipollone v. Liggett Group, 
Inc., 505 U.S. 504 (1992) for the proposition that the historic 
police powers of the states are not to be superseded by a federal 
statute unless that is the clear and manifest purpose of Congress. 
As discussed in the text above, the Commission believes that such 
clear and manifest purpose is demonstrated by the language of the 
Coordination Act and the intent of Congress as expressed in the 
Coordination Act's legislative history.
---------------------------------------------------------------------------

    The structure and design of section 203A suggest Congress intended 
to broadly preempt state investment adviser law. If Congress simply 
preempted all state law with respect to Commission-registered advisers, 
such a provision would have been over inclusive.150 If 
Congress preempted state investment adviser law by itemizing specific 
regulations to be preempted, such a provision would have been under 
inclusive and would have led to confusion whether a particular state 
regulation was included within a preempted category. Thus, the 
Commission believes that section 203A(b)(1) was drafted to describe 
what state investment adviser statutes typically require--registration, 
licensing, and qualification--in order to preempt statutes containing 
these requirements with respect to Commission-registered advisers. This 
view of section 203A(b)(1) comports with the express intent of Congress 
to subject larger advisers to a uniform, national regulatory regime. It 
also explains why Congress believed it was necessary to preserve 
certain state authority. If section 203A(b)(1) preempts only the 
specific registration, licensing, and qualification requirements of 
state investment adviser statutes, Congress would not have had to 
preserve the authority of states to investigate and enforce 
fraud.151
---------------------------------------------------------------------------

    \150\ Such a provision, for example, would preempt areas of 
state law such as labor and employment laws, commercial codes, and 
even criminal law as it applies to Commission-registered advisers.
    \151\ See supra note 142 and accompanying text.
---------------------------------------------------------------------------

2. Preservation of State Anti-Fraud Authority
    Section 203A(b)(2) preserves state authority to investigate and 
bring enforcement actions with respect to fraud or deceit against a 
Commission-registered adviser or a person associated with a Commission-
registered adviser. In the Proposing Release, the Commission 
interpreted section 203A(b)(2) as precluding a state from indirectly 
regulating the activities of Commission-registered advisers by applying 
state requirements that define ``dishonest'' or ``unethical'' business 
practices unless the prohibited practices would be fraudulent or 
deceptive absent the requirements.152
---------------------------------------------------------------------------

    \152\ See Proposing Release at notes 23 and 24 and accompanying 
text. The Commission, however, does not view section 203A(b)(2) as 
preempting state private civil liability laws or the authority of a 
state to bring an action against a Commission-registered adviser for 
failure to make notice filings or pay fees.
---------------------------------------------------------------------------

    NASAA and state commenters took strong exception to this 
interpretation. Some argued states could continue to enforce business 
practice rules as a means of enforcing anti-fraud rules. The Commission 
does not believe that the Coordination Act can be read to preserve such 
state regulatory authority over Commission-registered advisers. Under 
the design of the Coordination Act, Congress gave the responsibility of 
adopting and enforcing prophylactic rules with respect to state-
registered advisers to states, and with respect to Commission-
registered advisers to the Commission.\153\ Both the states and the 
Commission, however, retain anti-fraud authority with respect to all 
advisers.154 On its face, section 203A(b)(2) preserves only 
a state's authority to investigate and bring enforcement actions under 
its anti-fraud laws with respect to Commission-registered 
advisers.155 The Coordination Act does not limit state 
enforcement of laws prohibiting fraud. Rather, states are denied the 
ability to reinstitute the system of overlapping and duplicative 
regulation of investment advisers that Congress sought to 
end.156
---------------------------------------------------------------------------

    \153\ Senate Report, supra note 4, at 4 (``The states should 
play an important and logical role in regulating small investment 
advisers whose activities are likely to be concentrated in their 
home state. Larger advisers with national businesses, should be 
registered with the Commission and be subject to national rules.'' 
(emphasis added)).
    \154\ Id. (``Both the Commission and the states will be able to 
continue bringing anti-fraud actions against investment advisers 
regardless of whether the investment adviser is registered with the 
state or the SEC.'')
    \155\ While there is no legislative history addressing the scope 
of section 203A(b)(2), Congress used similar language to preserve 
state anti-fraud laws when it preempted state regulation of 
securities offerings in Title I of the 1996 Act. See section 
18(c)(1) of the Securities Act of 1933 (15 USC 77r(c)(1)) (``the 
(state) securities commission(s) * * * shall retain jurisdiction 
under the laws of such State(s) to investigate and bring enforcement 
actions with respect to fraud or deceit. * * *'' (emphasis added)). 
The House report discussing that section explained that ``(i)n 
preserving State laws against fraud and deceit * * * the Committee 
intends to prevent the States from indirectly doing what they have 
been prohibited from doing directly. * * * The legislation preempts 
authority that would allow the States to employ the regulatory 
authority they retain to reconstruct in a different form the 
regulatory regime * * * that section 18 has preempted.'' House 
Report, supra note 96, at 34. The Senate Report discusses a similar 
section in the Senate bill, stating that ``(t)he Committee clearly 
does not intend for the ``policing'' authority to provide states 
with a means to undo the state registration preemptions.'' Senate 
Report, supra note 4, at 15.
    \156\ Although the Commission is subject to no similar 
prohibition with regard to the application of its prophylactic rules 
to state-registered advisers, the Commission is making such rules 
inapplicable to state-registered advisers in recognition of the 
clearly stated purposes of Congress in passing the Coordination Act. 
See infra section II.I of this Release.
---------------------------------------------------------------------------

I. Other Amendments to Advisers Act Rules

    The Commission proposed to amend several rules under the Advisers 
Act to reflect changes made by the Coordination Act.157 The 
few commenters that addressed these proposed amendments generally 
supported them, and the Commission is adopting the amendments as 
proposed.
---------------------------------------------------------------------------

    \157\ See generally Proposing Release at section II.H.
---------------------------------------------------------------------------

1. Amendments to Form ADV; Elimination of Form ADV-S
    As proposed, the Commission is amending Form ADV to add a new 
Schedule I, which is substantially the same as Form ADV-
T.158 Schedule I will be used by the Commission to screen 
applicants as to eligibility for Commission registration. Schedule I is 
required to be included with all new registrations filed on or after 
July 8, 1997. Additionally, the Commission is adopting amendments to 
rule 204-1 to require an adviser to file an amended Schedule I annually 
within 90 days of the end of the adviser's fiscal year.159

[[Page 28127]]

The Commission also is amending Items 18 and 19 to Part I of Form ADV 
to require advisers to determine discretionary and non-discretionary 
assets under management in the same manner as required by Instruction 7 
of Schedule I.
---------------------------------------------------------------------------

    \158\ See supra section II.C.1.a of this Release. Schedule I is 
attached to this Release as Appendix B.
    \159\ 17 CFR 275.204-1(a)(1).
---------------------------------------------------------------------------

    Like Form ADV-T, Schedule I requires an adviser to indicate whether 
it remains eligible for Commission registration. Unlike Form ADV-T, 
however, Schedule I does not operate as a request for withdrawal of the 
adviser's registration from the Commission; rather, an adviser that 
indicates that it is not eligible for Commission registration on 
Schedule I is required to withdraw from Commission registration by 
filing Form ADV-W.160
---------------------------------------------------------------------------

    \160\ Instruction 6 to Schedule I. A separate Form ADV-W 
continues to be required in order to assure that the Commission 
staff is able to act promptly on the withdrawal from registration. 
Subject to the grace period under rule 203A-1(c), failure to file 
the completed Form ADV-W will subject an adviser to the commencement 
of proceedings to cancel its registration.
---------------------------------------------------------------------------

    The Commission no longer has any regulatory need for advisers to 
file Form ADV-S, the annual report for advisers registered under the 
Advisers Act, and therefore is eliminating the requirement to file Form 
ADV-S, amending rule 204-1 to delete references to Form ADV-S, and 
amending rule 279.3 to refer to Form ADV-T.
2. Rule 204-2--Books and Records
    In light of the Congressional determination not to subject advisers 
registered with the states to substantive federal regulatory 
requirements after July 8, 1997, the Commission is amending rule 204-2 
to make the recordkeeping requirements of that rule applicable only to 
advisers registered with the Commission.161 Additionally, 
the Commission is amending rule 204-2 to require advisers that register 
with the Commission after July 8, 1997 to preserve any books and 
records the adviser was previously required to maintain under state 
law.162 These books and records are required to be 
maintained in the same manner and for the same period of time as the 
other books and records required to be maintained under rule 204-
2(a).163
---------------------------------------------------------------------------

    \161\ Rule 204-2(a) (17 CFR 275.204-2(a)).
    \162\ Rule 204-2(k) (17 CFR 275.204-2(k)).
    \163\ Under rule 204-2(k), an adviser changing from state to 
federal registration will count the period during which the books 
and records were maintained under state law toward compliance with 
the Commission's recordkeeping requirement. For example, an adviser 
that was state-registered for one year prior to registering with the 
Commission will be required to maintain the books and records 
required under state law for an additional four years to fulfill the 
requirement of rule 204-2(e) (17 CFR 275.204-2(e)) that books and 
records be maintained for five years.
---------------------------------------------------------------------------

3. Rule 205-3--Performance Fee Arrangements
    By its terms, section 205 prohibits all advisers, except those 
exempt from registration under section 203(b), from entering into 
advisory contracts in which the adviser would be compensated on the 
basis of performance of client accounts.164 Therefore, 
advisers prohibited from registering with the Commission after July 8, 
1997 will continue to be subject to the limitations of section 
205.165 Rule 205-3 provides an exemption from these 
limitations, but the rule applies only to advisers registered with the 
Commission. The Commission is amending rule 205-3 to make this 
exemption available to all advisers, including those registered only 
under state law after July 8, 1997.166
---------------------------------------------------------------------------

    \164\ Section 205(a)(1) (15 U.S.C. 80b-5(a)(1)). Section 
205(a)(1) provides that ``[n]o investment adviser, unless exempt 
from registration pursuant to section 203(b)'' may enter into, 
extend, or renew any investment advisory contract that provides for 
performance-based compensation.
    \165\ State-registered advisers generally would not be exempted 
from registration under section 203(b), but rather, would be 
prohibited from registration under section 203A(a).
    \166\ The extension of rule 205-3's safe harbor to state-
registered advisers does not preclude a state from further 
restricting performance fee arrangements.
---------------------------------------------------------------------------

4. Rule 206(3)-2--Agency Cross Transactions
    By its terms, section 206(3) of the Advisers Act prohibits all 
advisers from engaging in agency cross transactions.167 Rule 
206(3)-2 provides a non-exclusive safe harbor from this prohibition, 
but applies only to certain advisers and broker-dealers registered with 
the Commission.168 Therefore, advisers prohibited from 
registering with the Commission after July 8, 1997 will continue to be 
subject to the limitations of section 206(3). The Commission is 
amending rule 206(3)-2 to make this safe harbor available to all 
advisers, including those registered only under state law after July 8, 
1997.169
---------------------------------------------------------------------------

    \167\ Section 206(3) (15 U.S.C. 80b-6(3)). Section 206(3) makes 
it unlawful for any investment adviser acting as principal for its 
own account to knowingly sell any security to, or purchase any 
security from, a client, without disclosing to the client in writing 
before the completion of the transaction the capacity in which the 
adviser is acting and obtaining the client's consent. This 
limitation also applies if the adviser is acting as a broker for a 
person other than the client in effecting such a transaction.
    \168\ 17 CFR 275.206(3)-2.
    \169\ The amendment to rule 206(3)-2 was not proposed in the 
Proposing Release, but the Commission believes that good cause 
exists to adopt the amendment without the notice and comment period 
required under section 553(b)(B) of the Administrative Procedure Act 
(5 U.S.C. 553(b)(B)). In the Proposing Release, the Commission 
proposed to amend several rules under the Advisers Act to reflect 
changes made by the Coordination Act by exempting state-registered 
advisers from Commission regulation. In most cases, these amendments 
involved modifying the scope of the rules to apply only to 
Commission-registered advisers. See amendments to rules 204-2, 
206(4)-1, 206(4)-2, and 206(4)-4 (discussed in sections II.H.2 and 
II.H.4 of the Proposing Release and sections II.I.2 and II.I.5 of 
this Release). In another case, however, a rule was proposed to be 
broadened in order to make an existing exemption available to all 
advisers, including state-registered advisers. See amendments to 
rule 205-3 (discussed in section II.H.3 of the Proposing Release and 
section II.I.3 of this Release). In preparing the Proposing Release, 
the Commission staff surveyed the rules under the Advisers Act to 
determine which rules needed to be amended. The need to amend rule 
206(3)-2, however, was brought to the attention of the Commission 
staff after the publication of the Proposing Release in the Federal 
Register. The Commission believes good cause exists to amend rule 
206(3)-2 without notice and comment. The decision to amend rule 
206(3)-2 does not reflect a specific policy decision, but rather, is 
part of the technical amendment of all the rules under the Advisers 
Act to reflect the changes of the Coordination Act. The public 
effectively was on notice that the Commission was undertaking such a 
technical revision to the Advisers Act rules. See Proposing Release 
at section II.H.1. (``The Commission is proposing amendments to 
several rules under the Advisers Act to reflect changes made by the 
Coordination Act.'').
---------------------------------------------------------------------------

5. Rules 206(4)-1, 206(4)-2, and 206(4)-4--Anti-Fraud Rules
    The Commission has adopted four rules pursuant to its authority 
under section 206(4) to ``define, and prescribe means reasonably 
designed to prevent * * * acts, practices, and courses of business 
[that] are fraudulent, deceptive, or manipulative.'' 170 
These rules prohibit certain abusive advertising practices, govern an 
adviser's custody of client funds and securities, address the payment 
of cash to persons soliciting on behalf of an adviser, and require 
certain disclosure to clients regarding an adviser's financial 
condition and disciplinary history.171 Each of these rules, 
other than the cash solicitation rule, applies to all advisers, 
regardless of whether they are registered with the Commission. The 
Commission is amending these rules to make them applicable only to 
advisers registered (or required to be registered) with the Commission. 
By excluding advisers not registered with the Commission from these 
rules, the Commission is not suggesting that the practices prohibited 
by these rules would not be prohibited by section 206.172 
Rather, the Commission recognizes that these rules contain prophylactic 
provisions, and

[[Page 28128]]

that after the effective date of the Coordination Act, the application 
of these provisions to state-registered advisers is more appropriately 
a matter for state law.173
---------------------------------------------------------------------------

    \170\ 15 U.S.C. 80b-6(4).
    \171\ See rules 206(4)-1 to -4 [17 CFR 275.206(4)-1 to -4].
    \172\ The anti-fraud provisions of the Advisers Act will 
continue to apply to state-registered advisers after July 8, 1997. 
See Proposing Release at note 108 and accompanying text.
    \173\ The Commission also is amending rule 206(4)-3, the cash 
solicitation rule, to correct cross-references that were made 
incorrect by changes made to the Advisers Act by the Coordination 
Act.
---------------------------------------------------------------------------

III. Effective Dates

    The effective date of the Coordination Act is July 8, 1997. With 
the exception of rule 203A-2, the rules and rule amendments adopted in 
this Release will take effect on that same date, July 8, 1997.
    Rule 203A-2, which provides four exemptions from the prohibition on 
Commission registration,174 will become effective July 21, 
1997. The Office of Management and Budget has determined that rule 
203A-2 is a ``major rule'' under Chapter 8 of the Administrative 
Procedure Act,175 which was added by the Small Business 
Regulatory Enforcement Fairness Act of 1996 (``SBREFA'').176 
SBREFA requires all final agency rules to be submitted to Congress for 
review and requires generally that the effective date of a major rule 
be delayed for 60 days pending Congressional review. A major rule may 
become effective at the end of the 60-day review period, unless 
Congress passes a joint resolution disapproving the rule.177
---------------------------------------------------------------------------

    \174\ See supra section II.D of this Release.
    \175\ 5 U.S.C. 801.
    \176\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). Under 
SBREFA, a rule is ``major'' if the rule is likely to result in (i) 
an annual effect on the economy of $100 million or more, (ii) a 
major increase in costs or prices for consumers or individual 
industries, or (iii) significant adverse effects on competition, 
investment, or innovation. 5 U.S.C. 804(2).
    \177\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    As discussed above, all investment advisers registered with the 
Commission on July 8, 1997 are required to file a completed Form ADV-T 
with the Commission no later than that date.178 Advisers 
that are eligible for an exemption from the prohibition on Commission 
registration provided by rule 203A-2 must indicate that eligibility by 
checking the appropriate box on Form ADV-T. Although the exemptive rule 
will not become effective until July 21, 1997, the instructions to Form 
ADV-T require an investment adviser to indicate eligibility for an 
exemption assuming that rule 203A-2 will become 
effective.179 Advisers that will be eligible for an 
exemption under rule 203A-2 will remain registered with the Commission 
between July 8, 1997 and the rule 203A-2 effective date, although the 
exemptive rule will not be effective during that period. If Congress 
were to pass a joint resolution during that time period disapproving 
rule 203A-2, the Commission would notify all such advisers that those 
exemptions are not available.
---------------------------------------------------------------------------

    \178\ See supra section II.A of this Release.
    \179\ See Instruction 5(a) to Form ADV-T. Likewise, investment 
advisers registering with the Commission on or after July 8, 1997, 
but before July 21, 1997, should indicate eligibility for an 
exemption on Schedule I assuming that rule 203A-2 will become 
effective.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Certain provisions of the rules and rule amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The 
Commission submitted them to the Office of Management and Budget 
(``OMB'') for review and OMB has approved them in accordance with 44 
U.S.C. 3507(d). The title for the collections of information and their 
OMB control numbers are: ``Form ADV''--3235-0049, ``Schedule I''--3235-
0490, ``Rule 203A-5 and Form ADV-T''--3235-0483, and ``Rule 204-2''--
3235-0278, all under the Advisers Act. The Commission did not receive 
any comments from the public in response to its request for comments in 
the Paperwork Reduction Act section of the Proposing Release. The final 
rules as adopted do not include any changes that materially affect the 
collections of information, including their requirements, purpose, use, 
or necessity. In response to comments from OMB, the Commission revised 
part of its Paperwork Reduction Act submission to OMB to reflect one 
collection of information on Form ADV, as amended, and another 
collection of information on new Schedule I to Form ADV. As described 
below, this revision, as well as an updated estimate regarding the 
number of respondents to the collections of information, has resulted 
in a change to the burden estimates for Form ADV and Schedule I. The 
collections of information imposed by Form ADV, Schedule I, rule 203A-5 
and Form ADV-T, and rule 204-2 are in accordance with 44 U.S.C. 
3507(d). An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.

Form ADV

    Form ADV is required by rule 203-1 (17 CFR 275.203-1) to be filed 
by every applicant for registration with the Commission as an 
investment adviser. Rule 204-1 (17 CFR 275.204-1) sets forth the 
circumstances requiring the filing of an amended Form ADV. Registrants 
must file an amended Form ADV only when information on the initial Form 
ADV filing has changed, either at the end of the fiscal year or 
``promptly'' for certain material changes. The Commission amended rule 
204-1 to require an adviser additionally to file the cover page of Form 
ADV annually within 90 days after the end of the adviser's fiscal year 
(along with a new Schedule I, discussed below), regardless of whether 
other changes have taken place during the year.
    The Commission has revised its estimate of the overall burden hours 
required by Form ADV as a result of a change in the number of estimated 
respondents. The likely respondents to this collection of information 
are all applicants for registration with the Commission after July 8, 
1997 as well as all currently-registered advisers who will remain 
registered after July 8, 1997. The number of currently-registered 
advisers is 23,350, and the Commission estimates that approximately 28 
percent of these advisers (6,538) will remain registered after July 8, 
1997. The Commission estimates that it will take currently-registered 
advisers 1.0672 hours, on average, to fill out and file an amended Form 
ADV, and that currently-registered advisers will, on average, file Form 
ADV 1.5 times per year. The Commission also estimates that it will take 
new applicants 9.0063 hours, on average, to fill out and file their 
first Form ADV. The Commission estimates that approximately 750 new 
applicants will register with the Commission per year. Of the 750 new 
applicants per year, 650 will amend Form ADV an average of 1 time 
annually. The estimated 100 newly-formed investment advisers that will 
rely on the exemption provided by 203A-2(d) will amend Form ADV an 
average of 2 times annually (for purposes of updating their Schedule I 
120 days after initial registration). Accordingly, the revised annual 
burden estimate is 18,128 total hours in the aggregate for all 
respondents to Form ADV.
    The collection of information required by Form ADV is mandatory, 
and responses are not kept confidential. The amendments to the 
instructions to Form ADV and rule 204-1 do not affect the burden of 
filing Form ADV itself. The additional burden of filing the Schedule I 
is included in the analysis of Schedule I (below).

Schedule I

    Schedule I is a new schedule to Form ADV. Schedule I requires an 
adviser to declare whether it is eligible for Commission registration. 
Schedule I, as

[[Page 28129]]

part of Form ADV, is required to be filed with an investment adviser's 
initial application on Form ADV. The rules imposing this collection of 
information are found at 17 CFR 275.203-1 and 17 CFR 279.1. The 
Commission has not amended rule 203-1 or rule 279.1. Rule 204-1 (17 CFR 
275.204-1) sets forth the circumstances requiring the filing of an 
amended Form ADV. The Commission amended rule 204-1 to require an 
adviser to file an amended Schedule I annually within 90 days after the 
end of the adviser's fiscal year. In addition, an investment adviser 
relying on the ``reasonable expectation'' exemption from the 
prohibition on Commission registration provided by rule 203A-2(d) is 
required to file an amended Schedule I to Form ADV at the end of 120 
days after its initial registration with the Commission. If the adviser 
indicates on the amended Schedule I that it has not become eligible to 
register with the Commission, the adviser is required to file a Form 
ADV-W concurrently with the Schedule I, thereby withdrawing its 
registration with the Commission.180 The collection of the 
information required by Schedule I is mandatory and responses will not 
be kept confidential.
---------------------------------------------------------------------------

    \180\ Such an adviser also is required to file a short written 
undertaking on Schedule E to Form ADV, simply stating that the 
adviser ``will withdraw from registration'' if on the 120th day 
after registering with the Commission the adviser does not meet the 
eligibility requirements for registration under section 203A of the 
Advisers Act and rules thereunder. This requirement imposes only a 
nominal burden, subsumed under the burden attributed to the Form 
ADV.
---------------------------------------------------------------------------

    The Commission has revised its estimate of the overall burden hours 
required by Schedule I as a result of a change in the number of 
estimated respondents and by considering Schedule I as a separate 
collection of information from Form ADV. The likely respondents to this 
collection of information are all applicants for registration with the 
Commission after July 8, 1997 as well as all currently-registered 
advisers who will remain registered after July 8, 1997. As noted above, 
the Commission estimates that approximately 6,538 advisers will remain 
registered with the Commission after July 8, 1997. These currently-
registered advisers will file Schedule I once per year. Of the 750 new 
applicants per year, 650 will file Schedule I once per year. The 
Commission estimates that approximately 100 newly registered advisers 
each year will rely on the ``reasonable expectation'' exemption 
provided by rule 203A-2(d), and that these advisers will file Schedule 
I twice per year. The Commission estimates that it will take all 
advisers, whether currently-registered or new applicants, 52.13 
minutes, on average, to fill out and file Schedule I. Accordingly, the 
revised annual burden estimate is 6,419 total hours in the aggregate 
for all respondents to Schedule I.

Rule 203A-5 and Form ADV-T

    Providing the information required by Form ADV-T is mandatory, and 
responses will not be kept confidential. Rule 203A-5 and Form ADV-T are 
being adopted substantially as proposed, and the burden estimate has 
not changed.

Rule 204-2

    Providing the information and keeping the books and records 
required by rule 204-2 is mandatory, and responses generally are kept 
confidential. The amendments to rule 204-2 were adopted substantially 
as proposed, and the burden estimate has not changed.

V. Cost/Benefit Analysis

    In adopting these rules the Commission has given consideration to 
their benefits as well as their costs. Certain of the new rules and 
rule amendments, as well as Form ADV-T and new Schedule I to Form ADV, 
are necessary to implement the Coordination Act, both initially and on 
an on-going basis.181 They will establish the process by 
which the Commission will identify those larger advisers that will 
remain registered with the Commission and those smaller advisers that 
are not eligible for Commission registration. This process will 
implement Congress' determination that only larger advisers be 
regulated by the Commission. In addition, by identifying smaller 
advisers whose registration will be withdrawn, these rules will work to 
prevent the preemption of state laws regulating those small advisers 
that Congress intended to be regulated solely by the states. Although 
both of these benefits are substantial, neither is quantifiable. These 
rules impose some incidental preparation costs on investment advisers 
required to file Form ADV-T and on those advisers that will, on an 
ongoing basis, be required to file Schedule I. Without implementing 
rules, however, the goals of the Coordination Act would not be 
achieved.
---------------------------------------------------------------------------

    \181\ See rules 203A-5 and 204-1.
---------------------------------------------------------------------------

    Other rules related to the eligibility for and process of 
Commission registration and de-registration are designed to reduce 
costs on investment advisers.182 These rules (i) relieve 
advisers from the regulatory burden of frequently having to register 
and then de-register with the Commission as a result of changes in the 
amount of their assets under management, (ii) provide guidance on how 
an adviser should determine its assets under management, and (iii) 
provide a safe harbor for advisers that register with state securities 
authorities based on a reasonable belief that they are prohibited from 
registering with the Commission because they have insufficient assets 
under management. These rules are expected to provide investment 
advisers with substantial benefits, and are not expected to impose any 
significant costs on investment advisers or investors.
---------------------------------------------------------------------------

    \182\ See rule 203A-1, Instruction 8 to Form ADV-T, and rule 
203A-4.
---------------------------------------------------------------------------

    One rule exempts certain classes of advisers from the prohibition 
on Commission registration, based on a finding by the Commission that 
the prohibition on Commission registration would be unfair, a burden on 
interstate commerce, or inconsistent with the purposes of the 
Coordination Act.183 This rule should reduce regulatory 
burdens on investment advisers, without significantly affecting 
compliance costs or imposing other significant costs on investment 
advisers or the investing public. Although the Commission will incur 
the incidental additional costs associated with regulating the advisers 
that qualify for these exemptive rules, the Commission has concluded 
that these costs are appropriate in light of the purposes of the 
Coordination Act and the exemptive authority provided to the Commission 
therein.
---------------------------------------------------------------------------

    \183\ See rule 203A-2.
---------------------------------------------------------------------------

    The Commission is also adopting several definitional rules to fill 
gaps left open by the Coordination Act. These rules are intended to 
permit investment advisers to more readily ascertain their regulatory 
status and that of their supervised persons. Investment advisers 
generally are expected to benefit as a result of this increased 
certainty. In particular, Commission-registered advisers and their 
supervised persons may incur substantial benefits as a result of the 
definitions of investment adviser representative and place of business 
to the extent that the failure of the Commission to define these terms 
could lead to the application of significantly broader and non-uniform 
definitions by the states. Broader state definitions would subject a 
greater number of supervised persons to state qualification 
requirements than the

[[Page 28130]]

Commission believes Congress intended.184 The Commission 
believes that institutional and other non-retail clients do not need 
the protections of state qualification requirements. The Commission has 
concluded, therefore, that there are no substantial costs associated 
with the narrower definitions the Commission is adopting.
---------------------------------------------------------------------------

    \184\ See supra section II.F.
---------------------------------------------------------------------------

    Finally, amendments to several existing rules under the Advisers 
Act reflect the Coordination Act's reallocation of regulatory 
responsibilities over investment advisers. These amendments are not 
expected to provide substantial savings to investment advisers or to 
impose significant costs on investment advisers or the investing 
public. They will, however, have important regulatory benefits, because 
in each case the rules will either work to implement the Coordination 
Act's goal of reallocating regulatory responsibility for advisers 
between the Commission and the securities authorities of the states, or 
to ensure that smaller, state-registered advisers are not unfairly 
disadvantaged.
    A complete cost-benefit analysis (including supporting data) 
prepared by the Commission staff is available for public inspection in 
File No. S7-31-96, and a copy may be obtained by contacting Cynthia G. 
Pugh, Securities and Exchange Commission, 450 5th Street, NW., Stop 10-
2, Washington, DC 20549.

VI. Summary of Regulatory Flexibility Analysis

    The Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA'') in accordance with the provisions of the Regulatory 
Flexibility Act (``Reg. Flex. Act'') (5 U.S.C. 604) in connection with 
the adoption of rule and form amendments described in this Release. An 
Initial Regulatory Flexibility Analysis (``IRFA'') was prepared in 
accordance with 5 U.S.C. 603 in conjunction with the Proposing Release 
and was made available to the public. A summary of the IRFA was 
published in Investment Advisers Act Release No. 1601 (Dec. 20, 1996) 
(61 FR 68480, 68491-92 (Dec. 27, 1996)). As discussed further below, 
one comment was received on the IRFA.
    The FRFA explains both the need for, and the objectives of, the 
rules adopted by the Commission. As set forth in greater detail in the 
FRFA, the Coordination Act makes several amendments to the Advisers 
Act, the most significant of which reallocates federal and state 
responsibilities for the regulation of investment advisers currently 
registered with the Commission by limiting the application of federal 
law and preempting certain state laws. The adopted rules and rule 
amendments implement provisions of the Coordination Act that reallocate 
regulatory responsibilities for investment advisers between the 
Commission and the securities regulatory authorities of the states. The 
adopted rules establish the process by which all investment advisers 
that are currently registered with the Commission will determine their 
eligibility for Commission registration as of July 8, 1997, the 
effective date of the Coordination Act. The adopted amendments to 
several rules under the Advisers Act generally reflect the changes made 
by the Coordination Act.
    The FRFA also (i) summarizes the significant issues raised by 
public comments in response to the IRFA, (ii) summarizes the 
Commission's assessment of such issues, and (iii) states any changes 
made in the proposed rules as a result of such comments. The Commission 
received one comment on the IRFA,185 which noted that the 
IRFA did not consider the potential impact of the proposed rules on 
small advisers that manage funds regulated under ERISA.186 
According to the commenter, by failing to discuss such an exemption or 
other potential alternatives that could minimize this impact on small 
ERISA advisers,187 the Commission overlooked an important 
effect of the proposed rules. The Regulatory Flexibility Act requires 
that an agency describe in the IRFA those significant alternatives to 
the proposed rule that would further the stated objectives of the 
applicable statutes and that would minimize the significant economic 
impact of the proposed rule on small entities.188 In 
response to this comment, the FRFA discusses the possibility of 
exempting these small advisers from the prohibition on Commission 
registration, and explains the Commission's conclusion that such an 
exemption would not be consistent with the objectives of the 
Coordination Act.
---------------------------------------------------------------------------

    \185\ See Letter from The Honorable Christopher S. Bond, 
Chairman of the Senate Committee on Small Business (Feb. 25, 1997) 
to Arthur Levitt, Chairman, SEC (available in SEC File No. S7-31-
96).
    \186\ See generally section II.D.5 of this Release. As discussed 
in that section, ERISA protects a plan's named fiduciary from 
liability for the individual decisions of an investment manager 
appointed by the fiduciary to manage the plan's assets. The term 
investment manager is defined by ERISA to include certain investment 
advisers that are registered under the Advisers Act, as well as 
certain banks and insurance companies. Although the Coordination Act 
amended ERISA to include state-registered investment advisers as 
investment managers, that amendment expires two years after 
enactment, on October 11, 1998.
    \187\ 5 U.S.C. 603(c).
    \188\ See id.
---------------------------------------------------------------------------

    The FRFA also provides a description of and an estimate of the 
number of small entities to which the rules will apply. For purposes of 
the Advisers Act and the Reg. Flex. Act, an investment adviser 
generally is a small entity (i) if it manages assets of $50 million or 
less, in discretionary or non-discretionary accounts, as of the end of 
its most recent fiscal year and (ii) if it renders other advisory 
services, has $50,000 or less in assets related to its advisory 
business. 189 The Commission estimates that up to 17,650 of 
approximately 23,350 investment advisers currently registered with the 
Commission are small entities. The Commission estimates that, after 
July 8, 1997, approximately 850 of these small-entity advisers will 
remain eligible for registration with the Commission. 190
---------------------------------------------------------------------------

    \189\ See rule 275.0-7 (17 CFR 275.0-7).
    \190\ The Commission estimates that approximately 16,800 (72 
percent) of the 23,350 advisers currently registered with the 
Commission will be ineligible for Commission registration after July 
8, 1997. Most of those 16,800 advisers will be small entities. 
Certain small entity advisers, however, will remain eligible for 
Commission registration, including, for example, small entity 
advisers in the four states that do not currently regulate 
investment advisers. The IRFA estimated that roughly 800 small 
entity advisers will remain eligible for Commission registration 
after the effective date of the Coordination Act. The estimate 
presented in the IRFA has been increased to reflect the additional 
advisers that have registered with the Commission.
---------------------------------------------------------------------------

    As required by the Reg. Flex. Act, the FRFA describes the projected 
reporting, recordkeeping and other compliance requirements of the 
rules, and includes an estimate of the classes of small entities that 
will be subject to the requirements and the type of professional skills 
necessary for preparation of the reports or records. Rule 203A-5 
requires all investment advisers registered with the Commission on July 
8, 1997, to file new Form ADV-T no later than that date. The FRFA 
notes, however, that the Commission anticipates that as a consequence 
of this one-time filing, approximately 72 percent of the investment 
advisers currently registered with the Commission will no longer be 
subject to federal investment adviser regulatory requirements, 
including reporting and recordkeeping requirements. The incidental 
burden imposed by this one-time filing requirement is necessary in 
order to implement the Coordination Act. The FRFA explains that the 
Commission devised Form ADV-T so that an individual familiar with the 
adviser's services and operations may complete the form without legal 
or other professional assistance, although in

[[Page 28131]]

some cases an adviser may need to seek outside assistance in connection 
with the calculation of its assets under management.
    The adopted amendments to Form ADV add new Schedule I, which must 
be completed by every adviser registering with the Commission after 
July 8, 1997, and revise Items 18 and 19 to Part I of Form ADV to 
direct advisers to determine discretionary and non-discretionary assets 
under management in the same manner as required by Schedule I. Schedule 
I requires advisers to report information similar to that required by 
Form ADV-T. The Commission believes that the burden this new schedule 
imposes on advisers is necessary in order to accomplish, on an ongoing 
basis, the Coordination Act's reallocation of regulatory responsibility 
for investment advisers. The FRFA notes that like Form ADV-T, the 
Commission has designed Schedule I so that an individual familiar with 
the adviser's services and operations can complete this schedule 
without legal or other professional assistance, although in some cases, 
an adviser may need to seek outside assistance in connection with the 
calculation of its assets under management. The FRFA explains that the 
annual burden imposed on small entity advisers by the amendments to 
Items 18 and 19 of Form ADV is expected to be negligible.
    Rule 203A-2(d) permits a newly formed investment adviser with a 
reasonable expectation that it will be eligible for Commission 
registration within 120 days after such registration becomes effective, 
to register with the Commission. The rule requires the newly formed 
adviser (i) to include on Schedule E to its Form ADV an undertaking to 
withdraw from Commission registration if, on the 120th day after 
registering with the Commission, it has not become eligible for 
Commission registration, and (ii) to file an amended Schedule I to Form 
ADV at the end of the 120-day period. If the amended Schedule I 
indicates that the adviser has not become eligible for Commission 
registration, the rule requires the adviser to file concurrently a Form 
ADV-W, thereby withdrawing its Commission registration. The FRFA notes 
that this burden on newly formed advisers that choose to rely on this 
rule will be outweighed by the cost savings and benefits provided by 
the rule.
    The adopted amendments to rule 204-1 require all Commission-
registered investment advisers to update new Schedule I annually. The 
FRFA explains that because the Commission has eliminated the 
requirement that Commission-registered advisers annually file Form ADV-
S, this new annual reporting requirement should not be a significant 
additional burden on the small-entity investment advisers that remain 
eligible for Commission registration after July 8, 1997.
    The adopted amendments to rule 204-2 make the books and 
recordkeeping requirements of that rule applicable only to advisers 
registered with the Commission, and so eliminate these recordkeeping 
requirements with respect to small entities and other advisers that are 
not eligible for Commission registration after July 8, 1997. The 
amendments to this rule also require advisers that register with the 
Commission after July 8, 1997, to preserve any books and records the 
adviser was previously required to maintain under state law, but this 
requirement is not expected to be a significant additional burden on 
advisers that register with the Commission after July 8, 1997. The FRFA 
notes that the adopted amendment does not have any impact on the type 
of professional skills necessary for compliance with rule 204-2.
    The FRFA also describes the steps the Commission has taken to 
minimize the significant economic impact on small entities consistent 
with the stated objectives of applicable statutes.
    As discussed further in the FRFA, in connection with the adopted 
rules, the Commission considered the following alternatives to minimize 
the impact on small entities: (a) The establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (b) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rule for small entities; (c) the use 
of performance rather than design standards; and (d) exemption from 
coverage of the rule, or any part thereof, for small 
entities.191 The Commission is easing the impact on small 
entities by increasing the threshold for Commission registration from 
$25 to $30 million of assets under management, and by providing an 
optional exemption from Commission registration for advisers with 
assets under management of between $25 and $30 million. The exemption 
gives such advisers, including many small entities, the flexibility to 
decide when it is best for them to transition from state to Commission 
registration if their assets under management increase to $25 million 
or more, and to transition from Commission to state registration if 
their assets decrease to $30 million or less, and so should enable 
these advisers to avoid the unnecessary costs and burdens associated 
with frequent transitions between regulators. The Commission is also 
adopting a second exemption from the prohibition on Commission 
registration that permits Commission registration by newly formed 
advisers that have a reasonable expectation of becoming eligible for 
Commission registration within 120 days. This exemption will help to 
ensure that newly formed advisers, including small entity advisers, 
will not be required to register with numerous states, only to de-
register and re-register with the Commission shortly thereafter once 
their assets under management increase to $25 million.
---------------------------------------------------------------------------

    \191\ The Commission also considered these alternatives in 
connection with the proposed rules. See IRFA; Investment Advisers 
Act Rel. No. 1601 (Dec. 20, 1996) (61 FR 68480, 68491-92 (Dec. 27, 
1996)) (summary of IRFA).
---------------------------------------------------------------------------

    The FRFA explains that in the proposing release, the Commission 
also sought comment on other possible alternatives that could meet the 
need for flexibility for small entities, including whether the 
transition from state to Commission registration should include a grace 
period, or whether a state-registered adviser should only have to 
determine once annually whether it is required to register with the 
Commission due to an increase in its assets under management. In light 
of the comments on these issues, the Commission is adopting rule 203A-
1(d), which permits (but does not require) a state-registered adviser 
whose assets under management increase to $30 million to postpone 
registering with the Commission until 90 days after it has reported the 
increase in its assets under management in its annual filing with its 
state regulator. This rule will provide advisers, including small 
entity advisers, that have assets under management of close to $30 
million, additional flexibility in determining if and when to transfer 
to Commission registration.
    The FRFA also discusses the general concern expressed by some 
commenters that the requirement that small advisers withdraw from 
Commission registration by filing Form ADV-T will have an adverse 
competitive effect on small advisers. The FRFA explains that the 
Commission believes that this concern is too speculative to be 
considered a significant economic impact on small advisers. Although 
there is some evidence that smaller advisers believe that holding 
themselves out as SEC-registered has marketing advantages, the 
Commission is not aware of evidence that shows the loss of such status 
would result in the loss of clients of inhibit an

[[Page 28132]]

adviser's ability to market itself to new clients. Moreover, as 
detailed in the FRFA, the Commission believes that an exemption from 
the prohibition on Commission registration for small advisers that 
believe they would be put to a competitive disadvantage if required to 
de-register would be inconsistent with the purposes of the Coordination 
Act.
    As detailed in the FRFA, the Commission considered exempting small 
advisers that manage accounts subject to ERISA from the prohibition on 
Commission registration. Several commenters expressed concern that 
unless they were permitted to remain registered with the Commission, 
they effectively would be denied the ability to manage ERISA accounts 
and would be harmed competitively. The FRFA explains that, although the 
Commission shares these commenters' concerns,192 the 
Commission believes such an exemption would be inconsistent with the 
purposes of the Coordination Act and outside the scope of the 
Commission's authority. The grant of exemptive authority in section 
203A(c) was designed to permit Commission registration for advisers 
that are larger, national firms, but do not have $25 million under 
management. On April 7, 1997, however, Chairman Levitt wrote to the 
leadership of the Congressional committees with jurisdiction over 
ERISA, urging that legislation be enacted to make permanent the 
amendment of ERISA that would permit state-registered advisers to serve 
as investment managers.193
---------------------------------------------------------------------------

    \192\ For analytical purposes, the Commission assumes that ERISA 
assets may make up as much as 30% (or $6.8 billion) of the total of 
approximately $22.7 billion of discretionary assets managed by all 
advisers that manage less than $25 million of discretionary assets. 
Assuming that all of those assets would be transferred from those 
smaller advisers, and that on average the smaller advisers earned a 
1% fee to manage those ERISA assets, it is estimated that as much as 
$68 million in fees could be foregone by small advisers that no 
longer qualify as investment managers under ERISA. These fees would 
probably be earned instead by larger advisers that are registered 
with the Commission.
    \193\ Letters from Arthur Levitt, Chairman, SEC (Apr. 7, 1997) 
to The Honorable James M. Jeffords, Chairman, Committee on Labor and 
Human Resources, U.S. Senate, and The Honorable William F. Goodling, 
Chairman, Committee on Education and the Work Force, U.S. House of 
Representatives (available in SEC File No. S7-31-96).
---------------------------------------------------------------------------

    The FRFA is available for public inspection in File No. S7-31-96, 
and a copy may be obtained by contacting Cynthia G. Pugh, Securities 
and Exchange Commission, 450 Fifth Street, NW, Mail Stop 10-2, 
Washington, DC 20549.

VII. Statutory Authority

    The Commission is adopting amendments to rule 203(b)(3)-1 pursuant 
to the authority set forth in section 206A of the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-6A).
    The Commission is adopting new rule 203A-1 pursuant to the 
authority set forth in section 203A(a)(1)(A) (15 U.S.C. 80b-
3A(a)(1)(A)); section 203A(c) (15 U.S.C. 80b-3A(c)); and section 211(a) 
(15 U.S.C. 80b-11(a)) of the Investment Advisers Act of 1940.
    The Commission is adopting new rule 203A-2 pursuant to the 
authority set forth in section 203A(c) of the Investment Advisers Act 
of 1940 (15 U.S.C. 80b-3A(c)).
    The Commission is adopting new rule 203A-3 pursuant to the 
authority set forth in section 202(a)(17) (15 U.S.C. 80b-2(a)(17)) and 
section 211(a) (15 U.S.C. 80b-11(a)) of the Investment Advisers Act of 
1940.
    The Commission is adopting new rule 203A-4 pursuant to the 
authority set forth in section 211(a) of the Investment Advisers Act of 
1940 (15 U.S.C. 80b-11(a)).
    The Commission is adopting new rule 203A-5 pursuant to the 
authority set forth in sections 203(c)(1) and 204 of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-3(c)(1) and 80b-4).
    The Commission is adopting amendments to rule 204-1 pursuant to the 
authority set forth in section 204 of the Investment Advisers Act of 
1940 (15 U.S.C. 80b-4).
    The Commission is adopting amendments to rule 204-2 pursuant to the 
authority set forth in sections 204 and 206(4) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-4 and 80b-6(4)).
    The Commission is adopting amendments to rule 205-3 pursuant to the 
authority set forth in section 206A of the Investment Advisers Act of 
1940 (15 U.S.C. 80b-6A).
    The Commission is adopting amendments to rules 206(4)-1, 206(4)-2, 
and 206(4)-4 pursuant to the authority set forth in section 206(4) of 
the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(4)).
    The Commission is adopting amendments to rule 206(4)-3 pursuant to 
the authority set forth in sections 204, 206, and 211 of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-4, 80b-6, and 80b-11).
    The Commission is adopting new rules 222-1 and 222-2 pursuant to 
the authority set forth in section 211(a) of the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-11(a)).
    The Commission is adopting amendments to rule 279.3, new Form ADV-
T, and amendments to Form ADV pursuant to the authority set forth in 
sections 203(c)(1) and 204 of the Investment Advisers Act of 1940 (15 
U.S.C. 80b-3(c)(1) and 80b-4).

Text of Rules and Forms

List of Subjects in 17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is amended as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    The authority citation for part 275 is revised to read as follows:

    Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6A, 80b-11, unless otherwise noted.
    Section 275.203A-1 is also issued under 15 U.S.C. 80b-3A.
    Section 275.203A-2 is also issued under 15 U.S.C. 80b-3A.
    Section 275.204-2 is also issued under 15 U.S.C. 80b-6.

    2. Section 275.203(b)(3)-1 is revised to read as follows:


Sec. 275.203(b)(3)-1  Definition of ``client'' of an investment 
adviser.

Preliminary Note to Sec. 203(b)(3)-1

    This rule is a safe harbor and is not intended to specify the 
exclusive method for determining who may be deemed a single client 
for purposes of section 203(b)(3) of the Act.

    (a) General. For purposes of section 203(b)(3) of the Act (15 
U.S.C. 80b-3(b)(3)), the following are deemed a single client:
    (1) A natural person, and:
    (i) Any minor child of the natural person;
    (ii) Any relative, spouse, or relative of the spouse of the natural 
person who has the same principal residence;
    (iii) All accounts of which the natural person and/or the persons 
referred to in this paragraph (a)(1) are the only primary 
beneficiaries; and
    (iv) All trusts of which the natural person and/or the persons 
referred to in this paragraph (a)(1) are the only primary 
beneficiaries;
    (2)(i) A corporation, general partnership, limited partnership, 
limited liability company, trust (other than a trust referred to in 
paragraph (a)(1)(iv) of this section), or other legal organization (any 
of which are referred to hereinafter as a ``legal organization'') that 
receives investment advice based on its investment objectives rather 
than

[[Page 28133]]

the individual investment objectives of its shareholders, partners, 
limited partners, members, or beneficiaries (any of which are referred 
to hereinafter as an ``owner''); and
    (ii) Two or more legal organizations referred to in paragraph 
(a)(2)(i) of this section that have identical owners.
    (b) Special Rules. For purposes of this section:
    (1) An owner must be counted as a client if the investment adviser 
provides investment advisory services to the owner separate and apart 
from the investment advisory services provided to the legal 
organization, Provided, however, that the determination that an owner 
is a client will not affect the applicability of this section with 
regard to any other owner;
    (2) An owner need not be counted as a client of an investment 
adviser solely because the investment adviser, on behalf of the legal 
organization, offers, promotes, or sells interests in the legal 
organization to the owner, or reports periodically to the owners as a 
group solely with respect to the performance of or plans for the legal 
organization's assets or similar matters;
    (3) A limited partnership is a client of any general partner or 
other person acting as investment adviser to the partnership;
    (4) Any person for whom an investment adviser provides investment 
advisory services without compensation need not be counted as a client; 
and
    (5) An investment adviser that has its principal office and place 
of business outside of the United States must count only clients that 
are United States residents; an investment adviser that has its 
principal office and place of business in the United States must count 
all clients.
    (c) Holding Out. Any investment adviser relying on this section 
shall not be deemed to be holding itself out generally to the public as 
an investment adviser, within the meaning of section 203(b)(3) of the 
Act (15 U.S.C. 80b-3(b)(3)), solely because such investment adviser 
participates in a non-public offering of interests in a limited 
partnership under the Securities Act of 1933.
    Sections 275.203A-1 through 275.203A-5 are added to read as 
follows:


Sec. 275.203A-1  Eligibility for Commission registration.

    (a) Threshold increased to $30 million of assets under management. 
No investment adviser that is registered or required to be registered 
as an investment adviser in the State in which it maintains its 
principal office and place of business shall register with the 
Commission under section 203 of the Act (15 U.S.C. 80b-3), unless the 
investment adviser:
    (1) Has assets under management of not less than $30,000,000, as 
reported on the Form ADV (17 CFR 279.1) of the investment adviser; or
    (2) Is an investment adviser to an investment company registered 
under the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.].
    (b) Exemption for Investment advisers having between $25 and $30 
million of assets under management. Notwithstanding paragraph (a) of 
this section, an investment adviser that is registered or required to 
be registered as an investment adviser in the State in which it 
maintains its principal office and place of business may register with 
the Commission if the investment adviser has assets under management of 
not less than $25,000,000 but not more than $30,000,000, as reported on 
the Form ADV (17 CFR 279.1) of the investment adviser. This paragraph 
(b) shall not apply to an investment adviser:
    (1) To an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or
    (2) That is exempted by Sec. 275.203A-2 from the prohibition in 
section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) on registering with 
the Commission.

Note to Paragraphs (a) and (b)

    Paragraphs (a) and (b) together make registration with the 
Commission optional for certain investment advisers that have 
between $25 and $30 million of assets under management.

    (c) Grace period for transition from Commission to State 
Registration. An investment adviser registered with the Commission, 
upon filing an amendment to Form ADV (17 CFR 279.1) that indicates that 
it would be prohibited by section 203A(a) of the Act (15 U.S.C. 80b-
3A(a)) from registering with the Commission, shall be subject to having 
its registration cancelled pursuant to section 203(h) of the Act (15 
U.S.C. 80b-3(h)), Provided, That the Commission shall not commence any 
cancellation proceeding on the basis of the amendment until the 
expiration of a period of not less than 90 days from the date the 
investment adviser was required by Sec. 275.204-1(a) to file the 
amendment.
    (d) Transition From State to Commission Registration. An investment 
adviser that is registered with a securities commissioner (or any 
agency or officer performing like functions) of any State that requires 
such investment adviser annually to report to it the amount of assets 
under management pursuant to a form or rule substantially similar to 
Schedule I to Form ADV (17 CFR 279.1) must register with the Commission 
within 90 days after the date on which the investment adviser is 
required to report assets under management of $30,000,000 or more to 
the state securities commissioner, unless, at the time of registration 
with the Commission, the investment adviser is prohibited by section 
203A(a) of the Act (15 U.S.C. 80b-3A(a)) from registering with the 
Commission.

Notes to Paragraph (d)

    1. An investment adviser may be prohibited by section 203A(a) 
from registering with the Commission if its assets under management 
have decreased to an amount less than $25,000,000 during the 90-day 
period.
    2. An investment adviser not eligible to rely on paragraph (d) 
must register with the Commission promptly when no longer prohibited 
by section 203A(a) from registering with the Commission.


Sec. 275.203A-2  Exemptions from prohibition on Commission 
registration.

    The prohibition of section 203A(a) of the Act [15 U.S.C. 80b-3A(a)] 
shall not apply to:
    (a) Nationally recognized statistical rating organizations. An 
investment adviser that is a nationally recognized statistical rating 
organization, as that term is used in paragraphs (c)(2)(vi)(E), (F), 
and (H) of Sec. 240.15c3-1 of this chapter.
    (b)(1) Pension consultants. An investment adviser that is a 
``pension consultant,'' as defined in this section, with respect to 
assets of plans having an aggregate value of at least $50,000,000.
    (2) An investment adviser is a pension consultant, for purposes of 
paragraph (b) of this section, if the investment adviser provides 
investment advice to:
    (i) Any employee benefit plan described in section 3(3) of the 
Employee Retirement Income Security Act of 1974 (``ERISA'') [29 U.S.C. 
1002(3)];
    (ii) Any governmental plan described in section 3(32) of ERISA (29 
U.S.C. 1002(32)); or
    (iii) Any church plan described in section 3(33) of ERISA (29 
U.S.C. 1002(33)).
    (3) In determining the aggregate value of assets of plans, only 
that portion of a plan's assets for which the investment adviser 
provided investment advice (including any advice with respect to the 
selection of an investment adviser to manage such assets) may be 
included. The value of assets shall be determined

[[Page 28134]]

as of the date during the investment adviser's most recent fiscal year 
that the investment adviser was last employed or retained by contract 
to provide investment advice to the plan with respect to those assets.
    (c) Investment advisers controlling, controlled by, or under common 
control with an investment adviser registered with the Commission. An 
investment adviser that controls, is controlled by, or is under common 
control with, an investment adviser eligible to register, and 
registered with, the Commission (``registered adviser''), provided that 
the principal office and place of business of the investment adviser is 
the same as that of the registered adviser. For purposes of this 
paragraph, control means the power to direct or cause the direction of 
the management or policies of an investment adviser, whether through 
ownership of securities, by contract, or otherwise. Any person that 
directly or indirectly has the right to vote 25 percent or more of the 
voting securities, or is entitled to 25 percent or more of the profits, 
of an investment adviser is presumed to control that investment 
adviser.
    (d) Investment advisers expecting to be eligible for Commission 
registration within 120 Days. An investment adviser that:
    (1) Immediately before it registers with the Commission, is not 
registered or required to be registered with the Commission or a 
securities commissioner (or any agency or officer performing like 
functions) of any State and has a reasonable expectation that it would 
be eligible to register with the Commission within 120 days after the 
date the investment adviser's registration with the Commission becomes 
effective;
    (2) Includes on Schedule E to its Form ADV (17 CFR 279.1) an 
undertaking to withdraw from registration with the Commission if, on 
the 120th day after the date the investment adviser's registration with 
the Commission becomes effective, the investment adviser would be 
prohibited by section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) from 
registering with the Commission; and
    (3) Within 120 days after the date the investment adviser's 
registration with the Commission becomes effective, files an amendment 
to Form ADV (17 CFR 279.1) revising Schedule I thereto and, if the 
amendment indicates that the investment adviser would be prohibited by 
section 203A(a) of the Act (15 U.S.C. 80b-3A(a)) from registering with 
the Commission, the amendment is accompanied by a completed Form ADV-W 
(17 CFR 279.2) whereby it withdraws from registration with the 
Commission.


Sec. 275.203A-3  Definitions.

    For purposes of section 203A of the Act (15 U.S.C. 80b-3A) and the 
rules thereunder:
    (a)(1) Investment adviser representative. ``Investment adviser 
representative'' of an investment adviser means a supervised person of 
the investment adviser more than ten percent of whose clients are 
natural persons other than excepted persons described in paragraph 
(a)(3)(i) of this section.
    (2) Notwithstanding paragraph (a)(1) of this section, a supervised 
person is not an investment adviser representative if the supervised 
person:
    (i) Does not on a regular basis solicit, meet with, or otherwise 
communicate with clients of the investment adviser; or
    (ii) Provides only impersonal investment advice.
    (3) For purposes of this section:
    (i) Excepted person means a natural person who:
    (A) Immediately after entering into the investment advisory 
contract with the investment adviser has at least $500,000 under 
management with the investment adviser, or
    (B) The investment adviser reasonably believes, immediately prior 
to entering into the advisory contract, has a net worth (together with 
assets held jointly with a spouse) at the time the contract is entered 
into of more than $1,000,000.
    (ii) ``Impersonal investment advice'' means investment advisory 
services provided by means of written material or oral statements that 
do not purport to meet the objectives or needs of specific individuals 
or accounts.
    (4) Supervised persons may rely on the definition of ``client'' in 
Sec. 275.203(b)(3)-1 to identify clients for purposes of paragraph 
(a)(1) of this section, except that supervised persons need not count 
clients that are not residents of the United States.
    (b) Place of business. ``Place of business'' of an investment 
adviser representative means:
    (1) An office at which the investment adviser representative 
regularly provides investment advisory services, solicits, meets with, 
or otherwise communicates with clients; and
    (2) Any other location that is held out to the general public as a 
location at which the investment adviser representative provides 
investment advisory services, solicits, meets with, or otherwise 
communicates with clients.
    (c) Principal office and place of business. ``Principal office and 
place of business'' of an investment adviser means the executive office 
of the investment adviser from which the officers, partners, or 
managers of the investment adviser direct, control, and coordinate the 
activities of the investment adviser.


Sec. 275.203A-4  Investment advisers registered with a State securities 
commission.

    The Commission shall not assert a violation of section 203 of the 
Act (15 U.S.C. 80b-3) (or any provision of the Act to which an 
investment adviser becomes subject upon registration under section 203 
of the Act (15 U.S.C. 80b-3)) for the failure of an investment adviser 
registered with the securities commission (or any agency or office 
performing like functions) in the State in which it has its principal 
office and place of business to register with the Commission if the 
investment adviser reasonably believes that it does not have assets 
under management of at least $30,000,000 and is therefore not required 
to register with the Commission.


Sec. 275.203A-5  Transition rules.

    (a) Every investment adviser registered with the Commission on July 
8, 1997 shall file a completed Form ADV-T (17 CFR 279.3) no later than 
July 8, 1997.
    (b) If an investment adviser registered with the Commission on July 
8, 1997 would be prohibited from registering with the Commission under 
section 203A(a) of the Act (15 U.S.C. 80b-3A(a)), and is not otherwise 
exempted by Sec. 275.203A-2 from such prohibition, such investment 
adviser shall withdraw from registration with the Commission on Form 
ADV-T (17 CFR 279.3).
    (c)(1) Except as provided in paragraph (c)(2) of this section, an 
investment adviser that indicates on Form ADV-T (17 CFR 279.3) that the 
investment adviser withdraws from registration with the Commission 
shall be deemed to have withdrawn from registration as of the later of:
    (i) July 8, 1997; or
    (ii) The date the investment adviser first files with the 
Commission Form ADV-T (17 CFR 279.3) or any amendment to Form ADV-T (17 
CFR 279.3) that indicates that the investment adviser withdraws from 
registration with the Commission.
    (2) If, prior to the effective date of the withdrawal from 
registration of an investment adviser on Form ADV-T (17 CFR 279.3), the 
Commission has instituted a proceeding pursuant to section 203(e) of 
the Act (15 U.S.C. 80b-3(e)) to suspend or revoke registration,

[[Page 28135]]

or a proceeding pursuant to section 203(h) of the Act (15 U.S.C. 80b-
3(h)) to impose terms or conditions upon withdrawal, the withdrawal 
from registration shall not become effective except at such time and 
upon such terms and conditions as the Commission deems necessary or 
appropriate in the public interest or for the protection of investors.
    4. Section 275.204-1 is revised to read as follows:


Sec. 275.204-1  Amendments to application for registration.

    (a) Every investment adviser whose registration with the Commission 
is effective on the last day of its fiscal year shall, within 90 days 
of the end of its fiscal year, unless its registration has been 
withdrawn, cancelled, or revoked prior to that day, file:
    (1) Schedule I to Form ADV (17 CFR 279.1);
    (2) A balance sheet if the balance sheet is required by Item 14 of 
Part II of Form ADV (17 CFR 279.1); and
    (3) An executed page one of Part I of Form ADV (17 CFR 279.1).
    (b)(1) If the information contained in the response to Items 1, 2, 
3, 4, 5, 8, 11, 13A, 13B, 14A and 14B of Part I of any application for 
registration as an investment adviser, or in any amendment thereto, 
becomes inaccurate for any reason, or if the information contained in 
response to any question in Items 9 and 10 of Part I, all of Part II 
(except Item 14), and all of Schedule H of any application for 
registration as an investment adviser, or in any amendment thereto, 
becomes inaccurate in a material manner, the investment adviser shall 
promptly file an amendment on Form ADV (17 CFR 279.1) correcting the 
information.
    (2) For all other changes not designated in paragraph (b)(1) of 
this section, the investment adviser shall file an amendment on Form 
ADV (17 CFR 279.1) updating the information together with the 
amendments required by paragraph (a) of this section.
    5. Section 275.204-2 is amended by revising the introductory text 
of paragraph (a) and adding paragraph (k) to read as follows:


Sec. 275.204-2  Books and records to be maintained by investment 
advisers.

    (a) Every investment adviser registered or required to be 
registered under section 203 of the Act (15 U.S.C. 80b-3) shall make 
and keep true, accurate and current the following books and records 
relating to its investment advisory business:
* * * * *
    (k) Every investment adviser that registers under section 203 of 
the Act (15 U.S.C. 80b-3) after July 8, 1997 shall be required to 
preserve in accordance with this section the books and records the 
investment adviser had been required to maintain by the State in which 
the investment adviser had its principal office and place of business 
prior to registering with the Commission.
    Section 275.205-3 is amended by revising the section heading and 
paragraph (a) to read as follows:


Sec. 275.205-3  Exemption from the compensation prohibition of section 
205(a)(1) for registered investment advisers.

    (a) General. The provisions of section 205(a)(1) of the Act (15 
U.S.C. 80b-5(a)(1)) shall not prohibit any investment adviser from 
entering into, performing, renewing or extending an investment advisory 
contract that provides for compensation to the investment adviser on 
the basis of a share of the capital gains upon, or the capital 
appreciation of, the funds, or any portion of the funds, of a client, 
Provided, That all the conditions in this section are satisfied.
* * * * *
    7. Section 275.206(3)-2 is amended by revising the introductory 
text of paragraph (a) to read as follows:


Sec. 275.206(3)-2  Agency cross transactions for advisory clients.

    (a) An investment adviser, or a person registered as a broker-
dealer under section 15 of the Securities Exchange Act of 1934 (15 
U.S.C. 78o) and controlling, controlled by, or under common control 
with an investment adviser, shall be deemed in compliance with the 
provisions of sections 206(3) of the Act (15 U.S.C. 80b-6(3)) in 
effecting an agency cross transaction for an advisory client, if:
* * * * *
    8. Section 275.206(4)-1 is amended by revising the introductory 
text of paragraph (a) to read as follows:


Sec. 275.206(4)-1  Advertisements by investment advisers.

    (a) It shall constitute a fraudulent, deceptive, or manipulative 
act, practice, or course of business within the meaning of section 
206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser 
registered or required to be registered under section 203 of the Act 
(15 U.S.C. 80b-3), directly or indirectly, to publish, circulate, or 
distribute any advertisement:
* * * * *
    9. Section 275.206(4)-2 is amended by revising the introductory 
text of paragraph (a) to read as follows:


Sec. 275.206(4)-2  Custody or possession of funds or securities of 
clients.

    (a) It shall constitute a fraudulent, deceptive, or manipulative 
act, practice or course of business within the meaning of section 
206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser 
registered or required to be registered under section 203 of the Act 
(15 U.S.C. 80b-3) who has custody or possession of any funds or 
securities in which any client has any beneficial interest, to do any 
act or take any action, directly or indirectly, with respect to any 
such funds or securities, unless:
* * * * *


Sec. 275.206(4)-3  [Amended]

    10. In Sec. 275.206(4)-3, paragraph (a)(1)(ii)(C) is amended by 
revising the cite ``paragraphs (1), (4) or (5)'' to read ``paragraphs 
(1), (5) or (6)''.
    11. Section 275.206(4)-4 is amended by revising the introductory 
text of paragraph (a) to read as follows:


Sec. 275.206(4)-4  Financial and disciplinary information that 
investment advisers must disclose to clients.

    (a) It shall constitute a fraudulent, deceptive, or manipulative 
act, practice, or course of business within the meaning of section 
206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser 
registered or required to be registered under section 203 of the Act 
(15 U.S.C. 80b-3) to fail to disclose to any client or prospective 
client all material facts with respect to:
* * * * *
    12. Sections 275.222-1 and 222-2 are added to read as follows:


Sec. 275.222-1  Definitions.

    For purposes of section 222 (15 U.S.C. 80b-18a) of the Act:
    (a) Place of business. ``Place of business'' of an investment 
adviser means:
    (1) An office at which the investment adviser regularly provides 
investment advisory services, solicits, meets with, or otherwise 
communicates with clients; and
    (2) Any other location that is held out to the general public as a 
location at which the investment adviser provides investment advisory 
services, solicits, meets with, or otherwise communicates with clients.
    (b) Principal place of business. ``Principal place of business'' of 
an investment adviser means the executive office of the investment 
adviser from which the officers, partners, or managers of the 
investment adviser direct, control, and coordinate the activities of 
the investment adviser.

[[Page 28136]]

Sec. 275.222-2  Definition of ``client'' for purposes of the national 
de minimis standard.

    For purposes of section 222(d)(2) of the Act (15 U.S.C. 80b-
18a(d)(2)), an investment adviser may rely upon the definition of 
``client'' provided by Sec. 275.203(b)(3)-1.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

    13. The authority citation for part 279 continues to read as 
follows:

    Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, 
et seq.


Sec. 279.1  (Form ADV) [Amended]

    14. By revising Instructions 2 and 7 of Form ADV (referenced in 
Sec. 279.1), and by adding Instruction 10 to read as follows:

    Note: The text of Form ADV does not and the amendments will not 
appear in the Code of Federal Regulations.

Form ADV

* * * * *

Form ADV Instructions

* * * * *

2. Organization

    This Form contains two parts. Parts I and II are filed with the 
SEC and the jurisdictions; Part II generally can be given to clients 
to satisfy the brochure rule. The Form also contains the following 
schedules:

     Schedule A--for corporations;
     Schedule B--for partnerships;
     Schedule C--for entities that are not sole 
proprietorships, partnerships or corporations (e.g., limited 
liability companies and limited liability partnerships);
     Schedule D--for reporting information about individuals 
under Part I Item 12;
     Schedule E--for continuing responses to Part I items;
     Schedule F--for continuing responses to Part II items;
     Schedule G--for the balance sheet required by Part II 
Item 14;
     Schedule H--for satisfaction of the brochure rule by 
sponsors of wrap fee programs; and
     Schedule I--for reporting information related to 
eligibility for SEC registration.
* * * * *

7. SEC Filings

     Submit filings in triplicate to the Securities and 
Exchange Commission, Washington DC 20549. There is no fee for 
registration or amendments.
     Non-residents--Rule 0-2 under the Investment Advisers 
Act of 1940 (17 CFR 275.0-2) covers those non-resident persons named 
anywhere in Form ADV that must file a consent to service of process 
and a power of attorney. Rule 204-2(j) under the Investment Advisers 
Act of 1940 (17 CFR 275.204-2(j)) covers the notice of undertaking 
on books and records non-residents must file with Form ADV.
     Federal Information Law and Requirements--Investment 
Advisers Act of 1940 sections 203(c), 204, 206, and 211(a) authorize 
the SEC to collect the information on this Form from applicants for 
investment adviser registration. The information is used for 
regulatory purposes, including deciding whether to grant 
registration. The SEC maintains files of the information on this 
Form and makes it publicly available. Only the Social Security 
Number, which aids in identifying the applicant, is voluntary. The 
SEC may return as unacceptable Forms that do not include all other 
information. By accepting this Form, however, the SEC does not make 
a finding that it has been filled out or submitted correctly. 
Intentional misstatements or omissions constitute Federal criminal 
violations under 18 U.S.C. 1001 and 15 U.S.C. 80b-17.
* * * * *

10. Updating

    Amendments to this form should be filed:

--promptly for any changes in:
    Part I--Items 1, 2, 3, 4, 5, 8, 11, 13A, 13B, 14A, and 14B;
--promptly for material changes in:
    Part I--Items 9, 10, all items of Part II except Item 14, and 
all Items of Schedule H;
--within 90 days of the end of the fiscal year for the filing of 
Schedule I and any other changes.
    Note: Every investment adviser is required to file Schedule I no 
later than 90 days after the end of its fiscal year.
* * * * *


Sec. 279.1   (Form ADV) [Amended]

    15. By revising Items 18 and 19 of Form ADV (referenced in 
Sec. 279.1) to read as follows:

    Note: The text of Form ADV does not and the amendments will not 
appear in the Code of Federal Regulations.
* * * * *

18. Assets Under Management: Discretionary

    Does applicant manage client securities portfolios that receive 
continuous and regular supervisory or management services on a 
discretionary basis?
Yes {time}       No {time} 
    If yes, at the end of applicant's last fiscal year:
    A. These securities portfolios numbered ____________.
    B. These securities portfolios, in aggregate market value, 
totaled $____________.00 (to nearest dollar).
    Determine: (i) whether an account is a ``securities portfolio''; 
(ii) whether a securities portfolio receives ``continuous and 
regular supervisory or management services''; and (iii) the 
aggregate market value of such a securities portfolio, in accordance 
with Instruction 7 of Schedule I to Form ADV. Items 18(B) and 19(B) 
should total the response (if any) to Part II of Schedule I.

19. Assets Under Management: Non-Discretionary

    Does applicant manage or supervise client securities portfolios 
that receive continuous and regular supervisory or management 
services on a non-discretionary basis?
Yes {time}       No {time} 
    If yes, at the end of applicant's last fiscal year:
    A. These securities portfolios numbered ____________.
    B. These securities portfolios, in aggregate market value, 
totaled $____________.00 (to nearest dollar).
    Determine: (i) whether an account is a ``securities portfolio''; 
(ii) whether a securities portfolio receives ``continuous and 
regular supervisory or management services''; and (iii) the 
aggregate market value of such a securities portfolio, in accordance 
with Instruction 7 of Schedule I to Form ADV. Items 18(B) and 19(B) 
should total the response (if any) to Part II of Schedule I.
* * * * *


Sec. 279.1   (Form ADV) [Amended]

    16. By adding Schedule I to Form ADV [Sec. 279.1].

    Note: The text of Schedule I will not appear in the Code of 
Federal Regulations. Schedule I is attached as Appendix B to this 
Release.

    17. Section 279.3 and Form ADV-S are revised to read as follows:


Sec. 279.3  Form ADV-T, transition form for determining eligibility for 
Commission registration.

    Note: The text of Form ADV-T will not appear in the Code of 
Federal Regulations. Form ADV-T is attached as Appendix A to this 
Release.

    This form shall be filed pursuant to Sec. 275.203A-5(a) of this 
chapter by every investment adviser registered with the Commission on 
July 8, 1997.

    By the Commission.

    Dated: May 15, 1997.
Margaret H. McFarland,
Deputy Secretary.

BILLING CODE 8010-01-P

[[Page 28137]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.000



[[Page 28138]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.001



[[Page 28139]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.002



[[Page 28140]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.003



[[Page 28141]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.004



[[Page 28142]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.005



[[Page 28143]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.006



[[Page 28144]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.007



[[Page 28145]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.008



[[Page 28146]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.009



[[Page 28147]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.010



[[Page 28148]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.011



[[Page 28149]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.012



[[Page 28150]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.013



[[Page 28151]]

[GRAPHIC] [TIFF OMITTED] TR22MY97.014



[FR Doc. 97-13284 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-C