[Federal Register Volume 62, Number 223 (Wednesday, November 19, 1997)]
[Proposed Rules]
[Pages 61866-61882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30296]



[[Page 61865]]

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Part III





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Parts 275 and 279



Exemption for Investment Advisers Operating in Multiple States; 
Revisions to Rules Implementing Amendments to the Investment Advisers 
Act of 1940; Proposed Rule



17 CFR Part 275



Exemption to Allow Investment Advisers To Charge Fees Based Upon a 
Share of Capital Gains Upon or Capital Appreciation of a Client's 
Account; Proposed Rule

  Federal Register / Vol. 62, No. 223 / Wednesday, November 19, 1997 / 
Proposed Rules  

[[Page 61866]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-1681, File No. S7-28-97]
RIN 3235-AH22


Exemption for Investment Advisers Operating in Multiple States; 
Revisions to Rules Implementing Amendments to the Investment Advisers 
Act of 1940

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Commission is publishing for comment under the Investment 
Advisers Act of 1940 rule amendments to exempt multi-state investment 
advisers from the prohibition on Commission registration and two 
alternative amendments to revise the definition of the term 
``investment adviser representative.'' The Commission is proposing 
these amendments to refine the rules implementing the Investment 
Advisers Supervision Coordination Act.

DATES: Comments must be received on or before January 20, 1998.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Stop 6-9, Washington, D.C. 20549. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-28-97; this file number 
should be included on the subject line if E-mail is used. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Electronically submitted comment letters also will be 
posted on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Carolyn-Gail Gilheany, Attorney, or 
Jennifer S. Choi, Special Counsel, at (202) 942-0716, Task Force on 
Investment Adviser Regulation, Division of Investment Management, Stop 
10-6, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on proposed amendments to rule 203A-2 [17 CFR 275.203A-2], rule 203A-3 
[17 CFR 275.203A-3], rule 206(4)-3 [17 CFR 275.206(4)-3] and Schedule I 
to Form ADV [17 CFR 279.1] under the Investment Advisers Act of 1940 
[15 U.S.C. 80b-1 et seq.] (``Advisers Act''). The Commission also is 
proposing to withdraw rule 203A-5 [17 CFR 275.203A-5] and Form ADV-T 
[17 CFR 279.3] under the Advisers Act.

Table of Contents

Executive Summary

I. Background
II. Discussion
    A. Multi-State Investment Adviser Exemption From Prohibition on 
Registration With the Commission
    B. Definition of Investment Adviser Representative
    1. Accommodation Clients
    2. ``High Net Worth'' Clients
    C. Other Amendments
    1. Pension Consultants--Determining the Value of Assets of Plans
    2. Rule 206(4)-3--Cash Payments for Client Solicitations
    3. Schedule I to Form ADV
    4. Transition Rule 203A-5 and Form ADV-T
    D. General Request for Comment
III. Cost-Benefit Analysis
IV. Paperwork Reduction Act
V. Summary of Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Proposed rule and Form Amendments
Appendix A: Schedule I to Form ADV

Executive Summary

    Section 203A of the Advisers Act generally prohibits an investment 
adviser from registering with the Commission unless it has more than 
$25 million of assets under management or is an adviser to a registered 
investment company. Section 203A also preempts most state regulatory 
requirements for Commission-registered investment advisers and their 
supervised persons except for certain ``investment adviser 
representatives.'' The Commission is proposing an exemption from the 
prohibition on Commission registration for advisers required to 
register as an investment adviser in 30 or more states. The Commission 
also is proposing two alternative amendments to the definition of 
investment adviser representative. Under the current definition, 
supervised persons of Commission-registered investment advisers will 
not be subject to state qualification requirements if no more than ten 
percent of their clients are natural persons (``ten percent 
allowance''). The Commission is proposing either (1) to add a provision 
that would permit supervised persons to have the greater of five 
natural person clients or the number of natural person clients 
permitted under the ten percent allowance, or (2) to eliminate the ten 
percent allowance and permit supervised persons to have an unlimited 
number of accommodation clients who have certain business or familial 
relationships with the supervised person or the supervised person's 
business or institutional clients.

I. Background

    Last year, Congress enacted the National Securities Markets 
Improvement Act of 1996 (``1996 Act''). 1 Title III of the 
1996 Act, the Investment Advisers Supervision Coordination Act 
(``Coordination Act''), amended the Advisers Act by reallocating 
federal and state responsibilities for regulation of investment 
advisers. By limiting federal registration and preempting certain state 
laws, the Coordination Act divided regulatory responsibilities for the 
approximately 23,350 investment advisers that were registered with the 
Commission. 2 The Coordination Act became effective on July 
8, 1997.
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    \1\ Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in 
scattered sections of the United States Code).
    \2\ Other amendments made by the 1996 Act to the Advisers Act 
include revisions to (i) section 205 [15 U.S.C. 80b-5] to create 
additional exceptions to the Advisers Act's limitations on 
performance fee arrangements, (ii) section 222 [15 U.S.C. 80b-18a] 
to impose certain uniformity requirements on state investment 
adviser laws, (iii) section 203(e) [15 U.S.C. 80b-3(e)] to permit 
the Commission to deny or revoke the registration of any person 
convicted of any felony (or any person associated with such 
investment adviser), and (iv) section 203(b) [15 U.S.C. 80b-3(b)] to 
exempt from registration certain advisers to church employee pension 
plans. See sections 210, 304, 305(a), and 508(d) of the 1996 Act.
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    Under new section 203A(a) of the Advisers Act, 3 an 
investment adviser that is regulated or required to be regulated as an 
investment adviser in the state in which it maintains its principal 
office and place of business is prohibited from registering with the 
Commission unless the investment adviser (i) has at least $25 million 
of assets under management, or (ii) is an investment adviser to an 
investment company registered under the Investment Company Act of 1940 
(``Investment Company Act''). 4 Section 203A(b) of the 
Advisers Act generally preempts state law with respect to Commission-
registered investment advisers. 5
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    \3\ 15 U.S.C. 80b-3a(a).
    \4\ The Commission has authority to deny registration to any 
applicant that does not meet the criteria for Commission 
registration and to cancel the registration of any adviser that no 
longer meets the registration criteria. Section 203(c) and (h) of 
the Advisers Act [15 U.S.C. 80b-3(c) and (h)].
    \5\ 15 U.S.C. 80b-3a(b). In addition, state law is preempted 
with respect to advisers that are excepted from the definition of 
investment adviser under section 202(a)(11) of the Advisers Act [15 
U.S.C. 80b-2(a)(11)].
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    On May 15, 1997, the Commission adopted new rules and rule

[[Page 61867]]

amendments to implement the Coordination Act. 6 These 
implementing rules included rules that exempt four types of investment 
advisers from the statutory prohibition on Commission registration and 
define certain terms used in the Coordination Act. 7 In 
adopting these rules, the Commission anticipated that experience with 
the new regulatory scheme might reveal the need for additional rules or 
further refinement of existing rules. Based on its experience, the 
Commission is proposing to exempt multi-state investment advisers from 
the prohibition on Commission registration, to amend the definition of 
investment adviser representative, and to clarify certain other 
implementing rules.
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    \6\ Rules Implementing Amendments to the Investment Advisers Act 
of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997) [62 
FR 28112 (May 22, 1997)] (``Adopting Release'').
    \7\ Id. The Commission also amended several rules under the 
Advisers Act to reflect the changes made by the 1996 Act.
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II. Discussion

A. Multi-State Investment Adviser Exemption from Prohibition on 
Registration with the Commission

    As discussed above, section 203A of the Advisers Act limits 
registration with the Commission, in most cases, to investment advisers 
with at least $25 million of assets under management and preempts state 
law with respect to these investment advisers. 8 The $25 
million threshold was designed to allocate regulatory responsibility to 
the Commission for larger investment advisers whose activities are 
likely to affect national markets and to relieve them of the burdens 
imposed by multiple state regulation. 9 Congress recognized, 
however, that there may be investment advisers with less than $25 
million of assets under management that have national businesses and 
for which multiple state registration would be burdensome. 
10 Therefore, the Commission was given authority in section 
203A(c) of the Advisers Act to exempt investment advisers, by rule or 
order, from the prohibition on Commission registration if the 
prohibition would be ``unfair, a burden on interstate commerce, or 
otherwise inconsistent with the purposes'' of section 203A. 
11
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    \8\ Section 203A(a) and (b). Notwithstanding section 203A(b), 
states retain authority over Commission-registered advisers under 
state investment adviser statutes to: (1) investigate and bring 
enforcement actions with respect to fraud or deceit against an 
investment adviser or a person associated with an investment 
adviser; (2) require filings, for notice purposes only, of documents 
filed with the Commission; and (3) require payment of state filing, 
registration, and licensing fees. Moreover, section 203A(b) 
specifically preserves state law with respect to investment adviser 
representatives of Commission-registered advisers who have a place 
of business in the state. See infra section II.B of this Release.
    \9\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-5 (1996) 
[hereinafter Senate Report].
    \10\ Id. at 5.
    \11\ Section 203A(c) [15 U.S.C. 80b-3a(c)].
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    Pursuant to its authority, the Commission adopted rule 203A-2, 
which permits Commission registration for nationally recognized 
statistical rating organizations and certain pension consultants, 
affiliated investment advisers, and newly formed investment advisers 
with reasonable expectations that they would soon become eligible for 
Commission registration.12 The Commission also, by order, 
has granted exemptive relief to investment advisers that do not have 
$25 million of assets under management but have a national or multi-
state practice and conduct advisory activities that require them to 
register as investment advisers in 30 or more states.13 The 
Commission is proposing to amend rule 203A-2 to codify the exemptions 
provided by individual orders to investment advisers required to be 
registered in multiple states.
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    \12\ 17 CFR 275.203A-2.
    \13\ See Arthur Andersen Financial Advisers, Investment Advisers 
Act Release Nos. 1637 (June 16, 1997), 62 FR 33689 (Notice of 
Application), 1642 (July 8, 1997), 64 SEC Docket 2417 (Order); Ernst 
& Young Investment Advisers LLP, Investment Advisers Act Release 
Nos. 1638 (June 16, 1997), 62 FR 33692 (Notice of Application), and 
1641 (July 8, 1997), 64 SEC Docket 2416 (Order); and KPMG Investment 
Advisors, Investment Advisers Act Release Nos. 1639 (June 17, 1997), 
62 FR 33945 (Notice of Application), and 1643 (July 8, 1997), 64 SEC 
Docket 2418 (Order).
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    Under the proposed exemption, an investment adviser required to be 
registered as an investment adviser with 30 or more state securities 
authorities would be permitted to register with the 
Commission.14 The Commission believes that an investment 
adviser whose activities trigger registration requirements in 30 states 
is a national firm and that the multiple state registration 
requirements for such a firm would constitute a burden on interstate 
commerce. For that reason, the Commission believes that such an 
investment adviser would be the type of firm for which Congress 
expected the Commission to exercise its section 203A(c) exemptive 
authority and, as a result, would have a single, national 
regulator.15
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    \14\ In tallying the number of states in which an adviser is 
required to register, the investment adviser would be required to 
exclude those states in which it is not required to register because 
of applicable state laws or the national de minimis standard of 
section 222(d) of the Advisers Act. [15 U.S.C. 80b-18a] The 
Commission believes such an exclusion is appropriate because it is 
the obligation to register in a state, rather than the business 
decision to register voluntarily, that demonstrates that the adviser 
is subject to the type of burden contemplated by the exemption.
    \15\ See Senate Report at 5 (Congress recognized that the 
``definition of `assets under management' * * * may, in some cases, 
exclude firms with a national or multistate practice from being able 
to register with the SEC'').
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    Under the proposed rule amendments, an adviser applying for 
registration relying on the exemption would be required to submit a 
representation that the investment adviser has reviewed its obligations 
under state law and concluded that it is required to register as an 
investment adviser with the securities authorities of at least 30 
states.16 Once registered with the Commission, the 
investment adviser would continue to be eligible for the exemption as 
long as it is annually able to provide a representation that the 
investment adviser has determined that, but for the exemption, it would 
be obligated to register in at least 25 states, five fewer states than 
when it initially registered.17 The Commission is proposing 
this five-state difference to prevent an investment adviser registered 
with the Commission from losing the exemption simply because, for 
example, it lost a few clients in a small number of 
states.18
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    \16\ Proposed paragraph (e)(2) of rule 203A-2. At the time of 
its application for registration with the Commission, the investment 
adviser would be required to include on Schedule E to Form ADV an 
undertaking to withdraw from registration with the Commission if it 
would no longer be required to register in at least 25 states at the 
time of filing Schedule I. The exemption would require an investment 
adviser that indicates that it is no longer required to register in 
at least 25 states to withdraw from Commission registration by 
filing Form ADV-W within 90 days of filing Schedule I. Proposed 
paragraph (e)(3) of rule 203A-2.
    \17\ This representation must be attached to the investment 
adviser's annual amendment to Form ADV revising Schedule I. Proposed 
paragraph (e)(2) of rule 203A-2. Under the proposed multi-state 
exemption, the investment adviser also would be required to maintain 
a record of the states that the adviser believes it would, but for 
the exemption, be required to register. Proposed paragraph (e)(4) of 
rule 203A-2.
    \18\ This ``five-state difference'' is similar to the ``$5 
million window,'' which makes Commission registration optional for 
an adviser having between $25 and $30 million of assets under 
management. See rule 203A-1(a), (b) [17 CFR 275.203A-1(a), (b)]. The 
Commission adopted the $5 million window to avoid transient 
registration problems that could occur because of a small decrease 
in the value of client assets (as a result of a market decline) or 
the departure of one or a few clients. See Rules Implementing 
Amendments to the Investment Advisers Act of 1940, Investment 
Advisers Act Release No. 1601 (Dec. 20, 1996) [61 FR 68480 (Dec. 27, 
1996)] (``Proposing Release''). Under the proposed five-state 
difference, an investment adviser registered with the Commission in 
reliance upon the multi-state exemption would not be required to de-
register and then re-register with the Commission frequently as a 
result of a change in registration obligation in one or a few 
states.
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    Like other exemptions in rule 203A-2, the proposed multi-state 
exemption

[[Page 61868]]

could be used by a newly formed investment adviser in conjunction with 
the ``start-up adviser'' exemption in paragraph (d) of the 
rule.19 A newly formed investment adviser not registered in 
any state could register with the Commission if it reasonably expected 
that it would be required to register in 30 or more states within 120 
days. After the 120-day period, the investment adviser would be 
required to file an amendment to Form ADV revising Schedule I and 
attach a representation that, but for the proposed multi-state 
exemption, the investment adviser would be required to register in at 
least 25 states.20
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    \19\ 17 CFR 275.203A-2(d).
    \20\ These requirements would be the result of the conditions 
for the exemptions provided by rule 203A-2(d) and proposed paragraph 
(e) of rule 203A-2.
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    Comment is requested whether the 30 state threshold should be 
increased or decreased and whether the five-state difference is 
sufficient to prevent transient registration problems. Because 
determining the obligations to register under state law requires a 
legal analysis, should the Commission require investment advisers to 
represent that counsel has reviewed the applicable state and federal 
laws and has concluded that the investment adviser qualifies for the 
proposed multi-state exemption? Should the Commission prohibit a newly 
formed investment adviser from using this exemption in conjunction with 
the reasonable expectation exemption?

B. Definition of Investment Adviser Representative

    The Coordination Act preempts most state regulatory requirements 
for Commission-registered investment advisers and their supervised 
persons,21 but permits states to continue to license, 
register, or otherwise qualify an ``investment adviser representative'' 
who has a place of business in the state.22 In rule 203A-
3(a), the Commission defined investment adviser representative as a 
supervised person more than ten percent of whose clients are natural 
persons other than excepted persons.23
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    \21\ The term supervised person is defined in the Advisers Act 
as any ``partner, officer, director . . . or employee of an 
investment adviser, or other person who provides investment advice 
on behalf of the investment adviser and is subject to the 
supervision and control of the investment adviser.'' Section 
202(a)(25) of the Advisers Act [15 U.S.C. 80b-2(a)(25)].
    \22\ Section 203A(b).
    \23\ 17 CFR 275.203A-3(a). The rule defines ``excepted persons'' 
as natural persons who have $500,000 or more under management with 
the representative's investment advisory firm immediately after 
entering into the advisory contract with the firm, or who the 
advisory firm reasonably believes immediately prior to entering into 
the advisory contract have a net worth in excess of $1 million 
(collectively ``high net worth individuals''). Rule 203A-3(a)(3)(i) 
[17 CFR 275.203A-3(a)(3)(i)]. (The Commission is proposing changes 
to the criteria for determining high net worth individuals. See 
infra section II.B.2 of this Release.) The Commission also excluded 
from the term ``investment adviser representative'' those supervised 
persons who do not on a regular basis solicit, meet with, or 
otherwise communicate with clients of the investment adviser or who 
provide only impersonal investment advice. Rule 203A-3(a)(2) [17 CFR 
275.203A-3(a)(2)].
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1. Accommodation Clients
    The ``ten percent allowance'' in the definition of investment 
adviser representative was designed to permit supervised persons who 
provide advisory services principally to clients other than natural 
persons to continue to accept so-called ``accommodation clients'' 
without being subject to state qualification requirements.24 
In adopting the ten percent allowance, the Commission acknowledged that 
the allowance may pose a problem for supervised persons with one or a 
few institutional clients who would not be able to have any 
accommodation clients.25 To have one accommodation client, a 
supervised person would need to have at least ten clients that are not 
natural persons. Therefore, the Commission directed the staff to work 
with investment advisers whose supervised persons would be affected by 
the definition to develop a workable method of addressing this concern 
and indicated that it may propose revisions to the 
definition.26 The Commission staff has consulted with 
members of the industry for their views and has recommended proposals 
to the Commission to resolve this issue.
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    \24\ Adopting Release, supra note 6, at nn.113-117 and 
accompanying text.
    \25\ As originally proposed, the ten percent allowance would 
have been measured either by reference to the assets under 
management attributable to the supervised person or by reference to 
clients of the supervised person. The Commission adopted only the 
client test because there did not appear to be any workable method 
of attributing client assets to supervised persons. See Adopting 
Release, supra note 6, at n.115 and accompanying text.
    \26\ Id.
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    The Commission is now proposing two alternative amendments to the 
definition of investment adviser representative to allow supervised 
persons who provide services to one or a few institutional or business 
client accounts to continue to have accommodation clients without being 
subject to state qualification requirements. Under the first 
alternative, the Commission proposes to retain the ten percent 
allowance and add a provision that would permit supervised persons to 
have up to five natural person clients. Supervised persons could have 
under the first alternative the greater of five natural person clients 
or the number of natural person clients permitted under the ten percent 
allowance without being subject to state qualification requirements.
    The first alternative would allow supervised persons with one or a 
few institutional or business clients to accept at least five natural 
person clients and would address the problem with the current rule. 
Moreover, this alternative would provide a simple, bright-line test for 
supervised persons to determine when they are subject to state 
qualification requirements. The disadvantage of this alternative, 
however, is that the five clients may not necessarily be limited to 
those clients who the supervised person advises on an accommodation 
basis; the proposed five natural person minimum could include natural 
persons who have no relationship to an investment adviser's 
institutional or business clients. Furthermore, the five natural person 
minimum would permit supervised persons who have only retail clients 
(i.e., natural person clients) to avoid state qualification 
requirements until they obtained their sixth client. The provision, 
however, likely would have a small effect on the number of supervised 
persons who would not be subject to state qualification requirements 
because many states do not require supervised persons to register in 
the state until they have more than five clients in their respective 
state.27
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    \27\ See, e.g., Unif. Sec. Act section 201(c) (1997); Burns Ind. 
Code Ann. section 23-2-1-8(c)(3) (1997); Md. Code Ann. section 11-
401(b)(3)(ii) (1997); Utah Code Ann. section 61-1-3(3)(c) (1997). 
The first alternative is narrower than these state exemptions 
because it would permit supervised persons to have a total of five 
natural person clients nationwide, rather than five natural person 
clients per state as permitted by these states.
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    Under the second alternative, supervised persons who have natural 
person clients would be excluded from the definition of investment 
adviser representative if the natural person clients either are ``high 
net worth'' clients or have a familial or business relationship with 
the supervised person or his business or institutional 
clients.28

[[Page 61869]]

Under this alternative, the Commission would eliminate the current ten 
percent allowance, and a supervised person could have an unrestricted 
number of clients who are natural persons without being subject to 
state qualification requirements. These clients would be limited, 
however, to either (i) high net worth clients (as currently permitted 
by the rule), or (ii) persons who are (A) partners, officers, or 
directors of the investment adviser for whom the supervised person 
works or of a business or institutional client of the investment 
adviser for whom the supervised person works, (B) relatives, spouses, 
or relatives of spouses of such partners, officers or directors, or (C) 
relatives or spouses, or relatives of spouses of the supervised person.
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    \28\ The Investment Company Institute (``ICI'') suggested that 
the Commission retain the ten percent allowance and exclude from the 
term natural persons certain clients who are ``affiliated with non-
natural person clients.'' See Letter from Craig S. Tyle, Vice-
President and Senior Counsel, ICI, dated August 12, 1997 (available 
in File No. S7-28-97). Under the current rule, the ten percent 
allowance is designed as a proxy for accommodation clients and 
assumes that a supervised person who has a small number of natural 
person clients does so on the basis of an accommodation to her 
institutional clients. The ICI proposal would permit the supervised 
person to have a defined group of accommodation clients in addition 
to a group of natural persons (up to ten percent of the supervised 
person's clients) who are unrelated to her institutional clients 
without being subject to the state qualification requirements. The 
Commission is proposing a narrower version of the ICI's 
recommendation to limit the rule's exception to clients who are or 
may reasonably be presumed to be accommodation clients.
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    The advantage of this approach is that it extends the provision of 
the rule for accommodation clients to supervised persons with one or a 
few clients while more closely tying the accommodation client exception 
to the purpose for which it was adopted. Instead of presuming that the 
natural person clients of a supervised person having primarily business 
clients are accommodation clients, the rule would (with the exception 
of high net worth clients) require there be the type of relationship 
between the supervised person and the client that customarily results 
in the client being considered an accommodation client. This approach, 
however, could greatly increase or decrease the number of natural 
person clients supervised persons are permitted to have by the rule 
before they are subject to state qualification requirements. Moreover, 
it would make the rule somewhat more complex and, perhaps, the status 
of a supervised person as an investment adviser representative less 
transparent to a state securities commissioner seeking to enforce state 
law. Comment is requested on the scope of the accommodation client 
exception under this alternative. Are there additional relationships 
between the investment adviser, supervised person, and client that 
suggest the client is an accommodation client?
    Comment is requested on the advantages and disadvantages of the two 
approaches. Comment is requested on whether additional approaches could 
be used to permit a supervised person with one or a few institutional 
or business clients to accept a small number of natural person clients 
on an accommodation basis without being subject to state qualification 
requirements. Commenters suggesting an additional approach should 
address whether the approach limits the scope of the exception to its 
original purpose (i.e., to permit accommodation clients), any 
additional complexity it adds to the rule, and the ease with which 
supervised persons can determine whether they are subject to state 
qualification requirements.
2. ``High Net Worth'' Clients
    Under the current rule, certain ``high net worth'' individuals are 
excepted persons for purposes of the definition of investment adviser 
representative and are not counted towards the ten percent allowance. 
The criteria for determining high net worth individuals are based on 
the criteria in rule 205-3 under the Advisers Act for determining those 
clients with whom investment advisers may enter into a performance fee 
contract under that exemptive rule.29 The Commission 
excluded these high net worth individuals from the definition of 
investment adviser representative because the Commission presumed that 
these individuals, who are less dependent on the protections of the 
performance fee prohibition, do not need the protections of state 
qualification requirements.30
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    \29\ 17 CFR 275.205-3.
    \30\ See Adopting Release, supra note 6, at nn. 110-112 and 
accompanying text.
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    In a companion release, the Commission is proposing to revise the 
high net worth criteria in rule 205-3 to reflect, among other things, 
the effects of inflation since the standards were adopted in 
1985.31 The criteria for determining which individuals 
qualify as high net worth individuals in the definition of investment 
adviser representative would be revised to reflect the changes being 
proposed in the companion release. Therefore, the threshold levels for 
high net worth individuals would increase from $500,000 under 
management and $1,000,000 net worth to $750,000 and $1,500,000, 
respectively.
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    \31\ See Investment Advisers Release No. 1682 (November 13, 
1997). In the companion release, the Commission also is proposing to 
add a third alternative test of sophistication.
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C. Other Amendments

1. Pension Consultants--Determining the Value of Assets of Plans
    The Commission adopted rule 203A-2(b) to exempt certain pension 
consultants from the prohibition on Commission registration. Under the 
rule, pension consultants that provide investment advice to employee 
benefit plans with respect to assets having an aggregate value of at 
least $50 million are required to register with the Commission even if 
they do not otherwise meet the criteria for Commission 
registration.32 Rule 203A-2(b)(3) requires investment 
advisers relying on the exemption to value plan assets as of the date 
during the investment adviser's most recent fiscal year that the 
investment adviser was last employed or retained by contract to provide 
investment advice to the plan with respect to those 
assets.33 Because of the fiscal year requirement, an 
investment adviser could not rely on the pension consultant exemption 
when, in fact, it provides investment advice to over $50 million of 
assets of employee benefit plans if the amount of assets grew to more 
than $50 million after the end of the investment adviser's fiscal year, 
but before it filed Schedule I.34 The Commission, therefore, 
is proposing to amend the rule to permit investment advisers to 
determine the aggregate value of plan assets during a 12-month period 
ending within 90 days before the investment adviser files Schedule 
I.35
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    \32\ See rule 203A-2(b) [17 CFR 275.203A-2(b)]; Adopting 
Release, supra note 6, at nn. 58-61 and accompanying text.
    \33\ 17 CFR 275.203A-2(b)(3).
    \34\ Conversely, if the value of the assets of plans was above 
$50 million as of the adviser's last fiscal year, but decreased to 
below $50 million before Schedule I is filed, under the current 
rule, the adviser would be eligible to rely on the pension 
consultant exemption.
    \35\ An adviser seeking to rely on the pension consultant 
exemption would be required to aggregate: (i) the value of plan 
assets for which it provided advisory services at the end of the 12-
month period, and (ii) the value of any other plan assets for which 
it provided advisory services at the end of its employment or 
contract (if terminated before the end of the 12-month period).
    During the interim period before the proposed rule is adopted, 
the Commission would not object if pension consultants chose to 
value plan assets under the method being proposed rather than under 
the method provided by the current rule.
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2. Rule 206(4)-3--Cash Payments for Client Solicitations
    The Coordination Act amended section 203(e) of the Advisers Act by 
adding new section 203(e)(3), which provided the Commission with the 
authority to deny or revoke the registration of any investment adviser 
if the investment adviser (or any person

[[Page 61870]]

associated with the investment adviser) is convicted of any felony, and 
redesignating section 203(e)(3) as section 203(e)(4).36 The 
Commission proposes to conform a cross-reference in rule 206(4)-
3(a)(1)(ii)(D) to the redesignated section.37
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    \36\ See section 305 of the 1996 Act.
    \37\ Rule 206(4)-3 prohibits cash payments for client 
solicitation under certain circumstances.
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3. Schedule I to Form ADV
    Instructions to Schedule I provide guidance on how an investment 
adviser should determine the amount of its assets under management for 
purposes of section 203A of the Advisers Act. The Commission is 
proposing to amend Instruction 7 to Schedule I to clarify that, in 
determining the total amount of assets under management, investment 
advisers may include only those securities portfolios for which they 
provide continuous and regular supervisory or management services as of 
the date of filing Schedule I. In valuing these securities portfolios, 
however, investment advisers may use market values as determined within 
90 days prior to the filing of Schedule I. The Commission also is 
proposing several other miscellaneous conforming amendments to Schedule 
I.\38\
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    \38\ Instruction 5 would be revised to eliminate an unnecessary 
reference to July 8, 1997, amend the instruction with respect to the 
pension consultant exemption consistent with the revision proposed 
in this Release, and add an instruction with respect to the proposed 
multi-state adviser exemption. In addition, the Commission is 
proposing to delete Instruction 8 and the unnecessary reference to 
the date of the valuation of the assets under management in Schedule 
I, Part II.
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4. Transition Rule 203A-5 and Form ADV-T
    The Commission is proposing to withdraw transition rule 203A-5 and 
Form ADV-T. The rule and form are unnecessary because the transition 
under the Coordination Act is now complete.

D. General Request for Comment

    Any interested persons wishing to submit written comments on the 
proposed rule amendments and form changes that are the subject of this 
Release, to suggest additional changes (including changes to the 
provisions of the rules that the Commission is not proposing to amend), 
or to submit comments on other matters that might have an effect on the 
proposals described above, are requested to do so. Commenters 
suggesting alternative approaches are encouraged to submit their 
proposed rule text.

III. Cost-Benefit Analysis

    As discussed above, the proposed multi-state investment adviser 
exemption would permit investment advisers required to register with 30 
or more states to register with the Commission even though they do not 
otherwise meet the criteria for Commission registration.\39\ The 
Commission has limited data on the number of investment advisers that 
would qualify for the proposed multi-state investment adviser 
exemption.\40\ Because investment advisers must be required to register 
in a large number of states to qualify for the proposed multi-state 
investment adviser exemption, the Commission expects that only a few 
investment advisers would be eligible. For Paperwork Reduction Act 
purposes, the Commission estimates that there may be ten investment 
advisers that would qualify each year. \41\ Comment is requested on 
whether there may be more than ten investment advisers eligible for 
this proposed multi-state investment adviser exemption annually. 
Investment advisers that believe they would qualify for this exemption 
are requested to notify the Commission.
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    \39\ See supra section II.A of this Release.
    \40\ Every investment adviser applying for registration with the 
Commission is required to file Form ADV with the Commission and to 
file an amended Form ADV when information on the form has changed. 
Form ADV requires information about the states in which an 
investment adviser is registered, but does not distinguish between 
states where the registration is mandatory and where registration is 
voluntary. Moreover, the Commission no longer receives Form ADV 
information for state-registered advisers.
    \41\ According to information obtained from the one-time form, 
Form ADV-T, there are approximately 21 advisers that are registered 
with 30 or more states and no longer registered with the Commission. 
Although approximately 21 investment advisers are registered in more 
than 30 states, the Commission estimates that only about half of 
these advisers are required to register in 30 or more states. 
Therefore, the Commission estimates that there may be ten investment 
advisers that would qualify for the proposed multi-state exemption 
each year.
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    The proposed multi-state investment adviser exemption would benefit 
investment advisers by permitting them to save costs they otherwise 
would incur if they were required to comply with 30 separate sets of 
state regulations, especially where state regulations may be 
duplicative or conflicting. These benefits would include cost savings 
for complying with state registration requirements, which the 
Commission estimates may be as much as $300,000 annually.\42\ Although 
these annual costs may vary from adviser to adviser, the Commission 
assumes, for purposes of this analysis, that it would cost each adviser 
$30,000 to comply with state-law registration requirements.\43\ Based 
on that figure, the Commission estimates that the annual benefit from 
the proposed multi-state investment adviser exemption, in the form of 
the foregone costs of state registration, would be approximately 
$300,000 for all ten investment advisers expected to be eligible for 
the proposed multi-state investment adviser exemption. Comment is 
requested on the reasonableness of this cost estimate. Commenters are 
requested to provide factual support or assumptions underlying any 
alternative cost estimate.
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    \42\ The Coordination Act expressly preserved the authority of 
the states to require Commission-registered investment advisers to 
pay state filing, registration, and licensing fees. Section 307(b) 
of the Coordination Act.
    \43\ In the Cost-Benefit Analysis of Rules Implementing 
Amendments to the Investment Advisers Act of 1940, the Commission 
estimated that the cost for a mid-size adviser to comply with state-
law registration requirements could be as much as $20,000. See Cost-
Benefit Memorandum (available in File No. S7-31-96) (``Implementing 
Amendments Cost-Benefit Analysis''). The Commission believes that, 
because advisers eligible for the proposed multi-state exemption 
would typically be required to register in more states than the 
average adviser registered with the Commission (i.e., at least 30 
states), the cost would be at least $30,000 per adviser. These 
dollar estimates were based on discussions with law firms that 
provide these kinds of services to investment advisers.
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    The benefits also would include savings for investment advisers 
from the cost of being examined by 30 different state regulators. State 
regulators would save the expense of examining these investment 
advisers.\44\ The Commission does not have information to estimate the 
costs of state examinations for investment advisers because the 
Commission has no data on the frequency with which these investment 
advisers would be examined by a particular state or the number of 
states that would examine these investment advisers each year. The 
Commission requests comment on the state examination costs saved by 
investment advisers that are regulated only by the Commission. Finally, 
the proposed multi-state investment adviser exemption would produce 
certain unquantifiable regulatory benefits in allowing qualifying 
investment advisers to be regulated by one entity rather than 30 
separate state regulators.
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    \44\ The Commission requests comment from the states on the 
costs of investment adviser examinations and the frequency of such 
examinations.
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    The proposed multi-state investment adviser exemption would impose 
certain costs on investment advisers relying on the proposed exemption. 
Under the proposed multi-state investment adviser exemption, an 
investment adviser would be required to attach a representation to 
Schedule I

[[Page 61871]]

initially, when registering, and annually, when amending Form ADV, 
about the number of states in which the investment adviser would be 
required to register. The investment adviser also would be required to 
maintain a record of the states in which it believes it would, but for 
the exemption, be required to register that was the basis of its 
representation included on the attachment to Schedule I.
    The Commission estimates that the total cost to each eligible 
investment adviser to comply with the requirements of the proposed 
multi-state investment adviser exemption would be approximately 
$24,000.\45\ Thus, the Commission estimates that the total cost for the 
ten investment advisers expected to be eligible for the proposed multi-
state investment adviser exemption would be approximately $240,000. 
There also may be incidental costs to the Commission of registering 
investment advisers that qualify for this proposed multi-state 
investment adviser exemption and costs associated with examining those 
investment advisers.
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    \45\ The Commission estimated this figure by multiplying the 
aggregate burden hours required to attach a representation to 
Schedule I to Form ADV (240 hours) by an average hourly compensation 
rate of $100. The estimation of the aggregate burden hours for 
complying with the requirements of the proposed multi-state 
exemption is based on the Commission's Paperwork Reduction Act 
Submission. See infra section IV of this Release.
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    Overall, the Commission believes that the proposed rule amendments 
would not impose significant additional costs on investment advisers, 
but rather would result in a net savings when compared with the costs 
of complying with state registration requirements. Comment is requested 
concerning the savings for complying with state registration 
requirements and any benefit to multi-state advisers in having one 
regulator. Comment is also requested concerning the costs associated 
with the requirements of the proposed multi-state investment adviser 
exemption.
    As discussed in more detail above, the Commission is proposing two 
alternative amendments to the definition of investment adviser 
representative.\46\ Although the Commission has never registered 
investment adviser representatives, the Commission estimates that 
Commission-registered advisers employ a total of approximately 153,000 
investment adviser representatives.\47\ The Commission, however, does 
not have data on the number of representatives who may be affected by 
the proposed amendments. The Commission, therefore, is unable to 
quantify the total benefits and costs that may result from these 
proposed amendments. The Commission believes, nonetheless, that the 
proposed amendments could provide benefits to Commission-registered 
investment advisers and their supervised persons because the proposed 
amendments would reduce their regulatory burdens by permitting 
supervised persons who provide services to a few institutional clients 
to have a small number of natural persons as accommodation clients 
without being subject to state qualification requirements. The 
Commission requests comment on the percentage of all investment adviser 
representatives who would be exempt from state qualification 
requirements under each of the alternatives being proposed.
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    \46\ See supra section II.B of this Release.
    \47\ This estimate of the number of investment adviser 
representatives employed by Commission-registered advisers was made 
for purposes of the Implementing Amendments Cost-Benefit Analysis. 
See Cost-Benefit Memorandum, supra note .
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    The first proposed alternative amendment to the definition of 
investment adviser representative would retain the present ten percent 
allowance and also permit a supervised person to have up to five 
natural person clients. The first alternative definition would benefit 
supervised persons who provide advice to five natural person clients 
because they would no longer be subject to state qualification 
requirements even if they are not able to take advantage of the ten 
percent allowance. Under the current rule, a supervised person would 
need to have ten institutional clients to have one accommodation 
client. The first proposed alternative amendment would provide a bright 
line test that would allow supervised persons and their firms to 
determine easily when supervised persons must register with the states.
    The first alternative would increase the number of supervised 
persons of Commission-registered advisers who would no longer be 
subject to state qualification requirements. This proposal would 
benefit affected supervised persons by permitting them to save the 
expense associated with investment adviser representative qualification 
examinations, such as the costs of monitoring state registration 
requirements and preparing and registering for state exams.\48\ The 
Commission is unable to quantify the total savings because the 
Commission does not have data on the number of representatives who 
would be affected by this proposed amendment. Because the Coordination 
Act preserved the authority of states to require the payment of state 
filing, registration, and licensing fees, there would be no loss to the 
states of fees collected.
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    \48\ In the Implementing Amendments Cost-Benefit Analysis, the 
Commission estimated the following costs: $96 to take an exam, $850 
for exam preparation, and $150 annually per investment adviser 
representative to monitor state registration requirements. See Cost-
Benefit Memorandum, supra note .
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    Costs associated with the first proposed amendment include the 
foregone fees collected by the National Association of Securities 
Dealers Regulation (``NASDR'') and the North American Securities 
Administrators Association, Inc. (``NASAA'') for state examinations for 
investment adviser representatives.\49\ The Commission is unable to 
quantify the total costs because the Commission does not have data on 
the number of representatives who would be affected by this proposed 
amendment. Comment is requested on the effect this provision will have 
on the costs incurred or avoided by investment advisers and their 
supervised persons and on the exam fees collected by the NASDR and 
NASAA.
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    \49\ In the Implementing Amendments Cost-Benefit Analysis, the 
Commission estimated that foregone revenue from the exam fees would 
$32 per exam. Id.
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    As detailed above, the second alternative proposed amendment to the 
definition of investment adviser representative would replace the ten 
percent allowance and allow supervised persons to have accommodation 
clients who have a familial or business relationship with the 
supervised persons or their institutional clients without limitation on 
the number of accommodation clients. This alternative proposal might 
have the effect of either increasing or decreasing the number of 
supervised persons subject to state qualification requirements, and 
comment is requested on which outcome is more likely.
    To the extent that the second alternative increases the number of 
supervised persons who are no longer subject to state qualification 
requirements, affected supervised persons would save state examination 
and examination preparation fees.\50\ The costs associated with such an 
increase would be the foregone fees collected by the NASDR and NASAA 
for the state examinations.\51\
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    \50\ See supra note and accompanying text.
    \51\ See supra note and accompanying text. The Commission does 
not believe that there are any substantial costs to investor 
protection that would be associated with this proposed amendment.
---------------------------------------------------------------------------

    If the second alternative decreases the number of supervised 
persons who are not subject to state qualification requirements, the 
alternative would

[[Page 61872]]

produce unquantifiable benefits by tying the accommodation client 
exception more closely to the purpose for which it was adopted. The 
second alternative would permit supervised persons to accept clients 
who have a relationship with the supervised person or his institutional 
clients that would result in the individual client being considered an 
accommodation client. The costs of the second alternative, if it 
decreases the number of supervised persons not subject to state 
qualification requirements, would be the expense associated with state 
investment adviser representative examinations.52 Comment is 
requested on the effect of the second alternative amendment on the 
costs incurred or avoided by investment advisers and their supervised 
persons.
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    \52\ See supra note and accompanying text.
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    The other proposed rule amendments would revise the time period for 
determining the value of assets of plans for pension consultants, 
clarify the instructions in Schedule I to Form ADV, and provide an 
additional instruction in Schedule I to Form ADV. The benefits of these 
proposed amendments would be to eliminate any confusion that the 
language of the rules or instructions may have created. The Commission 
believes that these amendments would not impose any additional costs to 
investment advisers.
    Comment is requested on this cost-benefit analysis. Commenters are 
requested to provide views and empirical data relating to any costs and 
benefits associated with the proposed rule amendments.
    For purposes of making determinations required by the Small 
Business Regulatory Enforcement Fairness Act of 1996, the Commission is 
requesting information regarding the potential effect of the proposed 
rule amendments on the economy on an annual basis. Commenters should 
provide data to support their views.

IV. Paperwork Reduction Act

    Certain provisions of the proposed rule amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995,53 and the Commission has 
submitted them to the Office of Management and Budget (``OMB'') for 
review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The 
title for the collections of information are ``Form ADV'' and 
``Schedule I to Form ADV,'' both under the Advisers Act. Form ADV and 
Schedule I to Form ADV, which the Commission is proposing to amend, 
contain currently approved collections of information under OMB control 
numbers 3235-0049 and 3235-0490, respectively. The proposed rule 
amendments are necessary to clarify previously-adopted rules that 
implemented changes to the Advisers Act. An agency may not sponsor, 
conduct, or require response to an information collection unless a 
currently valid OMB control number is displayed.
---------------------------------------------------------------------------

    \53\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

Form ADV

    Form ADV is required by rule 203-1 [17 CFR 275.203-1] to be filed 
by every adviser that applies for registration with the Commission as 
an investment adviser. Rule 204-1 [17 CFR 275.204-1] sets forth the 
circumstances requiring the filing of an amendment to Form ADV. 
Registrants must file an amended Form ADV when information on the 
initial Form ADV has changed, either at the end of the fiscal year or 
promptly for certain material changes. In addition, rule 204-1 also 
requires an investment adviser to file the cover page of Form ADV 
(along with a Schedule I) annually within 90 days after the end of the 
investment adviser's fiscal year regardless of whether other changes 
have taken place during the year.
    After 1997, the Commission estimates approximately 7,300 investment 
advisers would be registered with the Commission and required to amend 
Form ADV on an annual basis as required by rule 204-1.54 The 
Commission previously estimated that there would be 750 new investment 
advisers registering with the Commission each year. The Commission 
estimates that an additional ten investment advisers each year would be 
eligible for Commission registration under the proposed multi-state 
exemption. Thus, the annual number of responses for filing an 
application for investment adviser registration is estimated to be 
approximately 760. The 760 new advisers each year also will be subject 
to the annual amendment requirement. The Commission estimates that 
there would be 8,060 total respondents to this collection of 
information on an annual basis.
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    \54\ Under rule 203A-5 of the Advisers Act, all investment 
advisers registered with the Commission were required to file a 
completed Form ADV-T with the Commission by July 8, 1997, indicating 
whether they remain eligible for Commission registration. Of the 
23,350 Commission-registered investment advisers, approximately 
7,200 advisers indicated that they remain eligible for Commission 
registration, 10,600 advisers withdrew their registrations, and 
5,800 advisers did not file their Form ADV-T. The Commission 
believes that most of the investment advisers that did not file Form 
ADV-T are either no longer in the advisory business or no longer 
eligible to register with the Commission. The Commission expects to 
cancel the registrations of most of these investment advisers.
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    The Commission estimates that each of the 7,300 investment advisers 
registered with the Commission will amend Form ADV, as required by rule 
204-1, an average of 1.5 times annually. Of the 760 new advisers each 
year, 660 will amend Form ADV an average of once annually. The 
estimated 100 newly-formed investment advisers that will rely on rule 
203A-2(d) will amend Form ADV an average of twice annually. Thus, the 
annual number of responses for completing amended Form ADV is estimated 
to be approximately 11,810.
    The total number of annual responses for Form ADV (initial 
registration and amendments) is estimated to be 760 responses for new 
advisers (including ten responses for new advisers relying on the 
proposed multi-state exemption) and 11,810 responses for annual 
amendments. The average burden hours for completing Form ADV for 
initial registration is 9.0063 hours for each respondent (unchanged 
from previous estimate). The average burden hours for completing Form 
ADV as an annual amendment is 1.0672 hours (unchanged from previous 
estimate). The total burden hours imposed by Form ADV is estimated to 
be 19,448.42.
    The collection of information required by Form ADV is mandatory, 
and responses are not kept confidential.

Schedule I

    Schedule I requires an investment adviser to declare whether it is 
eligible for Commission registration. Schedule I, as part of Form ADV, 
is required to be filed with an investment adviser's initial 
application on Form ADV. The rules imposing this collection of 
information are found at 17 CFR 275.203-1 and 17 CFR 279.1. Rule 204-1 
[17 CFR 275.204-1] sets forth the circumstances requiring the filing of 
an amended Form ADV. Rule 204-1 requires an investment adviser 
registered with the Commission to file an amended Schedule I to Form 
ADV annually within 90 days after the end of the investment adviser's 
fiscal year.
    The Commission estimates that 7,300 investment advisers registered 
with the Commission would respond to the information collection 
requirements of Schedule I to Form ADV an average of once a year. In 
addition, the Commission estimates that approximately 760 new advisers 
each year will file Schedule I of Form ADV. Of the 760 advisers, 660 
will file Schedule I to Form ADV an average of once each year, and the 
remaining 100 that rely on the exemption provided by

[[Page 61873]]

rule 203A-2(d) will file Schedule I to Form ADV an average of twice 
each year. It is estimated that the total number of responses would be 
8,160.
    For the 765 investment advisers that must calculate assets under 
management for the purpose of completing Schedule I (9.5% of 
respondents--excluding the ten investment advisers expected to rely on 
the proposed multi-state exemption), compliance with the requirement to 
file an amended Schedule I would impose a total annual burden for each 
investment adviser of approximately 2 hours (unchanged from previous 
estimate). For the 7,285 investment advisers that either do not need to 
calculate assets under management to complete Schedule I or calculate 
assets under management as part of their normal business operations 
(90.5% of respondents--excluding the ten investment advisers expected 
to rely on the proposed multi-state exemption) this burden would be 
0.75 of an hour (unchanged from previous estimate).
    The Commission estimates that an additional ten investment advisers 
would be eligible for the proposed multi-state exemption. For the ten 
investment advisers that would rely on the proposed multi-state 
exemption, the Commission estimates compliance with the requirement to 
file an amended Schedule I attaching a representation that the 
investment adviser is required to register as an investment adviser in 
30 or more states would impose a total annual burden for each 
investment adviser of approximately 240 hours.55
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    \55\ Investment advisers also would be required to maintain a 
record of the states in which they believe they would, but for the 
exemption, be required to register that was the basis of their 
representation included on the attachment to Schedule I. The 
Commission believes that the requirement that the investment 
advisers maintain a record would impose a nominal burden on 
investment advisers because the information would have to be 
gathered for purposes of making the representation.
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    The total burden hours imposed by Schedule I to Form ADV is 
estimated to be 9,480.313.
    The collection of information required by Schedule I is mandatory, 
and responses are not kept confidential.
    The Commission estimates that these collections of Form ADV and 
Schedule I together would impose a total hourly burden of 28,928.73 
hours.
    The total burdens associated with Form ADV and Schedule I to Form 
ADV would change from the filing of the last Paperwork Reduction Act 
Submission because of the proposed multi-state exemption and the 
tabulation of Form ADV-Ts.56 The current total Form ADV 
burden is 18,127.88 hours. The new total Form ADV burden would be 
19,448.42 hours. The total change in burden hours for Form ADV would be 
1,320.54 hours. The current total burden for Schedule I is 6,418.94 
hours. The new total burden for Schedule I would be 9,480.313 hours. 
The total change in burden for Schedule I of Form ADV would be 
3,061.373 hours.
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    \56\ The total hourly burdens for Form ADV and Schedule I would 
change because (1) the proposed multi-state exemption would permit a 
small number of additional advisers to register with the Commission, 
and (2) the tabulation of information from the completed Forms ADV-T 
has provided the Commission with a more accurate number of advisers 
it regulates after the July 8, 1997 division of regulatory 
responsibilities between the federal and state governments.
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    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to (i) evaluate whether the proposed collections of 
information are necessary for the proper performance of the functions 
of the agency, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the agency's estimate of the 
burden of the proposed collections of information; (iii) enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) minimize the burden of the collections of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
D.C. 20503, and should also send a copy of their comments to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Stop 6-9, Washington, D.C. 20549 with reference to File 
No. S7-28-97. OMB is required to make a decision concerning the 
collections of information between 30 and 60 days after publication, so 
that a comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication.

V. Summary of Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding 
amendments to rules 203A-2, 203A-3, 206(4)-3 and Schedule I to Form 
ADV, and the withdrawal of rule 203A-5 and Form ADV-T under the 
Advisers Act. The following summarizes the IRFA.
    As set forth in greater detail in the IRFA, the Coordination Act, 
which became effective on July 8, 1997, amended the Advisers Act by 
reallocating federal and state responsibilities for regulation of 
investment advisers. On May 15, 1997, the Commission adopted new rules 
and rule amendments to implement the Coordination Act.57 The 
Commission proposes to revise some of these implementing rules. The 
IRFA states that the proposed rule amendments would exempt multi-state 
investment advisers from the prohibition on Commission registration, 
amend the definition of investment adviser representative, and clarify 
certain other implementing rules.
---------------------------------------------------------------------------

    \57\ See Adopting Release, supra note 6.
---------------------------------------------------------------------------

    The IRFA sets forth the statutory authority for the proposed rule 
amendments. The IRFA also discusses the effect of the proposed rule 
amendments on small entities. For purposes of the Advisers Act and the 
Regulatory Flexibility Act, an investment adviser generally is a small 
entity (i) if it manages assets of $50 million or less, in 
discretionary or nondiscretionary accounts, as of the end of its most 
recent fiscal year or (ii) if it renders other advisory services, has 
$50,000 or less in assets related to its advisory 
business.58
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    \58\ Rule 275.0-7 [17 CFR 275.0-7]. In January 1997, the 
Commission proposed to revise this definition of ``small entity.'' 
See Definitions of ``Small Business'' or ``Small Organization'' 
Under the Investment Company Act of 1940, the Investment Advisers 
Act of 1940, the Securities Exchange Act of 1934, and the Securities 
Act of 1933, Release Nos. 33-7383, 34-38190, IC-22478, and IA-1609 
(Jan. 22, 1997) [62 FR 4106 (Jan. 28, 1997)]. The Commission expects 
to adopt a revised definition of small investment adviser for 
Regulatory Flexibility Act purposes to reflect the Coordination Act.
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    The proposed multi-state exemption for investment advisers would be 
available to any investment adviser that is prohibited from registering 
with the Commission and is required to register in 30 or more states. 
The Commission estimates that there may be ten such investment advisers 
that would be eligible for the proposed multi-state exemption each 
year.59 Therefore, the Commission believes that there would 
be a few small entities that would be affected by the proposed rule.
---------------------------------------------------------------------------

    \59\ See supra note 41.
---------------------------------------------------------------------------

    The proposed rule amendments minimize regulatory burdens on small-
entity investment advisers that are eligible for the proposed multi-
state exemption by permitting the investment adviser, once registered 
with the

[[Page 61874]]

Commission, to continue to be eligible for the proposed multi-state 
exemption until it is obligated to register in less than 25 states. 
This five-state difference prevents an investment adviser from being 
required to register and then de-register frequently with the 
Commission as a result of a change in its registration obligation in 
one state or few states.
    The proposed amendments to the definition of investment adviser 
representative would permit supervised persons of Commission-registered 
investment advisers who only have a few business or institutional 
clients to accept accommodation clients. The Commission does not have 
information from which to estimate the number of Commission-registered 
investment advisers managing assets of $50 million or less or having 
less than $50,000 in assets relating to its advisory business whose 
supervised persons would be exempt from the definition of investment 
adviser representative under the proposed amendments.
    The other proposed rule amendments affect only Commission-
registered investment advisers. For purposes of these amendments, the 
Commission estimates that approximately 850 investment advisers are 
small entities.60 These proposed amendments clarify the 
implementing rules and do not impose any additional burden on 
investment advisers. Therefore, the Commission believes that it is 
reasonable to estimate that these clarifying amendments would not have 
a significant economic effect on small entities. Comment is requested 
on the number of small entities that would be affected by these 
proposed amendments.
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    \60\ This estimate of the number of small entities was made for 
purposes of the Final Regulatory Flexibility Analysis for the rules 
implementing the Coordination Act. See Adopting Release, supra note 
6, at nn. 189-190 and accompanying text. Of the 23,350 Commission-
registered investment advisers, 5,800 advisers have not filed their 
Form ADV-T, indicating their eligibility to remain registered with 
the Commission. See supra note 54. The Commission also expects to 
adopt a revised definition of small entity for purposes of the 
Regulatory Flexibility Act. See supra note 58. Therefore, the 
Commission plans to revise its estimate of the number of Commission-
registered advisers that are small entities after the transition is 
complete so that the Commission would have more accurate information 
to estimate the number of small entities under the new definition of 
that term.
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    The proposed withdrawal of rule 203A-5 and Form ADV-T would have no 
effect on small entities because no investment advisers currently 
should be filing Form ADV-T.
    The proposed rule amendments would impose certain new reporting and 
recordkeeping requirements and eliminate certain other requirements. 
Investment advisers relying on the proposed multi-state exemption would 
be required at initial registration to attach a representation to 
Schedule I that the investment adviser has determined that it must 
register in at least 30 states and a representation on Schedule E to 
Form ADV that it will withdraw from Commission registration when it is 
no longer required to register in at least 25 states.61 
Thereafter, in the annual amendment to Form ADV revising Schedule I, 
the investment adviser would be required to submit a representation 
that it has concluded that, but for the proposed multi-state exemption, 
it would be required to register in at least 25 states. If the amended 
Schedule I indicated that the investment adviser was no longer eligible 
for Commission registration, the proposed amendment would require the 
investment adviser to file a Form ADV-W within 90 days to withdraw its 
registration with the Commission.
---------------------------------------------------------------------------

    \61\ The proposed multi-state investment adviser exemption also 
would require investment advisers to maintain a record of the states 
in which they would, but for the exemption, be required to register.
---------------------------------------------------------------------------

    The Commission estimates that it will take approximately 240 hours, 
annually on average, to comply with these requirements. This burden on 
investment advisers that use this proposed rule would be outweighed by 
the cost savings and benefits to the multi-state investment advisers 
relying on the proposed multi-state exemption.
    The proposed withdrawal of Form ADV-T and rule 203A-5 would 
eliminate any incidental burden that may continue to be imposed by the 
transition rule. The proposed rule amendments to rule 206(4)-3 and Form 
ADV would not impose any new reporting, recordkeeping or other 
compliance requirements.
    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with, the proposed rule amendments.
    The IRFA discusses the various alternatives considered by the 
Commission in connection with the proposed rule amendments that might 
minimize the effect on small entities, including (a) the establishment 
of differing compliance or reporting requirements or timetables that 
take into account resources available to small entities; (b) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rule for small entities; (c) the use 
of performance rather than design standards; and (d) an exemption from 
coverage of the rule, or any part thereof, for small entities.
    As stated in the IRFA, after taking into account the resources 
available to small entities and the potential burden that could be 
placed on investment advisers that may no longer qualify for the 
proposed multi-state exemption because of a change in the registration 
obligations in a few states, the Commission proposes to permit an 
investment adviser, once registered with the Commission, to continue to 
be eligible for the proposed multi-state exemption as long as it would 
be obligated to register in at least 25 states, five fewer states than 
when it initially registered. Moreover, the burdens associated with 
complying with the requirements of the rule would affect only a very 
small number of investment advisers each year.
    With respect to the other proposed rule amendments, the Commission 
believes that the establishment of different compliance or reporting 
requirements for small entities is neither necessary nor practicable. 
The information required by Form ADV and Schedule I is necessary for 
the Commission to determine whether the investment advisers are 
eligible for Commission registration. The proposed rule amendments will 
not change significantly any compliance costs. Further clarification, 
consolidation or simplification of the requirements for small entities 
does not seem feasible. The Commission believes that the rule 
amendments, as proposed, will not adversely affect small entities and, 
instead, include regulatory alternatives that minimize the effect on 
small entities.
    The IRFA includes information concerning the solicitation of 
comments with respect to the IRFA generally, and in particular, the 
number of small entities that would be affected by the proposed rule 
amendments. A copy of the IRFA may be obtained by contacting Carolyn-
Gail Gilheany, Securities and Exchange Commission, 450 5th Street, 
N.W., Mail Stop 10-6, Washington, D.C. 20549.

VI. Statutory Authority

    The Commission is proposing amendments to rule 203A-2 pursuant to 
the authority set forth in section 203A(c) of the Investment Advisers 
Act of 1940 [15 U.S.C. 80b-3a(c)].
    The Commission is proposing amendments to rule 203A-3 pursuant to 
the authority set forth in sections 202(a)(17) and 211(a) of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-2(a)(17), 80b-11(a)].
    The Commission is proposing amendments to rule 206(4)-3 pursuant to 
the authority set forth in sections 204,

[[Page 61875]]

206, and 211 of the Investment Advisers Act of 1940 [15 U.S.C. 80b-4, 
80b-6, 80b-11].
    The Commission is proposing to withdraw rule 203A-5 pursuant to the 
authority set forth in sections 204 and 211(a) of the Investment 
Advisers Act of 1940 [15 U.S.C. 80b-4, 80b-11(a)].
    The Commission is proposing amendments to Schedule I to Form ADV 
pursuant to the authority set forth in sections 203(c)(1) and 204 of 
the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1) and 80b-4].
    The Commission is proposing to remove and reserve rule 279.3 and 
proposing to remove Form ADV-T pursuant to the authority set forth in 
sections 204 and 211(a) of the Investment Advisers Act of 1940 [15 
U.S.C. 80b-4, 80b-11(a)].

List of Subjects in 17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule and Form Amendments

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

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

    1. The authority citation for Part 275 is revised to read as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.
    Section 275.203A-1 is also issued under 15 U.S.C. 80b-3a.
    Section 275.203A-2 is also issued under 15 U.S.C. 80b-3a.
    Section 275.204-2 is also issued under 15 U.S.C. 80b-6.
    Section 275.205-3 is also issued under 15 U.S.C. 80b-5(e).

    2. Section 275.203A-2 is amended by revising the introductory text 
of Sec. 275.203A-2 and paragraph (b)(3) and adding paragraph (e) to 
read as follows:


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

    The prohibition of section 203A(a) of the Act (15 U.S.C. 80b-3a(a)) 
shall not apply to:
* * * * *
    (b)  * * *
    (3) In determining the aggregate value of assets of plans, include 
only that portion of a plan's assets for which the investment adviser 
provided investment advice (including any advice with respect to the 
selection of an investment adviser to manage such assets). Determine 
the aggregate value of assets by cumulating the value of assets of 
plans with respect to which the investment adviser was last employed or 
retained by contract to provide investment advice during the 12-month 
period ended within 90 days of filing Schedule I to Form ADV (17 CFR 
279.1).
* * * * *
    (e) Multi-State Investment Advisers. An investment adviser that:
    (1) Upon submission of its application for registration with the 
Commission, is required by the laws of 30 or more States to register as 
an investment adviser with securities commissioners (or any agencies or 
officers performing like functions) in the respective States, and 
thereafter would, but for this section, be required by the laws of at 
least 25 States to register as an investment adviser with securities 
commissioners (or any agencies or officers performing like functions) 
in the respective States;
    (2) Attaches a representation to Schedule I to Form ADV (17 CFR 
279.1) that the investment adviser has reviewed the applicable State 
and federal laws and has concluded that, in the case of an application 
for registration with the Commission, it is required by the laws of 30 
or more States to register as an investment adviser with the securities 
commissioners (or any agencies or officers performing like functions) 
in the respective States and, in the case of an amendment to Form ADV 
revising Schedule I to Form ADV, it would be required by the laws of at 
least 25 States to register with the securities commissioners (or any 
agencies or officers performing like functions) in the respective 
States within 90 days prior to the date of filing Schedule I;
    (3) Includes on Schedule E to its Form ADV (17 CFR 279.1), an 
undertaking to withdraw from registration with the Commission if an 
amendment to Form ADV revising Schedule I to Form ADV indicates that 
the investment adviser would be required by the laws of fewer than 25 
States to register as an investment adviser with the securities 
commissioners (or any agencies or officers performing like functions) 
in the respective States, and, within 90 days after filing Schedule I 
to Form ADV, files a completed Form ADV-W (17 CFR 279.2) whereby the 
investment adviser withdraws from registration with the Commission if 
the amendment to Form ADV revising Schedule I indicates that the 
investment adviser would be prohibited by section 203A of the Act (15 
U.S.C. 80b-3a) from registering with the Commission; and
    (4) Maintains in an easily accessible place a record of the States 
that the investment adviser has determined it would, but for the 
exemption, be required to register for a period of not less than five 
years from the filing of a Schedule I to Form ADV that includes a 
representation that is based on such record.
    3. In Sec. 275.203A-3 the introductory text and paragraph (a) are 
revised to read as follows:

Proposal I


Sec. 275.203A-3  Definitions.

    For purposes of section 203A of the Act (15 U.S.C. 80b-3a) and the 
rules thereunder:
    (a)(1) Investment Adviser Representative. Investment adviser 
representative of an investment adviser means a supervised person of 
the investment adviser:
    (i) Who has more than five clients who are natural persons other 
than excepted persons described in paragraph (a)(3)(i) of this section; 
or
    (ii) More than ten percent of whose clients are natural persons 
other than excepted persons described in paragraph (a)(3)(i) of this 
section.
    (2) Notwithstanding paragraph (a)(1) of this section, a supervised 
person is not an investment adviser representative if the supervised 
person:
    (i) Does not on a regular basis solicit, meet with, or otherwise 
communicate with clients of the investment adviser; or
    (ii) Provides only impersonal investment advice.
    (3) For purposes of this section:
    (i) Excepted person means a natural person who is a qualified 
client as defined in Sec. 275.205-3(d)(1).
    (ii) Impersonal investment advice means investment advisory 
services provided by means of written material or oral statements that 
do not purport to meet the objectives or needs of specific individuals 
or accounts.
    (4) Supervised persons may rely on the definition of client in 
Sec. 275.203(b)(3)-1 to identify clients for purposes of paragraph 
(a)(1) of this section, except that supervised persons need not count 
clients that are not residents of the United States.

Proposal II


Sec. 275.203A-3  Definitions.

    For purposes of section 203A of the Act (15 U.S.C. 80b-3a) and the 
rules thereunder:
    (a)(1) Investment Adviser Representative. Investment adviser 
representative of an investment adviser means a supervised person of 
the

[[Page 61876]]

investment adviser whose clients are natural persons other than 
excepted persons described in paragraph (a)(3)(i) of this section.
    (2) Notwithstanding paragraph (a)(1) of this section, a supervised 
person is not an investment adviser representative if the supervised 
person:
    (i) Does not on a regular basis solicit, meet with, or otherwise 
communicate with clients of the investment adviser; or
    (ii) Provides only impersonal investment advice.
    (3) For purposes of this section:
    (i) Excepted person means a natural person who is a:
    (A) Qualified client as defined in Sec. 275.205-3(d)(1);
    (B) Partner, officer, director, (or other person occupying a 
similar status or performing similar functions), of the investment 
adviser for whom the supervised person works or of a client that is not 
a natural person of the investment adviser for whom the supervised 
person works;
    (C) Relative, spouse, or relative of spouse of such partner, 
officer or director; or
    (D) Relative, spouse or relative of spouse of the supervised 
person.
    (ii) Impersonal investment advice means investment advisory 
services provided by means of written material or oral statements that 
do not purport to meet the objectives or needs of specific individuals 
or accounts.
    (4) Supervised persons may rely on the definition of client in 
Sec. 275.203(b)(3)-1 to identify clients for purposes of paragraph 
(a)(1) of this section, except that supervised persons need not count 
clients that are not residents of the United States.


Sec. 275.203A-5  [Removed and Reserved]

    4. Section 275.203A-5 is removed and reserved.


Sec. 275.206(4)-3  [Amended]

    5. In Sec. 275.206(4)-3, paragraph (a)(1)(ii)(D) is amended by 
revising the cite ``203(e)(3)'' to read ``203(e)(4)''.


Secs. 275.203A-1 and 275.203A-2  [Amended]

    6. In 17 CFR part 275 remove ``[15 U.S.C. 80b-3A(a)]'' and add, in 
its place, ``(15 U.S.C. 80b-3a(a))'' in the following places:
    a. Section 275.203A-1 (b)(2), (c), and (d); and
    b. Section 275.203A-2 (d)(2) and (d)(3).

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

    7. The authority citation for Part 279 continues to read as 
follows:

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

    8. By revising Schedule I to Form ADV (referenced in Sec. 279.1) to 
read as follows:

    Note: The text of Schedule I to Form ADV (Sec. 279.1) does not 
and the amendments will not appear in the Code of Federal 
Regulation. Schedule I is attached as Appendix A.


Sec. 279.3  [Removed and Reserved]

    9. Section 279.3 is removed and reserved.
    10. Form ADV-T is removed.

    Note: Form ADV-T does not appear in the Code of Federal 
Regulation.

    Dated: November 13, 1997.

    By the Commission.
Jonathan G. Katz,
Secretary.

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[[Page 61880]]

Schedule Instructions

Instruction 1. General Instructions

    (a) SEC's Collection of Information. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number. 
Sections 203(c)(1) and 204 of the Advisers Act authorize the Commission 
to collect the information on this Schedule from applicants. See 15 
U.S.C. Secs. 80b-3(c)(1) and 80b-4. Filing of this Schedule is 
mandatory. The principal purpose of this collection of information is 
to enable the Commission to determine which investment advisers are 
eligible to maintain their registration with the Commission and to 
provide for the withdrawal from Commission registration for advisers 
that are no longer eligible. The Commission will maintain files of the 
information on this Schedule and will make the information publicly 
available. Any member of the public may direct to the Commission any 
comments concerning the accuracy of the burden estimate on page one of 
this Schedule, and any suggestions for reducing this burden. This 
collection of information has been reviewed by the Office of Management 
and Budget in accordance with the clearance requirements of 44 U.S.C. 
Sec. 3507. The applicable Privacy Act system of records is SEC-2, and 
the routine use of the records are set forth at 40 Federal Register 
39255 (Aug. 27, 1975) and 41 FR 5318 (Feb. 5, 1976).
    (b) For Further Information: Additional information about the rules 
referred to in this Schedule is found in the Commission's adopting 
release, Rules Implementing Amendments to the Investment Advisers Act 
of 1940, Investment Advisers Act Rel. No. 1633 (May 15, 1997).

Instruction 2. Principal Place of Business

    Applicant's principal place of business reported in Form ADV, Part 
I, Item 2.A. is the applicant's principal office and place of business, 
i.e., the executive office from which the officers, partners, or 
managers of the applicant direct, control, and coordinate applicant's 
activities. See  rule 203A-3(c).

Instruction 3. Advisers in Colorado, Iowa, Ohio, or Wyoming; Foreign 
Advisors

    Under the Advisers Act, an applicant whose principal office and 
place of business (see Instruction 2) is in a State that does not 
register investment advisers is required to register with the 
Commission, even if none of the criteria for SEC registration (e.g., 
$25 million of assets under management) is met. Currently these States 
are Colorado, Iowa, Ohio, and Wyoming. Applicants that have their 
principal office and place of business in one of these States should 
check the box in item (a)(ii) of Part I.
    An applicant whose principal office and place of business is 
located in a country other than the United States (i.e., not in the 
United States, the District of Columbia, Puerto Rico, the Virgin 
Islands, or any other possession of the United States) also is required 
to register with the Commission. Such an applicant should check the box 
in item (a)(iii) of Part I.

Instruction 4. Advisers to Investment Companies

    An applicant should not check item (a)(iv) of Part I unless 
applicant currently provides advisory services pursuant to an 
investment advisory contract to an investment company registered under 
the Investment Company Act of 1940. The investment company must be 
operational, i.e., have assets and shareholders (other than just the 
organizing shareholders).

Instruction 5. Exemptions

    (a) Pension Consultants. An applicant that provides investment 
advice to employee benefit plans with respect to assets having an 
aggregate value of more than $50 million during the 12-month period 
ended within 90 days of filing this Schedule may register with the 
Commission. An investment adviser seeking to rely on the pension 
consultant exemption must aggregate: (i) the value of assets for which 
it provided advisory services at the end of the 12-month period, and 
(ii) the value of any other assets for which it provided advisory 
services at the end of its employment or contract (if terminated before 
the end of the 12-month period). See rule 203A-2(b).
    (b) Affiliated Advisers. An applicant that controls, is controlled 
by, or is under common control with, an investment adviser that is 
eligible to maintain its registration with the Commission (``eligible 
adviser'') is itself eligible to maintain its registration with the 
Commission if the principal office and place of business of the 
applicant is the same as that of the eligible adviser. See rule 203A-
2(c).
    (c) Newly Formed Advisers. A newly formed investment adviser may 
register with the Commission at the time of its formation if the 
adviser has a reasonable expectation that within 120 days of 
registration it will become eligible for Commission registration. At 
the end of the 120-day period, the adviser is required to file an 
amended Schedule I. If the investment adviser indicates on the amended 
Schedule I that it has not become eligible to register with the 
Commission, the adviser is required to file a Form ADV-W concurrently 
with the Schedule I, thereby withdrawing from registration with the 
Commission. An applicant registering with the Commission in reliance on 
this exemption must include on Schedule E of Form ADV an undertaking to 
withdraw from registration if, at the end of the 120-day period, the 
investment adviser would be prohibited from Commission registration. 
See rule 203A-2(d).
    (d) Multi-State Advisers. An investment adviser may register with 
the Commission if it is required to register as an investment adviser 
with the securities authorities of 30 or more states. To take advantage 
of this exemption, an applicant must (i) attach to this Schedule a 
representation that it has reviewed the state and federal laws and has 
concluded that it must register with the securities authorities of at 
least 30 states within 90 days prior to the date of filing this 
Schedule, and (ii) include on Schedule E to Form ADV an undertaking to 
withdraw from registration if it would no longer be required to 
register in at least 25 states when it files its annual amendment to 
Form ADV revising this Schedule. Each year (and for so long as the 
investment adviser continues to rely on the multi-state investment 
adviser exemption), when the adviser updates its Schedule I, it must 
attach a new representation that it has concluded that, but for the 
exemption, it would be required to register with the securities 
authorities of at least 25 states within 90 days prior to the date of 
filing Schedule I. Additionally, each time the adviser makes such a 
representation, the adviser must create and maintain a list of the 
states that, but for the exemption, it would be required to register. 
This list must be maintained in an easily accessible place for a period 
of not less than five years from the date each representation is filed 
as an attachment to this Schedule. See rule 203A-2(e).

Instruction 6. Part I, Item (b)

    If item (b) of Part I is checked, registrant's investment 
registration with the SEC must be withdrawn within 90 days after the 
date this Schedule I was required by rule 204-1(a) to have been filed 
with the Commission. Thus, registrant's registration must be withdrawn 
no later than 180 days after the end of its fiscal year. If 
registrant's

[[Page 61881]]

registration is not withdrawn within this time period, registrant will 
be subject to having its registration cancelled pursuant to section 
203(h) of the Advisers Act. See rule 203A-1(c).

Instruction 7. Determining Assets Under Management

    Not all applicants are required to provide the amount of their 
assets under management. An applicant must report its assets under 
management in Part II only if item I(a)(i) is check yes ``(x)'' and the 
amount of assets applicant has under management is the sole basis for 
applicant's eligibility for SEC registration (i.e., applicant has not 
checked any of items I(a)(ii) through (x)).
    In determining the assets applicant has under management, include 
the ``securities portfolios'' (or portions thereof) for which applicant 
provides ``continuous and regular supervisory or management services'' 
as of the date of filing this Schedule.
    (a) Securities Portfolios. An account is a securities portfolio if 
at least 50% of the total value of the account consists of securities. 
For purpose of this 50% test, applicant may treat cash and cash 
equivalents (i.e., bank deposits, certificates of deposit, bankers 
acceptances, and similar bank instruments) as securities.
    Applicants may include securities portfolios that are: (i) Family 
or proprietary accounts of the applicant (unless applicant is a sole 
proprietor, in which case the personal assets of the sole proprietor 
must be excluded); (ii) accounts for which applicant receives no 
compensation for its services; and (iii) accounts of clients who are 
not U.S. residents.
    (b) Value of Portfolio. Include the entire value of each securities 
portfolio (or portion thereof) for which applicant provides 
``continuous and regular supervisory or management services.'' If 
applicant provides continuous and regular supervisory or management 
services for only a portion of a securities portfolio, include as 
assets under management only the portion of the securities portfolio 
that receives such services. Exclude, for example, a portion of an 
account:
    (1) under management by another person; or
    (2) that consists of real estate or businesses the operations of 
which are ``managed'' on behalf of a client but not as an investment.
    No deduction is required for securities purchased on margin.
    (c) Continuous and Regular Supervisory or Management Services.
    General Criteria. An applicant provides continuous and regular 
supervisory or management services with respect to a securities 
portfolio if the applicant either--
    (1) has discretionary authority over and provides ongoing 
supervisory or management services with respect to the account; or
    (2) does not have discretionary authority over the account, but has 
an ongoing responsibility to select or make recommendations, based upon 
the needs of the client, as to specific securities or other investments 
the account may purchase or sell and, if such recommendations are 
accepted by the client, is responsible for arranging or effecting the 
purchase or sale.
    Factors. Applicants should consider the following factors in 
evaluating whether continuous and regular supervisory or management 
services are being provided.
    (1) Terms of the advisory contract. A provision in an advisory 
contract by which the applicant agrees to provide ongoing management 
services suggests that the account receives such services. Other 
provisions in the contract, or the actual management of the applicant, 
however, may rebut such a suggestion.
    (2) Form of compensation. A form of compensation based on the 
average value of assets under management over a specified period of 
time would suggest that the applicant provides continuous and regular 
supervisory or management services. On the other hand, a form of 
compensation based upon time the applicant spends with a client during 
a client visit would suggest otherwise. A retainer based upon a 
percentage of assets covered by a financial plan would not suggest that 
the applicant provides continuous and regular supervisory or management 
services.
    (3) The management practice of the applicant. The extent to which 
the applicant is actively managing the assets or providing advice bears 
on whether the services are continuous and regular supervisory or 
management services. However, infrequent trades (e.g., based on a ``buy 
and hold'' strategy) should not alone form the basis for a 
determination that the services are not provided on a continuous and 
regular basis.
    Examples. To assist applicants, the Commission is providing 
examples of accounts that may receive continuous and regular 
supervisory or management services, based upon the criteria and factors 
discussed above. These examples are not exclusive.
    Accounts that may receive continuous and regular supervisory or 
management services:
    (1) Accounts for which the applicant allocates assets of a client 
among mutual funds (even if it does so without a grant of discretionary 
authority, but only if the general criteria for non-discretionary 
accounts is satisfied and the factors suggest that the account receives 
continuous and regular supervisory or management services); and
    (2) Accounts for which the applicant allocates assets among other 
managers--but only under a grant of discretionary authority by which it 
may hire and fire managers and reallocate assets among them.
    Accounts that do not receive continuous and regular supervisory or 
management services:
    (1) Accounts for which the applicant provides market timing 
recommendations (to buy or sell) but has no ongoing management 
responsibilities;
    (2) Accounts for which the applicant provides only impersonal 
advice, e.g., market newsletters;
    (3) Accounts for which the applicant provides an initial asset 
allocation, without continuous and regular monitoring and reallocation; 
and
    (4) Accounts for which the applicant provides advice only on an 
intermittent or periodic basis, upon the request of the client, or in 
response to some market event, e.g., an account that is reviewed and 
adjusted on a quarterly basis.
    (d) Value of Assets Under Management. Calculate the total amount of 
applicant's assets under management by including the value, as 
determined within 90 days prior to the date of filing this Schedule, of 
securities portfolios (or portions thereof) for which applicant 
provides continuous and regular supervisory or management services as 
of the date of filing this Schedule. Current market value should be 
determined using the same method as that used to determine the account 
value reported to clients or fees for investment advisory services.
    (e) Example. To assist applicants, the Commission is providing an 
example of the method of determining whether a client account may be 
included as ``assets under management.''

Example

    A client's portfolio consists of the following:

                                                                        
                                                                        
                                                                        
$6,000,000..  stocks and bonds                                          
$1,000,000..  cash and cash equivalents                                 
$3,000,000..  non-securities (collectibles, commodities, real estate,   
               etc.)                                                    
-------------                                                           

[[Page 61882]]

                                                                        
$10,000,000.  Total Assets                                              
=============                                                           
                                                                        

    First, is the account a ``securities portfolio?'' The account is a 
securities portfolio because securities as well as cash and cash 
equivalents (which the applicant has chosen to include as securities) 
($6,000,000+$1,000,000=$7,000,000) comprise at least 50% of the value 
of the account (here, 70%). (See Instruction 7(a))
    Second, does the account receive ``continuous and regular 
supervisory or management services?'' The entire account is managed on 
a discretionary basis and is provided ongoing supervisory and 
management services, and therefore receives continuous and regular 
supervisory or management services. (See Instruction 7(c))
    Third, what is the entire value of the account? The entire value of 
the account ($10,000,000) is included in the calculation of the 
investment adviser's total assets under management.

[FR Doc. 97-30296 Filed 11-18-97; 8:45 am]
BILLING CODE 8010-01-P