[Federal Register Volume 64, Number 24 (Friday, February 5, 1999)]
[Proposed Rules]
[Pages 5722-5725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2703]



[[Page 5722]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-1787; File No. S7-2-99]
RIN 3235-AH60


Transition Rule for Ohio Investment Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing for comment a proposed rule under the Investment Advisers 
Act of 1940 to assist investment advisers that will be subject to a new 
Ohio investment adviser statute. The proposed rule would provide a 
transition process for these investment advisers to change from 
Commission to state registration.

DATES: Comments must be received on or before March 8, 1999.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Stop 6-9, Washington, D.C. 20549. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-2-99; this file number 
should be included on the subject line if E-mail is used. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, N.W. Washington, 
D.C. 20549. Electronically submitted comment letters also will be 
posted on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jeffrey O. Himstreet, Attorney, or 
Arthur B. Laby, Special Counsel, at (202) 942-0716, Task Force on 
Investment Adviser Regulation, Division of Investment Management, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 
5-6, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is publishing for comment 
proposed rule 203A-6 [17 CFR 275.203A-6] and a proposed amendment to 
Schedule I of Form ADV [17 CFR 279.1], both under the Investment 
Advisers Act of 1940 [15 U.S.C. 80b] (``Advisers Act'' or ``Act'').

I. Background

    Under the Advisers Act, as amended by the Investment Advisers 
Supervision Coordination Act (``Coordination Act''),\1\ the Commission 
has regulatory responsibility for investment advisers that have at 
least $25 million of assets under management or advise a registered 
investment company.\2\ The Commission also has regulatory 
responsibility for advisers that have less than $25 million of assets 
under management and have their principal place of business in a state 
that has not enacted an investment adviser statute.\3\ At the time the 
Coordination Act was adopted, Ohio was one of four states that did not 
have an investment adviser statute.\4\ Recently, Ohio enacted 
investment adviser legislation that will become effective by March 31, 
1999.\5\
---------------------------------------------------------------------------

    \1\ Title III of the National Securities Markets Improvement Act 
of 1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in 
scattered sections of the United States Code).
    \2\ Id.
    \3\ See Rules Implementing Amendments to the Investment Advisers 
Act of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997) 
[62 FR 28112 (May 22, 1997)] at II.E.1 (``Implementing Release'').
    \4\ Colorado, Iowa and Wyoming also did not have investment 
adviser statutes at the time Congress enacted the Coordination Act. 
The Commission recently amended Schedule I to Form ADV necessitated 
by the enactment of investment adviser statutes in both Colorado and 
Iowa. Technical Changes to Schedule I to Form ADV, Investment 
Advisers Act Release No. 1733A (Jan. 7, 1999).
    \5\ H.B. 695, 122d Gen. Ass., Reg. Sess. (Ohio 1997-1998).
---------------------------------------------------------------------------

    The Commissioner of the Ohio Division of Securities has requested 
that we create a transition process to assist in the implementation of 
the Ohio law.\6\ The transition process would primarily affect 
investment advisers that have their principal place of business in Ohio 
and are eligible for Commission registration only because of the 
location of their principal office and place of business (``smaller 
Ohio advisers''). Absent a transition rule, the preemptive provisions 
of the Coordination Act would prevent the Ohio Division of Securities 
(and other state securities authorities) from requiring the 
registration of smaller Ohio advisers until the advisers withdrew from 
Commission registration or we canceled their registrations.\7\ To 
assist the Ohio Division of Securities and to facilitate the transition 
of regulatory responsibilities for smaller Ohio advisers, we are 
proposing for public comment new rule 203A-6.
---------------------------------------------------------------------------

    \6\ See Letter from Thomas E. Geyer, Commissioner, Ohio Division 
of Securities, dated September 25, 1998 (available in File No. S7-2-
99).
    \7\ Section 203A(b) of the Act [15 U.S.C. 80b-3a(b)] preempts 
state laws that would require the registration, qualification and 
licensing of investment advisers registered with the Commission. See 
Implementing Release, supra note 3 at II.H.1.
---------------------------------------------------------------------------

II. Discussion

    Under the proposed rule, new Ohio advisers (i.e., those advisers 
that are not currently registered with the Commission) that would not 
be eligible for Commission registration would register with the Ohio 
Division of Securities on or after the effective date of Ohio's 
implementing rules.\8\ Smaller Ohio advisers that are currently 
registered with the Commission would switch over to registration with 
the Ohio Division of Securities during a one year transition period.\9\ 
These advisers could withdraw their Commission registration at the time 
they register with the Ohio Division of Securities, or by the end of 
the transition period.\10\
---------------------------------------------------------------------------

    \8\ The Ohio Division of Securities estimates that its 
implementing rules would be effective by March 31, 1999.
    \9\ In addition, advisers ineligible for Commission registration 
may be required to register with other state securities authorities. 
See Section 222(d) of the Advisers Act [15 U.S.C. 80b-22(d)] (the 
national de minimis standard). The timing of an investment adviser's 
state registration obligations would be governed by state law.
    \10\ Proposed rule 203A-6(b). We recognize that Ohio investment 
advisers may be registered with, and regulated by, both the Ohio 
Division of Securities and the Commission until the advisers 
withdraw from Commission registration. During this time, Ohio 
investment advisers may be subject to both federal and state 
regulatory requirements. Ohio investment advisers no longer eligible 
for Commission registration may withdraw from Commission 
registration at any time and thus avoid dual regulation.
---------------------------------------------------------------------------

    With the enactment of the Ohio law, smaller Ohio advisers may no 
longer rely on the location of their principal office and place of 
business as a basis for Commission registration. The Commission 
therefore is proposing to amend Schedule I by deleting the references 
to Ohio from both Schedule I and the Instructions to Schedule I. As a 
result of the proposed amendments to Schedule I, advisers would no 
longer be able to claim eligibility for Commission registration based 
on the location of their principal office and place of business in Ohio 
and must withdraw from Commission registration, unless otherwise 
eligible.\11\ The amendments to Schedule I would become effective on 
December 31, 1999.
---------------------------------------------------------------------------

    \11\ The Commission is proposing to require smaller Ohio 
advisers to withdraw from Commission registration by March 30, 2000. 
Proposed rule 203A-6(b).
---------------------------------------------------------------------------

III. General Request for Comment

    Any interested persons wishing to submit written comments on the 
proposed rule and form changes that are the subject of this release, to 
suggest additional changes or submit comments on other matters that 
might have an effect on the proposals described above, are requested to 
do so. Commenters

[[Page 5723]]

suggesting alternative approaches are encouraged to submit proposed 
rule text.
    For purposes of making determinations required by the Small 
Business Regulatory Enforcement Fairness Act of 1996, discussed below, 
the Commission also is requesting information regarding the potential 
impact of the proposed rule and Schedule I amendment on the economy on 
an annual basis. Commenters should provide empirical data to support 
their views.

IV. Cost-Benefit Analysis

    The proposed rule and form amendment are designed to facilitate the 
transition of certain advisers from Commission to state registration. 
This transition would further implement congressional intent to 
reallocate regulatory responsibilities for investment advisers between 
the Commission and state securities authorities.
    Proposed rule 203A-6 would not have a significant effect on the 
regulatory burden borne by investment advisers. The Coordination Act 
imposes certain costs on advisers as a consequence of no longer being 
registered with the Commission, and, at the same time, confers benefits 
on these advisers, such as no longer requiring them to file amendments 
to Form ADV with the Commission. The proposed rule does not alter these 
burdens and benefits, but merely establishes a time by which advisers 
are required to switch registrations from the Commission to the Ohio 
Division of Securities.\12\ Advisers may withdraw from Commission 
registration at any time and avoid any potential burdens associated 
with the proposed rule.
---------------------------------------------------------------------------

    \12\ Under current rules, advisers that are no longer eligible 
for Commission registration under section 203A(a) of the Act [15 
U.S.C. 80b-3a(a)] must withdraw from registration within 90 days 
after the date the adviser is required by rule 204-1(a) [17 CFR 
275.204-1(a)]. See 17 CFR 279.1 (Schedule I, instruction 6).
---------------------------------------------------------------------------

    Comment is requested on any costs that may be imposed by the 
proposed rule and form amendment. Commenters should submit data 
indicating the cost of filing Schedule I to Form ADV and Form ADV-W. 
Commenters also should submit data on the expected effects of the 
proposed rule and form amendment on the customers of investment 
advisers (such as the amount of fees paid).
    Comment is requested on this cost-benefit analysis. Commenters are 
requested to provide views and empirical data relating to any costs and 
benefits associated with the proposed rule and form amendment.

V. Paperwork Reduction Act

    The proposed amendments to Schedule I to Form ADV contains a 
``collection of information'' within the meaning of the Paperwork 
Reduction Act of 1995 [44 U.S.C. 3501 to 3520], and the Commission has 
submitted them to the Office of Management and Budget in accordance 
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection 
of information is ``Schedule I to Form ADV,'' under the Advisers Act. 
Schedule I to Form ADV contains a currently approved collection of 
information under OMB control number 3235-0490. An agency may not 
sponsor, conduct, or require response to an information collection 
unless a currently valid OMB control number is displayed.
    Each investment adviser must declare on Schedule I to Form ADV 
whether it is eligible for Commission registration. The rules imposing 
this collection of information are found at 17 CFR 275.203-1 and 17 CFR 
279.1. Rule 204-1 [17 CFR 275.204-1] requires an investment adviser 
registered with the Commission to file an amended Schedule I to Form 
ADV annually within 90 days after the end of the investment adviser's 
fiscal year. The Commission is proposing amendments to Schedule I only, 
and not to Form ADV. The burdens associated with this filing are the 
same as the burdens Form ADV-W imposes on all advisers withdrawing from 
registration. The proposed withdrawal procedures impose no additional 
paperwork burdens on advisers. The rule would create a March 30, 2000 
deadline by which smaller Ohio advisers must withdraw from Commission 
registration. Additionally, smaller Ohio advisers may withdraw from 
Commission registration at any time prior to March 30, 2000 and not be 
subject to the proposed rule.
    Approximately 899 investment advisers with their principal office 
in Ohio that are registered with the Commission would respond annually 
to the information requirements of Schedule I. In addition, an 
estimated 760 new advisers will file Schedule I to Form ADV annually, 
approximately 83 of which are estimated to have their principal office 
in Ohio. Of these 83 advisers, an estimated 72 will file Schedule I to 
Form ADV an average of once a year, and the remaining 11 that rely on 
the exemption provided by rule 203A-2(d) [17 CFR 275.203A-d] will file 
Schedule I to Form ADV an average of twice each year. The Commission 
would receive an estimated 993 total responses from investment advisers 
with their principal office in Ohio.
    The proposed form amendment will not materially alter the number of 
burden hours for investment advisers with their principal office in 
Ohio. An estimated 889 advisers with their principal office in Ohio 
(90.5% of respondents, excluding the estimated ten advisers nationwide 
expected to rely on the multi-state exemption) either do not need to 
calculate assets under management to complete Schedule I or calculate 
assets under management as part of their normal business operations. 
The burden for these advisers would be 0.75 of an hour (unchanged from 
previous estimate). For the estimated 93 investment advisers with their 
principal office in Ohio that must calculate assets under management to 
complete Schedule I (9.5% of respondents, excluding the estimated ten 
advisers nationwide expected to rely on the multi-state exemption 
provided by rule 203A-2(e) [17 CFR 275.203A-2(e)]), compliance with the 
requirement to file an amended Schedule I would impose a total annual 
burden for each investment adviser of approximately two hours 
(unchanged from previous estimate). Schedule I to Form ADV therefore is 
estimated to impose 852.75 total burden hours on advisers with their 
principal office in Ohio. This estimate would likely remain constant 
absent the proposed rule and form amendment.
    The collection of information required by Schedule I is mandatory, 
and responses are not kept confidential.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to (i) evaluate whether the proposed collections of 
information are necessary for the proper performance of the functions 
of the agency, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information; (iii) enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) minimize the burden of the collections of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
D.C. 20503, and also should send a copy of their comments to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
N.W., Stop

[[Page 5724]]

6-9, Washington, D.C. 20549 with reference to File No. S7-2-99. OMB is 
required to make a decision concerning the collections of information 
between 30 and 60 days after publication. A comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

VI. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding proposed 
rule 203A-6 and amendment to Schedule I to Form ADV. The following 
summarizes the IRFA.
    The IRFA sets forth the statutory authority for the proposed rule 
and amendment to Schedule I. The IRFA also discusses the effect of the 
proposed rule and form amendment on small entities. For the purposes of 
the Advisers Act and the Regulatory Flexibility Act, an investment 
adviser, under Commission rules, generally is a small entity if (i) it 
has assets under management of $25 million or less reported on its most 
recent Schedule I to Form ADV [17 CFR 279.1]; (ii) it does not have 
total assets of $5 million or more on the last day of the most recent 
fiscal year; and (iii) it is not in a control relationship with another 
investment adviser that is not a small entity.\13\
---------------------------------------------------------------------------

    \13\ Rule 0-7 [17 CFR 275.0-7].
---------------------------------------------------------------------------

    The Commission estimates that approximately 1,000 Commission-
registered advisers are small entities. Approximately 540 of these 
small entities have their principal office in Ohio. As explained in the 
IRFA, the majority of these advisers are smaller Ohio advisers that 
will be required by the Coordination Act to withdraw from Commission 
registration and register with the various state securities 
authorities. Absent Commission rulemaking, the Coordination Act will 
require smaller Ohio advisers to withdraw from Commission registration 
after the Ohio law is effective. Relatively few small entities thus 
would be affected by the proposed rule.
    The IRFA states that the proposed rule amendments would impose no 
new reporting or recordkeeping requirements and would eliminate certain 
other requirements. The proposed rule would, however, create a deadline 
for complying with an existing requirement. Smaller Ohio advisers no 
longer eligible for Commission registration would be required to 
withdraw from Commission registration by March 30, 2000. These advisers 
will no longer be required to file an amended Schedule I with the 
Commission each year, or the other annual updates to Form ADV.
    The proposed rule and rule amendment will not materially alter the 
time required for investment advisers to comply with these rules.\14\ 
The proposed rule and form amendment also are necessary to implement 
the Coordination Act with respect to smaller Ohio advisers. The IRFA 
states that the burden to investment advisers subject to the rule 
should be outweighed by the benefits to the investment advisers subject 
to the proposed rule and form amendment.
---------------------------------------------------------------------------

    \14\ Currently, investment advisers that are required to 
withdraw from Commission registration because they are no longer 
eligible under section 203A(a) of the Act [15 U.S.C. 80b-3a(a)] are 
required to withdraw from registration within 90 days after the date 
the adviser's Schedule I was required by rule 204-1(a) [17 CFR 
275.204-1(a)] to have been filed with the Commission. See Schedule 
I, instruction 6 [17 CFR 279.1].
---------------------------------------------------------------------------

    There are no rules that duplicate, overlap, or conflict with, the 
proposed rule amendments.
    The IRFA discusses the various alternatives considered by the 
Commission in connection with the proposed rule and form amendment that 
might minimize the effect on small entities, including (a) the 
establishment of differing compliance or reporting requirements or 
timetables that take into account resources available to small 
entities; (b) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the proposed rule for small 
entities; (c) the use of performance rather than design standards; and 
(d) an exemption from coverage of the proposed rule, or any part of the 
proposed rule, for small entities.
    As stated in the IRFA, it would be inconsistent with the 
Coordination Act to exempt small entities from the proposed rule and 
form amendment. This determination was made after taking into account 
the resources available to small entities and the potential burden that 
could be placed on investment advisers that may no longer be eligible 
for Commission registration. It does not appear feasible to establish 
different reporting or compliance requirements or to further clarify, 
consolidate or simplify the reporting or compliance requirements. The 
proposed rule and form amendment, as proposed, would not adversely 
affect small entities. The proposed rule and form amendment, instead, 
include regulatory alternatives that minimize the effect on small 
entities.
    The IRFA includes information concerning the solicitation of 
comments with respect to the IRFA generally, and in particular, the 
number of small entities that would be affected by the proposed rule 
and form amendment. A copy of the IRFA may be obtained by contacting 
Jeffrey O. Himstreet, Securities and Exchange Commission, 450 5th 
Street, N.W., Mail Stop 5-6, Washington, D.C. 20549.

VII. Statutory Authority

    The Commission is proposing new rule 203A-6 pursuant to the 
authority set forth in section 203(h) [15 U.S.C. 80b-3(h)]; section 
203A(c) [15 U.S.C. 80b-3a(c)]; and section 211(a) [15 U.S.C. 80b-11(a)] 
of the Investment Advisers Act of 1940.
    The Commission is proposing amendments to Form ADV pursuant to the 
authority set forth in section 203(c)(1) [15 U.S.C. 80b-3(c)(1)]; and 
section 204 [15 U.S.C. 80b-4] of the Investment Advisers Act of 1940.

Text of Proposed Rule and Form Amendments

List of Subjects in 17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements; Securities.

    For the reasons discussed in the preamble, the Commission proposes 
to amend Title 17, Chapter II of the Code of Regulations as follows:

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

    1. The authority citation for Part 275 continues to read in part as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.
* * * * *
    2. Section 275.203A-6 is added to read as follows:


Sec. 275.203A-6  Transition period for Ohio investment advisers.

    (a) Ohio authority. Notwithstanding section 203A(b) of the Act [15 
U.S.C. 80b-3a(b)], the Ohio Revised Code, sections 1707.01 to 1707.99, 
is effective with respect to an investment adviser registered with the 
Commission that, but for having its principal office and place of 
business in Ohio, would be prohibited from registering with the 
Commission under section 203A of the Act [15 U.S.C. 80b-3a].
    (b) Withdrawal required. Every investment adviser that is 
registered with the Commission solely because its principal office and 
place of business is located in Ohio must withdraw from Commission 
registration by March 30, 2000.

[[Page 5725]]

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

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

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

    4. By amending Schedule I to Form ADV (referenced in Sec. 279.1) to 
remove all references to ``Ohio'' and by amending the Instructions to 
Schedule I to Form ADV (referenced in Sec. 279.1) to remove all 
references to ``Ohio''.

    Note: The text of Schedule I to Form ADV [Sec. 279.1] does not 
and the amendments will not appear in the Code of Federal 
Regulations.

    Dated: January 29, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2703 Filed 2-4-99; 8:45 am]
BILLING CODE 8010-01-U