[Federal Register Volume 64, Number 62 (Thursday, April 1, 1999)]
[Rules and Regulations]
[Pages 15680-15683]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7955]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-1794; File No. S7-2-99]
RIN 3235-AH60


Transition Rule for Ohio Investment Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting a new rule and form amendments under the Investment Advisers 
Act of 1940 for investment advisers that will be subject to a new Ohio 
investment adviser statute. The new rule provides a transition process 
for these investment advisers to switch from Commission to state 
registration.

EFFECTIVE DATES: Rule 203A-6 (17 CFR 275. 203A-6) will become effective 
May 3, 1999. Amendments to Schedule I to Form ADV (279.1) will become 
effective on December 31, 1999.

FOR FURTHER INFORMATION CONTACT: Jeffrey O. Himstreet, Attorney, at 
(202) 942-0716, Task Force on Investment Adviser Regulation, Division 
of Investment Management, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Commission is adopting rule 203A-6 (17 
CFR 275.203A-6) and technical amendments to Schedule I of Form ADV (17 
CFR 279.1 W), 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 their principal place of business 
in a state that has not enacted an investment adviser statute, 
regardless of their assets under management.\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 on March 18, 
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\ 15 U.S.C. 80b-3A(a).
    \3\ See Rules implementing Amendments to the Investment Advisers 
Act of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997) 
[64 FR 28112 (May 22, 1997)] at II.E.1.
    \4\ Colorado, Iowa and Wyoming also did not have investment 
adviser statutes at the time Congress enacted the Coordination Act. 
Since that time, Colorado and Iowa have enacted investment adviser 
legislation, and we recently amended Schedule I to Form ADV to 
reflect these developments. Technical Changes to Schedule I to Form 
ADV, Investment Advisers Act Release No. 1733A (Jan. 7, 1999) [64 FR 
2120 (Jan. 13, 1999)].
    \5\ H.B. 695, 122d Gen. Ass., Reg. Sess. (Ohio 1997-1998).
---------------------------------------------------------------------------

    On January 29, 1999, we issued a release proposing rule 203A-6 
(``Proposing Release'') to assist the Ohio Division of Securities and 
to facilitate the transition of regulatory responsibilities for smaller 
Ohio advisers.\6\ We also proposed technical, corresponding changes to 
Schedule I to Form ADV. We received two comment letters in response to 
the proposal, both of which supported the new rule and form 
amendments.\7\ The Commission is adopting rule 203A-6 and technical 
revisions to Schedule I to Form ADV as proposed.
---------------------------------------------------------------------------

    \6\ Transition Rule for Ohio Investment Advisers, Investment 
Advisers Act Release No. 1787 (Jan. 29, 1999) [64 FR 5722 (Feb. 5, 
1999)].
    \7\ Letter from Thomas Geyer, Commissioner, Ohio Securities 
Division to Jonathan G. Katz, Secretary, SEC (Feb. 17, 1999), File 
No. S7-2-99; Letter from Peter C. Hildreth, President, North 
American Securities Administrators Association, Inc. to Johathan G. 
Katz, Secretary, SEC (Mar. 8, 1999), File No. S7-2-99.
---------------------------------------------------------------------------

II. Discussion

    Under new rule 203A-6, new Ohio advisers (i.e., those advisers that 
are not currently registered with the Commission) that would not be 
eligible for Commission registration would

[[Page 15681]]

register with the Ohio Division of Securities on or after the effective 
date of Ohio's implementing rules.\8\ Smaller Ohio advisers (i.e. those 
that have less than $25 million in assets under management) that are 
currently registered with the Commission will switch over to 
registration with the Ohio Division of Securities between March 18,1999 
and December 31, 1999.\9\ These advisers may withdraw their Commission 
registration after they register with the Ohio Division of Securities, 
but not later than March 30, 2000.\10\
---------------------------------------------------------------------------

    \8\ The Ohio Division of Securities estimates that its 
implementing rules would be effective by March 24, 1999.
    \9\ Ohio Legislation, supra note 5 (to be codified at section 
1707.161(E) of the Ohio Revised Code). In addition, advisers 
ineligible for Commission registration may be required to register 
with other state securities authorities, subject to the Advisers 
Act. The Coordination Act amended the Advisers Act to add Section 
222(d) [15 U.S.C. 80b-22(d)], which makes state investment adviser 
statues inapplicable to advisers that do not have a place of 
business in the state and have fewer than six clients who are 
residents of that state.
    \10\ New rule 203A-6(b). We recognize that Ohio investment 
advisers may be registered with, and regulated by, both the Ohio 
Divison 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 avoid this ``duplicate regulation'' by 
withdrawing from Commission registration at any time after they 
registered with the State of Ohio.
---------------------------------------------------------------------------

    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 amending Schedule I by deleting the references to Ohio 
from both Schedule I and the Instructions to Schedule I. The amendments 
to Schedule I will become effective on December 31, 1999. As a result 
of the amendments to Schedule I, advisers will 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.

III. Cost/Benefit Analysis

    New rule 203A-6 and the technical amendments to Schedule I to Form 
ADV are designed to facilitate the transition of certain advisers from 
Commission to state registration. This transition further implements 
congressional intent to reallocate regulatory responsibilities for 
investment advisers between the Commission and state securities 
authorities.
    New rule 203A-6 will 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 costs the Advisers Act imposes on 
advisers withdrawing from Commission registration is estimated to be 
$10 per adviser (or, $5,400 in the aggregate).\11\ The new rule does 
not alter these burdens and benefits, but merely establishes a time by 
which advisers are required to switch their registration from the 
Commission to the Ohio Division of Securities.\12\ Therefore, the net 
costs imposed by the new rule and form amendments are negligible. 
Smaller Ohio advisers may withdraw from Commission registration at any 
time and avoid any potential burdens associated with new rule 203A-6.
---------------------------------------------------------------------------

    \11\ The Office of Management and Budget has approved a 
collection of information for Form ADV-W (OMB Control No. 3235-
0313). The estimated burden is 1.0 hours, per response. Based on an 
average salary of $10 per hour, including benefits, the total costs 
imposed by the Advisers Act on Ohio advisers required to withdraw 
from Commission registration is approximately $5,400.
    \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).
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on the cost/benefit 
analysis. No comments on the cost/benefit analysis were provided. The 
Commission believes that the costs imposed by the new rule are 
insignificant.

IV. Paperwork Reduction Act

    As discussed in the Proposing Release, the amendments to Schedule I 
to Form ADV contain a ``collection of information within the meaning of 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 to 3520). The 
amendments to Schedule I to Form ADV are necessary to implement the 
Coordination Act with respect to advisers with their principal office 
in Ohio. The Commission received no public comment in response to its 
request for comments on the Paperwork Reduction Act analysis.
    Under Office of Management and Budget rules, an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the agency displays a valid OMB 
control number.\13\ Therefore, we have submitted the collection of 
information requirements to the Office of Management and Budget for 
review 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. 
OMB has approved the PRA request in accordance with 44 U.S.C. 3507(d), 
and has assigned control number 3235-0490 to Schedule I to Form ADV 
with an expiration date of March 31, 2002.
---------------------------------------------------------------------------

    \13\ 13 44 U.S.C. 3506(c)(1)(B)(v).
---------------------------------------------------------------------------

    The Commission is adopting amendments to Schedule I to Form ADV 
that will delete references to Ohio contained in Schedule I and the 
Instructions to Schedule I. 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 From ADV annually within 90 days after 
the end of the investment adviser's fiscal year. The Commission is 
amending Schedule I only, and not Form ADV.
    There are no additional burdens associated with this filing that 
are not already imposed by the statutory requirement that advisers 
withdraw from Commission registration if no longer eligible for 
Commission registration. The withdrawal procedures impose no additional 
paperwork burdens on advisers. The new rule creates 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 new rule.
    The Commission estimates that there are approximately 8,200 
investment advisers registered with the Commission. 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

[[Page 15682]]

year. It is estimated that the Commission will receive approximately 
993 total responses from investment advisers with their principal 
office in Ohio.
    The form amendments will affect only investment advisers with their 
principal office in Ohio, and will not materially alter the number of 
burden hours for those advisers. It is estimated that the amendments to 
Schedule I to Form ADV imposes on Ohio investment advisers 852.75 total 
burden hours. This estimate would likely remain constant absent the new 
rule and form amendments. The collection of information required by 
Schedule I is mandatory, and responses are not kept confidential. The 
form amendments, as adopted, do not impose a greater paperwork burden 
upon respondents than that estimated and described in the Proposing 
Release.

V. Summary of Final Regulatory Flexibility Analysis

    The Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA'') in accordance with the Regulatory Flexibility Act (``Reg. 
Flex. Act'') (5 U.S.C. 604) in connection with the adoption of the rule 
described in this Release. An Initial Regulatory Flexibility Analysis 
(``IRFA'') was prepared in accordance with 5 U.S.C. 603 in conjunction 
with the Proposing Release and was made available to the public. A 
summary of the IRFA was published in the Proposing Release. We received 
no comments on the IRFA.
    The FRFA discusses both the need for, and objectives of, the rule 
and form amendments adopted by the Commission. The new rule and form 
amendments, as adopted, create a transition process for smaller Ohio 
advisers. The new rule (a) provides a one-year transition period for 
advisers to switch from Commission registration to state registration, 
and (b) requires smaller Ohio advisers to withdraw from Commission 
registration by March 30, 2000. The amendments to Schedule I delete 
references to Ohio to reflect that Ohio has recently enacted an 
investment adviser statute.
    The FRFA also provides a description and an estimate of the number 
of small entities to which the rule amendments will apply. For the 
purposes of the Advisers Act and the Reg. Flex. Act, an investment 
adviser, under Commission rules, generally is a small entity if (i) it 
has assets under management of less than $25 million 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.\14\
---------------------------------------------------------------------------

    \14\ Rule 0-7 [17 CFR 275.0-7].
---------------------------------------------------------------------------

    It is estimated that approximately 1,000 Commission-registered 
advisers are small entities. It is estimated that approximately 540 of 
these small-entity advisers have their principal office in Ohio. 
Relatively few small entities thus will be affected by the new rule and 
form amendments. As explained in the FRFA, 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 requires smaller Ohio advisers to 
withdraw from Commission registration after the Ohio law is effective. 
It takes, on average, one hour to complete form ADV-W.\15\ The costs 
associated with withdrawing from Commission registration would exist 
absent the new rule and form amendments. Therefore, the net costs 
imposed by the new rule and form amendments are negligible.
---------------------------------------------------------------------------

    \15\ The Office of Management and Budget has approved a 
collection of information for Form ADV-W (OMB Control No. 3235-
0313). The estimated average burden is 1.0 hours, per response. 
Based on an average salary of $10 per hour, including benefits, the 
total costs imposed by the Advisers Act on Ohio advisers required to 
withdraw from Commission registration is approximately $5,400.
---------------------------------------------------------------------------

    The FRFA states that the rule amendments will impose no new 
reporting or recordkeeping requirements and will eliminate certain 
other requirements. The new rule does, however, create a deadline for 
complying with an existing requirement. Smaller Ohio advisers no longer 
eligible for Commission registration will 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 new rule and form amendments will not materially alter the time 
required for investment advisers to comply with these rules.\16\ The 
new rule and form amendments also are necessary to implement the 
Coordination Act with respect to smaller Ohio advisers. The FRFA states 
that the burden to investment advisers subject to the rule should be 
outweighed by the benefits to the investment advisers subject to the 
new rule and form amendments. There are no rules that duplicate, 
overlap, or conflict with, the new rule and form amendments.
---------------------------------------------------------------------------

    \16\ 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]
---------------------------------------------------------------------------

    Finally, the FRFA states that, in adopting the new rule and form 
amendments, we considered (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 new rule for small entities; (c) the use of 
performance rather than design standards; and (d) an exemption from 
coverage of the new rule, or any part of the new rule, for small 
entities. The FRFA explains that the Commission concluded that 
establishing different standards for small entities is unnecessary and 
inappropriate.
    The FRFA is available for public inspection in File No. S7-2-99, 
and a copy may be obtained by contacting Jeffrey O. Himstreet, 
Attorney, Securities and Exchange Commission, 450 5th Street, NW, 
Washington, DC 20549-0506.

VI. Statutory Authority

    The Commission is adopting 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 adopting 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.

List of Subjects in 17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements, Securities.

Text of Rule and Form Amendments

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

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

    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.
* * * * *

[[Page 15683]]

    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.

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''.


Sec. 279.1  [Amended]

    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: March 25, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7955 Filed 3-31-99; 8:45 am]
BILLING CODE 8010-01-P