[Federal Register Volume 65, Number 74 (Monday, April 17, 2000)]
[Proposed Rules]
[Pages 20524-20628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9036]



[[Page 20523]]

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Part II





Securities and Exchange Commission





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17 CFR Part 200 et al.



Electronic Filing by Investment Advisers; Proposed Amendments to Form 
ADV; Proposed Rule

  Federal Register / Vol. 65, No. 74 / Monday, April 17, 2000 / 
Proposed Rules  

[[Page 20524]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 275, and 279

[Release No. IA-1862; 34-42620; File No. S7-10-00]
RIN 3235-AD21


Electronic Filing by Investment Advisers; Proposed Amendments to 
Form ADV

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Commission and the state securities authorities are 
creating an electronic filing system for investment advisers. The 
system will permit investment advisers to satisfy their filing 
obligations with federal and state regulators with a single electronic 
filing made over the Internet. The system also will provide public 
access to information about investment advisers and persons who work 
for investment advisers. In connection with the development of the 
electronic filing system, we are proposing new rules under the 
Investment Advisers Act of 1940 and proposing to amend others. The new 
rules would require advisers to submit their filings electronically. 
Form ADV would be substantially updated and revised to accommodate 
electronic filing. Finally, we are proposing amendments that would 
require advisers to deliver to clients a narrative brochure written in 
plain English.

DATES: Comments must be received on or before June 13, 2000.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. S7-10-00; 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, NW., Washington, 
DC 20549. Electronically submitted comment letters also will be posted 
on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Lori H. Price, [email protected]> or 
Jeffrey O. Himstreet, [email protected]>, 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 today is requesting public 
comment on proposed amendments to rules 30-5 and 30-11 of the SEC's 
Organization and Program Management rules (17 CFR 200.30-5 and 200.30-
11), new rule 203-3 and Form ADV-H; proposed amendments to rules 0-2, 
0-7, 203-1, 203-2, 203A-1, 203A-2, 204-1, 204-2, and 204-3 (17 CFR 
275.0-2, 275.0-7, 275.203-1, 275.203-2, 275.203A-1, 275.203A-2, 
275.204-1, 275.204-2, and 275.204-3); and Form ADV, Form ADV-W, and 
Form 4-R (17 CFR 279.1, 279.2, and 279.4) under the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-1) (the Advisers Act or the Act). The 
Commission also is proposing to withdraw rules 204-5 and 206(4)-4 (17 
CFR 275.204-5 and 275.206(4)-4) and Forms 5-R, 6-R, 7-R, and ADV-Y2K 
(17 CFR 279.5, 279.6, 279.7, and 279.9) under the Advisers Act.

Table of Contents

Executive Summary
I. Introduction
II. Discussion
A. The Investment Adviser Registration Depository
    1. The Investment Adviser Filing System
    2. The Public Disclosure System
    3. System Implementation
    4. Filing Fees
B. Proposed Amendments to SEC Rules
    1. Applications for Registration on Form ADV
    2. Amendments to Form ADV
    3. Withdrawal from Registration
    4. Hardship Exemptions
C. Proposed Transition to Electronic Filing
D. Proposed Revisions to Form ADV
    1. Part 1
    a. Part 1A
    b. Part 1B
    2. Part 2
    a. Part 2A: The Firm Brochure
    b. Part 2B: The Brochure Supplement
    3. Execution Pages
E. Proposed Revisions to Form ADV-W
F. General Request for Comment
III. Cost/Benefit Analysis
IV. Paperwork Reduction Act
V. Summary of Initial Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Proposed Rule and Form Amendments
Proposed Form ADV--Appendix A
Proposed form ADV-W--Appendix B
Proposed Form ADV-H--Appendix C
Proposed Form ADV-NR--Appendix D

Executive Summary

    The Commission and the state securities authorities are creating an 
Internet-based system of electronic filing for investment advisers. The 
system, which we call the Investment Adviser Registration Depository 
(IARD), will permit investment advisers to satisfy filing obligations 
under state and federal laws by making a single electronic filing. 
Information contained in filings made through the IARD will be stored 
in a database that members of the public will be able to access free of 
charge through the Internet. The IARD, which is being built and will be 
operated for us by NASD Regulation, Inc. (NASDR), will give investors 
easy access to information about investment advisers.
    Today we are proposing to amend our rules to require advisers to 
make filings with us through the IARD after the system begins to 
operate. In addition, we are proposing substantial amendments to our 
application, reporting, and disclosure requirements for investment 
advisers. Some of the amendments are designed to take advantage of 
electronic filing. Others reflect recent regulatory changes. And others 
are designed to improve the quality of information advisers must 
provide to their clients and prospective clients in their information 
statements (brochures).

I. Introduction

    Since we implemented our EDGAR system in 1993, we have sought 
additional ways to take advantage of developments in information 
technology to provide investors with better access to market 
information.\1\ More and more types of filings are made with us 
electronically each year.\2\ As a

[[Page 20525]]

result, investors have timely access to the latest reports and filings 
made by public issuers. Last year, we required broker-dealers to begin 
to register with us electronically.\3\ Today we are proposing a number 
of rules and rule amendments designed to bring electronic filing to 
investment advisers.
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    \1\ Our EDGAR (Electronic Data Gathering, Analysis, and 
Retrieval) system electronically receives, processes and 
disseminates documents required to be filed with us under the 
Securities Act of 1933 (15 U.S.C. 77a to -mm), the Securities 
Exchange Act of 1934 (15 U.S.C. 78a to -mm) (Exchange Act), the 
Public Utility Holding Company Act of 1935 (15 U.S.C. 79a to -79), 
the Trust Indenture Act of 1939 (15 U.S.C. 77sss to -bbbb), and the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 to -64) (Investment 
Company Act).
    \2\ In 1995, we required new Form 24F-2 (used by registered 
investment companies for annual notices required by rule 24f-2 under 
the Investment Company Act) to be filed through EDGAR. See 
Registration Fees for Certain Investment Companies, Investment 
Company Act Release No. 21332 (Sept. 1, 1995) (60 FR 47041 (Sept. 
11, 1995)). In 1995, we also permitted electronic filing of Forms 3, 
4 and 5 and notices of securities transactions on Form 144, required 
under the Exchange Act, as well as notices concerning proxy 
communications for limited partnership roll-up transactions. See 
Adoption of Updated EDGAR Filer Manual and Technical Rule 
Amendments, Securities Act Release No. 7241 (Nov. 13, 1995) (60 FR 
57682 (Nov. 17, 1995)). In 1998, we allowed new mutual fund 
``profiles'' to be filed through EDGAR. See New Disclosure Option 
for Open-End Management Investment Companies, Investment Company Act 
Release No. 23065 (Mar. 13, 1998) (63 FR 13968 (Mar. 23, 1998)). In 
1999, we required Form 13F (filed by institutional investment 
managers), which we previously allowed to be filed electronically on 
a voluntary basis, to be filed electronically. See Rulemaking for 
EDGAR System, Investment Company Act Release No. 23640 (Jan. 12, 
1999) (64 FR 2843 (Jan. 19, 1999)). In 1999, we required Form N8-F 
(used to deregister a registered investment company), also 
previously filed electronically on a voluntary basis, to be filed 
electronically. See Deregistration of Certain Registered Investment 
Companies, Investment Company Act Release No. 23786 (Apr. 15, 1999) 
(64 FR 19469 (Apr. 21, 1999)). In 1999, we also required investment 
companies to file codes of ethics through EDGAR as an exhibit to 
their registration statements. See Personal Investment Activities of 
Investment Company Personnel, Investment Company Act Release No. 
23958 (Aug. 20, 1999) (64 FR 46821 (Aug. 27, 1999)).
    \3\ See Broker-Dealer Registration and Reporting, Securities 
Exchange Act Release No. 41594 (July 2, 1999) (64 FR 37585 (July 12, 
1999)) (amending Exchange Act rules 15b3-1, 15Ba2-2, and 15Ca2-1 (17 
CFR 240.15b3-1, 240.15Ba2-2, and 240.15Ca2-1)).
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    Approximately 8,000 investment advisers are registered with the 
Commission under the Advisers Act. We estimate that another 12,000 are 
registered with state securities authorities. These advisers currently 
make filings with us and the states on paper, much as they have since 
1940, when the Advisers Act was enacted. Investment adviser filings do 
not appear on our EDGAR system and are not easily accessible or widely 
available from other sources. In 1996, Congress passed legislation 
giving us authority to modernize our registration system and requiring 
us to provide investors with easy access to information about 
advisers.\4\
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    \4\ National Securities Market Improvement Act of 1996, Pub. L. 
No. 104-290, 110 Stat. 3416 (1996) (codified in scattered sections 
of the United States Code) (NSMIA). Section 303 of NSMIA added new 
section 203A(d) of the Advisers Act (15 U.S.C. 80b-3a(d)), which 
provides that ``(t)he Commission may, by rule, require an investment 
adviser--(1) to file with the Commission any fee, application, 
report, or notice required by this title or by the rules issued 
under this title through any entity designated by the Commission for 
that purpose; and (2) to pay the reasonable costs associated with 
such filing.'' Section 306 of NSMIA provides that ``(t)he Commission 
shall--(1) provide for the establishment and maintenance of a 
readily accessible telephonic or other electronic process to receive 
inquiries regarding disciplinary actions and proceedings involving 
investment advisers and persons associated with investment advisers; 
and (2) provide for prompt response to any inquiry described in 
paragraph (1).'' Section 306 was not codified.
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    NASDR currently is building the IARD for us and the state 
securities authorities.\5\ The IARD will permit advisers to make 
filings with the Commission and the states through the Internet. The 
information advisers submit will be stored in a database, and investors 
will have access to it by visiting a web site. The IARD will not only 
improve public access to information about advisers, it will also ease 
regulatory burdens on advisers by permitting a single electronic filing 
to satisfy SEC and state filing requirements.\6\ It also will help us 
better monitor advisers and administer the federal securities laws. The 
IARD is described in Section II.A. of this Release.
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    \5\ NASDR is a wholly owned subsidiary of the National 
Association of Securities Dealers (NASD), a self-regulatory 
organization which supervises broker-dealers that conduct a public 
business in securities other than on an exchange of which the 
broker-dealer is a member.
    \6\ In general, this Release discusses our rules and the changes 
we are proposing that affect advisers registered with us. The state 
securities authorities are likely to make similar changes that 
affect advisers registered with the states.
    State-registered advisers filing through the IARD can also 
satisfy Department of Labor (DOL) filing requirements. A state-
registered adviser currently must file Form ADV with DOL to be an 
``investment manager'' for purposes of the Employee Retirement 
Income Security Act (ERISA). 29 U.S.C. 1002(38)(B)(ii). DOL will 
treat an adviser as having satisfied this filing requirement when 
its Form ADV is available to DOL ``from a centralized electronic * * 
* database.'' See Act of Nov. 10, 1997, Pub. L. No. 105-72, 111 
Stat. 1457 (adding explanatory note ``Availability of Documents Via 
Filing Depository'' to 29 U.S.C. 1002).
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    Most of the filings made with the IARD will be on Form ADV, the 
Uniform Application for Investment Adviser Registration. Advisers use 
Form ADV to apply for registration with us and with the state 
securities authorities, and must keep it current by filing periodic 
amendments as long as they are registered.\7\ We are proposing to 
require that new advisers apply for registration electronically, and 
that advisers currently registered with us re-submit their Form ADV to 
us through the IARD. The proposed new filing rules are described in 
Section II.B. and the proposed transition rules are described in 
Section II.C. of this Release.
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    \7\ See rules 203-1 and 204-1.
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    Form ADV currently has two parts. Part I asks for information about 
an adviser's business, the persons who own or control the adviser, and 
whether the adviser or certain of its personnel have been sanctioned 
for violating the securities or other laws. It provides us with 
information we need to decide whether to grant an application for 
registration or to revoke a registration, and to manage our regulatory 
and examination programs. Our proposed changes to Part I are discussed 
in Section II.D.1. of this Release.\8\
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    \8\ We are changing the numbering of the parts of Form ADV from 
Roman to Arabic numbers: Part I to Part 1, Part II to Part 2. 
References in this Release to Part I or Part II refer to current 
Form ADV; references to Part 1 or Part 2 refer to the proposed form. 
The paper version of Form ADV, as proposed to be amended, is 
included as Appendix A of this Release.
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    Part II, or a written brochure containing the same information, 
must be delivered to clients before they engage the adviser and then 
offered to them each year.\9\ Part II provides clients with information 
about business practices, fees and conflicts of interest the adviser 
may have with its clients. We are proposing that all advisers provide 
clients with a narrative brochure containing disclosure about the 
advisory firm written in plain English, and update the brochure at 
least once a year to reflect changes. We also are proposing to require 
that the firm brochure be accompanied by a supplement containing 
important information about the advisory personnel with whom the client 
will be dealing. Proposed Part 2A sets forth the information about the 
advisory firm that an adviser must include in its brochure. Proposed 
Part 2B sets forth the information about advisory personnel that an 
adviser must include in brochure supplements. These proposed changes 
are described in Section II.D.2. of this Release.
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    \9\ See rule 204-3.
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II. Discussion

A. The Investment Adviser Registration Depository

    The IARD is being built and will be operated by NASDR under 
contracts with the Commission and the North American Securities 
Administrators Association, Inc. (NASAA).\10\ The IARD will be modeled 
on NASDR's Web Central Registration Depository (CRD), which is used by 
broker-dealers to make filings with us, state securities authorities, 
and NASDR.\11\ NASDR will perform certain administrative tasks related 
to the filing and public disclosure systems described below. It will 
not, however, act as a self-regulatory organization for advisers.\12\
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    \10\ NASAA represents the 50 U.S. state securities authorities 
responsible for the administration of state securities laws, also 
known as ``blue sky laws.'' Currently, 49 states (all except 
Wyoming), the District of Columbia, Guam, and Puerto Rico have 
investment adviser statutes. See http://www.nasaa.org/search/memberslinks.html> (last visited Mar. 15, 2000).
    \11\ For a description of the CRD system, see Securities 
Exchange Act Release No. 41594, supra note 3.
    \12\ Only Congress can grant such authority. See The Maloney 
Act, Pub. L. 75-719, 52 Stat. 1070 (1938) (codified as amended at 15 
U.S.C. 78o, authorizing the Commission to register national 
securities associations).
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1. The Investment Adviser Filing System
    The IARD will be an Internet-based system that advisers will access 
through

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computers in their offices, without the need for specialized hardware 
or software. An adviser will be able to use the system to apply for 
registration, amend its registration, and withdraw from 
registration.\13\ An SEC-registered adviser will also be able to 
electronically send ``notice filings'' to the states and pay state fees 
through the IARD.\14\
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    \13\ Institutional investment managers will continue to make 
Form 13F filings on our EDGAR system. See Investment Company Act 
Release No. 23640, supra note 2. Form 13F filings are made by many 
firms other than investment advisers, and it would not be feasible 
to include these filings on the IARD.
    \14\ Many states require an SEC-registered adviser doing 
business in their state to provide them with copies of the adviser's 
SEC filings and to pay fees. See section 201(c) of the Uniform 
Securities Act (1999). These are usually referred to as ``notice 
filings.'' See section 307(a) of NSMIA (states are permitted to 
require SEC-registered advisers to file with them documents advisers 
filed with the Commission ``solely for notice purposes * * * and 
(pay) any required fee''). Section 307 was not codified.
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    The IARD will contain a number of features designed to make it easy 
for persons to complete Form ADV, even if they are unfamiliar with the 
form. To use the system, an adviser will visit a designated web site, 
which it will be able to enter through our web site.\15\ Persons 
visiting the web site to make a filing will indicate whether they wish 
to apply for registration, amend an existing registration, or withdraw 
from registration as an investment adviser. Persons wishing to register 
as an investment adviser will be presented with a blank Form ADV, which 
they would complete on-line. A partially completed form could be saved 
in draft form.\16\ A ``help'' function will be available to answer 
questions,\17\ and an on-line glossary will allow persons completing 
the form to review the definition of key terms used in the form.\18\
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    \15\ In order to use the system, an adviser first will complete 
a paper request for IARD filer access and submit it to NASDR. NASDR 
then will assign a user name and password, which persons authorized 
to file on behalf of the adviser would be required to use to submit 
filings to the IARD.
    \16\ An adviser will be able to save one draft of each form type 
for up to 60 days. While an adviser will be not able to download the 
draft form, it will be able to print either the entire draft form or 
selected pages.
    \17\ The ``help'' function will provide answers to frequently 
asked questions and guidance for completing the electronic Form ADV. 
Our staff will formulate answers to the frequently asked questions 
and update them from time to time.
    \18\ Defined terms appear in italic on the forms, both on the 
proposed paper forms and on the electronic forms in the IARD. The 
glossary is included in Appendix A of this Release.
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    The IARD will present an adviser completing Part 1 of Form ADV with 
only those items relevant to its application. An adviser indicating 
that it is registering with us, for example, will not see items that 
apply only to advisers registering with the states.\19\ The system also 
will prevent an adviser from submitting an incomplete form or from 
entering inconsistent information at different places on the form.\20\ 
These features should help prevent the most common errors we see in 
applications for registration under the Advisers Act and speed the 
registration process.
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    \19\ See discussion of additional requirements for state-
registered advisers infra at Section II.D.1.b. of this Release.
    \20\ For example, if an adviser indicates that it has assets 
under management of less than $25 million, the system would preclude 
the adviser from indicating that it is eligible for SEC registration 
because it has assets under management of $25 million or more. See 
proposed Items 2.A(1) and 5.F(2)(c) of Part 1A of Form ADV.
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    We also have designed the system to provide efficiencies for firms 
registered with us as both an investment adviser on Form ADV through 
the IARD and a broker-dealer on Form BD \21\ through the CRD. These 
advisers will be able to link their responses to common items to avoid 
entering the data twice.\22\
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    \21\ 17 CFR 249.501.
    \22\ See discussion of IARD functionality for the Disciplinary 
Reporting Pages (DRPs) and Schedules A and B, infra notes 85 and 
101, respectively.
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    Unlike the check-the-box and multiple-choice format of proposed 
Part 1, proposed Part 2 of Form ADV would require the adviser to 
prepare a narrative brochure containing disclosure about the advisory 
firm.\23\ NASDR will design the part of the system that will accept 
Part 2.\24\ Once this part of the system is built, an adviser will be 
able to prepare its brochure on its own computer using its word 
processing software and transmit the file to the IARD.\25\ We do not 
anticipate, however, that brochure supplements will be submitted to the 
IARD.
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    \23\ See discussion of Part 2 infra at Section II.D.2. of this 
Release.
    \24\ See discussion of system implementation infra at Section 
II.A.3. of this Release.
    \25\ Using their word processing software, advisers may be 
required to convert the word processing file to a standard file 
format, such as HyperText Markup Language (HTML) or American 
Standard Code for Information Interchange (ASCII).
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2. The Public Disclosure System
    All current information submitted to the IARD by advisers will be 
available to members of the public through our web site without 
charge.\26\ Interested persons will be able to search the database to 
retrieve information about advisory firms and persons associated with 
them.\27\ Anyone with access to the Internet will be able to look up an 
adviser and review its Form ADV--including the disciplinary records of 
the adviser and persons associated with the adviser.\28\
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    \26\ The IARD data will be available for commercial use, for a 
fee, and the proceeds will be used to maintain and upgrade the IARD.
    \27\ Members of the public will be able to search the IARD for 
information about a specific individual once the system begins 
accepting investment adviser representative filings on Form U-4 
(Uniform Application for Securities Industry Registration or 
Transfer) and Form U-5 (Uniform Termination Notice for Securities 
Industry Registration). See discussion of system implementation 
infra Section II.A.3. of this Release.
    \28\ Section 15A(h)(3)(i) of the Exchange Act (15 U.S.C. 78o-
3(h)(3)(i)) requires a registered securities association to 
establish and maintain a toll-free telephone listing to receive 
inquiries regarding disciplinary actions involving its members and 
their associated persons, and to promptly respond to any of these 
inquiries in writing. NASDR currently makes certain information 
about broker-dealers and their agents available on its web site. 
Disciplinary information about broker-dealers and their agents is 
not available on NASDR's web site, although NASDR will make it 
available in written form upon request. NASDR has not made broker-
dealer disciplinary information available on its web site because 
the Exchange Act provides NASDR with immunity from lawsuits 
challenging the accuracy of disciplinary information it provides in 
written form. NASDR has asked Congress to amend the Exchange Act to 
provide legal immunity for information made available on the 
Internet. See Ruth Simon and Aaron Lucchett, Disciplinary Records of 
Stockbrokers Won't be on Web this Spring After All, Wall St. J., 
Jan. 18, 1999, at B7. If immunity is granted, we hope that the CRD 
and the IARD can be linked so that a single search will provide 
information from both databases. This may be helpful to an investor 
who is unsure whether a person or firm is registered as a broker-
dealer or an adviser. Until then, the IARD will warn investors that 
they should consider contacting NASDR for possible additional 
disciplinary information.
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3. System Implementation
    We expect that the IARD will begin to receive filings later this 
year. We anticipate that the entire system will be ``rolled out'' in 
four separate releases: \29\
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    \29\ We understand that some would prefer that all components of 
the system begin operating together at the earliest possible date. 
We share that preference. Implementing the system in stages, 
however, permits NASDR to reduce its programming costs, which would 
otherwise have to be offset by higher filing fees.
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     First, SEC-registered advisers and applicants for SEC 
registration will begin using the system to file Part 1 with us and 
submit notice filings to state securities authorities.\30\ We expect 
that most (if not all) state securities authorities will accept 
``notice filings'' from SEC-registered advisers through the IARD at 
that time, and that many state securities authorities also will begin 
to require advisers registered with them to use the system. We 
understand, however, that some state securities authorities lack 
statutory authority to require advisers registered with them to file 
through the IARD and will postpone

[[Page 20527]]

full participation in the system until necessary legislation is 
enacted.\31\
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    \30\ Section II.C. of this Release discusses our proposed 
transition process for advisers registered with us.
    \31\ We understand that these state securities authorities are 
able to accept broker-dealer filings exclusively through the CRD 
because NASDR mandates the use of the CRD in its capacity as the 
self-regulator of its members. NASDR has no similar authority over 
investment advisers. Anyone interested in a particular state's 
participation in the IARD should contact the state's securities 
authority or NASAA.
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     Second, NASDR will release the public disclosure system, 
which should begin operating a few months after the first filings are 
made on the system. \32\
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    \32\ During the period of time after advisers begin to submit 
filings to the system and before the public disclosure system is 
operational, these filings will continue to be available from our 
public reference room.
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     Third, NASDR will release the state investment adviser 
representative licensing system. We expect that it will begin operating 
a few months after the public disclosure system is released. It is 
likely that some states will not participate until their laws have been 
changed.
     Fourth, the IARD will begin to accept Part 2A of Form ADV.
4. Filing Fees
    The Advisers Act permits the operator of the IARD to charge 
reasonable fees to cover system costs.\33\ We will pay NASDR to build 
the system; filing fees will be used to pay for its operation and 
maintenance. NASDR will charge fees for initial applications and annual 
updating amendments.\34\ These fees will be based on the amount of 
assets an adviser has under management and the number of states to 
which the adviser submits notice filings. We expect IARD annual filing 
fees to range from $200 for smaller advisers to $400 for the largest 
advisers.\35\ We must approve any fee or fee change, and we will do so 
only if the proposed fees are reasonable and necessary to support 
proper operation of the IARD. The IARD also will collect registration, 
licensing and notice fees on behalf of state securities 
authorities.\36\ All fee revenues will be segregated from NASDR's other 
assets and retained for the exclusive benefit of the IARD. The system 
will be audited annually by an independent public accountant, the 
results of which will be reported to us and NASAA. We will provide a 
copy of the report to interested persons.
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    \33\ Section 203A(d). See supra note 4 (section 203A(d) of the 
Advisers Act authorizes us to require advisers to pay the costs 
associated with electronic filing).
    \34\ NASDR does not plan to charge fees for other amendments to 
Form ADV or for filing Form ADV-W (17 CFR 279.2), the Notice of 
Withdrawal from Registration as Investment Adviser.
    \35\ As discussed in Section II.C. of this Release, infra, we 
will require advisers that are registered with us to re-submit their 
registration forms through the IARD. We expect that the IARD filing 
fees for these one-time submissions and for initial applications 
will be approximately twice the amount of the IARD annual filing 
fees. When the IARD accepts investment adviser representative 
filings on Form U-4 and Form U-5, supra note 27, NASDR will 
establish filing fees for these filings.
    \36\ We do not charge any registration fees for investment 
advisers. See Changes Selected Rules In Order To Eliminate Fees 
Previously Adopted by the Commission Pursuant to the Independent 
Offices Appropriations Act of 1952, Investment Advisers Act Release 
No. 1578 (Sept. 17, 1996) (61 FR 49957 (Sept. 24, 1996)) 
(eliminating $150 initial application fee).
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    Advisers using the system will be required to establish an account 
with NASDR and maintain funds in the account necessary to pay state 
fees as well as IARD filing fees. \37\ The IARD will automatically 
calculate the amount of the fees due based on information provided by 
the adviser on its Form ADV, debit the adviser's account, and remit 
amounts due to the appropriate state securities authorities. The IARD 
will not accept a filing if insufficient funds are on account to pay 
fees due.
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    \37\ Advisers that are members of the NASD (because they also 
are broker-dealers) will be able to use their existing CRD accounts 
to pay IARD filing fees as well as state registration and notice 
fees. We currently are exploring with NASDR ways for advisers to 
transfer funds to NASDR for filing and state fees.
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    The one-stop filing and fee collection functions of the IARD should 
substantially reduce regulatory burdens on advisers. Larger advisers, 
which typically will impose more costs on the system by submitting 
notice filings and paying fees in multiple states, will benefit the 
most. We believe, therefore, that it is appropriate that larger 
advisers pay higher fees to support the system.

B. Proposed Amendments to SEC Rules

    To implement the IARD, we are proposing new rules and amendments to 
rules that govern the process by which advisers apply for registration 
with us, amend their registrations, and withdraw from registration.\38\ 
This section discusses the proposed rules and rule amendments.\39\
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    \38\ Under the proposed rule amendments, advisers will file 
Forms ADV and ADV-W through the IARD system. We receive relatively 
few filings on Form ADV-E (17 CFR 279.8), and accountants that 
conduct surprise inspections of advisers would continue to file that 
form with us on paper. We expect to receive few filings on proposed 
Form ADV-NR, the execution form for non-resident general partners 
and managing agents of investment advisers (which would be 
substantially similar to Form 7-R), and we therefore propose to 
require paper filings of this new form. See discussion of proposed 
Form ADV-NR infra at section II.D.3. of this Release and proposed 
Form ADV-NR is included as Appendix D of this Release. Advisers also 
would file requests for hardship exemptions in paper format. See 
discussion of proposed hardship exemptions infra at section II.B.4. 
and proposed Form ADV-H infra at Appendix C. of this Release.
    \39\ In addition to the rule changes discussed in detail in this 
Release, we are proposing to withdraw rule 204-5 (Year 2000 Reports) 
and Form ADV-Y2K.
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1. Applications for Registration on Form ADV
    We propose to amend our rules under the Advisers Act to require all 
advisers applying for registration with us to file Form ADV through the 
IARD.\40\ Each adviser currently registered with us would be required 
to re-submit its Form ADV to us using the IARD and the revised 
form.\41\ We will publish a schedule of dates by which each adviser 
registered with us must re-submit its Form ADV through the IARD.\42\ 
Paper filings would be accepted only if the adviser has obtained a 
continuing hardship exemption, as described below.\43\
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    \40\ Proposed rule 203-1(b). The Advisers Act provides that, 
within 45 days after a person files an application for registration 
with us, we must either grant registration under the Act or 
institute a proceeding to determine whether registration should be 
denied. Section 203(c)(2) (15 U.S.C. 80b-3(c)(2)). Under the 
proposed amendments, an application for registration under the Act 
that is filed with the IARD would be considered filed with us on the 
date that it is accepted by the IARD. Proposed rule 203-1(c). As 
discussed above, the IARD will only accept filings that are complete 
and for which filing fees have been paid. Proposed rule 203-1(d).
    We explained in a 1997 release that an adviser and its 
affiliates could submit a single registration on Form ADV. 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 n.64. Our experience with advisers that have 
attempted such a registration has convinced us that Form ADV does 
not, and cannot be revised to, accommodate this registration, since 
each adviser may have different responses to the same items. 
Therefore each affiliated adviser would be required to file a 
separate Form ADV.
    \41\ Proposed rule 204-1(b).
    \42\ See discussion of transition process infra Section II.C. of 
this Release. Until the date on which an adviser must re-submit its 
Form ADV, that adviser will continue to make all required amendments 
on paper using the current (i.e., not revised) Form ADV. When we 
adopted Uniform Form ADV in 1985, we required all advisers 
registered with us to re-submit the form. See Uniform Investment 
Adviser Registration Application Form, Investment Advisers Act 
Release No. 991 (Oct. 15, 1985) (50 FR 42903 (Oct. 23, 1985)).
    \43\ The proposed hardship exemptions are discussed infra in 
Section II.B.4. of this Release.
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2. Amendments to Form ADV
    After an adviser has submitted an application for registration on 
Form ADV or re-submitted its Form ADV through the IARD, the adviser 
will have to make all amendments through the system.\44\ Our rules 
would continue to require each adviser to update its Form ADV at least 
once a year, or more frequently depending upon the information in the 
form that becomes

[[Page 20528]]

stale.\45\ To amend its Form ADV, an adviser would access its Form ADV 
through the IARD and simply type over the stale information.\46\ The 
adviser would then electronically ``sign'' \47\ the form and submit it 
to the IARD.\48\ The IARD would replace the stale information with the 
new information submitted and record the date of the change.\49\
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    \44\ Proposed rules 203-1(b) and 204-1(b).
    \45\ For the rules governing updating of Part 1A, see proposed 
rule 204-1(a) and proposed General Instruction 3 to Form ADV. For 
the rules governing updating of Part 2, see proposed rule 204-3, 
proposed Instruction 8 to Part 2A, and proposed Instruction 7 to 
Part 2B.
    \46\ When an adviser makes its annual updating amendment, 
information it has previously submitted regarding the amount of its 
assets under management and other information relevant to its 
eligibility for SEC registration would not appear. As a result, an 
adviser would be forced to affirmatively restate its basis for 
continued eligibility. This approach is not substantively different 
than the current requirement to re-file Schedule I each year, even 
if none of the information has changed. See rule 204-1(a). As 
discussed below, we are proposing to bring the information 
requirements of Schedule I into Part 1A of the form as Item 2.A. and 
eliminate Schedule I. See discussion infra, Section II.D.1.a. of 
this Release.
    \47\ The process of executing Form ADV and filing it through the 
IARD system will be an ``electronic signature,'' but not a ``digital 
signature,'' which is an electronic sequence of bits encrypted by a 
``key'' belonging only to the person ``signing'' the document. See 
generally Information Security Committee, Electronic Commerce 
Division, Science and Technology Section, American Bar Association, 
Digital Signature Guidelines Sec. 1.11 (Aug. 1, 1996) (available at 
http://www.abanet.org/scitech/ec/isc/dsgfree.html> (last visited 
Mar. 15, 2000)).
    \48\ See discussion of electronic signatures and the proposed 
execution pages of Form ADV infra at Section II.D.3. of this 
Release. An adviser that has been granted a continuing hardship 
exemption would amend its Form ADV by submitting Page 1, the 
appropriate execution page, and each page on which a change is made 
with the item number circled for which the response is changed. See 
discussion of proposed hardship exemptions at Section II.B.4. of 
this Release and proposed General Instruction 13 to Form ADV.
    \49\ All information replaced by the adviser will be retained on 
the IARD and will remain accessible, although not through the public 
disclosure system. The public disclosure system will provide access 
only to current information about each adviser, including 
disciplinary events occurring during the past ten years. See 
discussion of public disclosure system supra at Section II.A.2. of 
this Release.
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3. Withdrawal From Registration
    Investment advisers generally withdraw from SEC registration as a 
result of ceasing operations or switching to state registration.\50\ In 
either case, an adviser would file Form ADV-W with the IARD.\51\ The 
IARD will pre-populate the Form ADV-W with information from the 
adviser's most recent Form ADV filing; the adviser would then complete 
Form ADV-W, electronically sign it, and submit it to the IARD. We 
propose to make investment adviser withdrawals effective upon filing, 
eliminating the current 60-day waiting period.\52\ Eliminating the 60-
day waiting period for investment adviser withdrawals would smooth the 
transition process for advisers switching to state registration.
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    \50\ An adviser might ``switch'' from SEC to state registration 
because its assets under management have decreased to below $25 
million and therefore it is no longer eligible for SEC registration. 
See section 203A(a) (15 U.S.C. 80b-3a).
    \51\ Proposed rule 203-2. The proposed amendments to Form ADV-W 
are discussed infra at Section II.E. of this Release and proposed 
Form ADV-W is included as Appendix B of this Release.
    \52\ When we adopted the 60-day waiting period of rule 203-2(b), 
our enforcement remedies were limited primarily to suspending or 
revoking an adviser's registration, and the waiting period was 
intended to give our staff the opportunity, in appropriate cases, to 
investigate or institute proceedings against the adviser before it 
withdrew its registration. See Adoption of Form ADV-W and Amendment 
of Rule 203-2 Under the Investment Advisers Act of 1940, Investment 
Advisers Act Release No. 213 (Nov. 13, 1967) (32 FR 16151 (Nov. 25, 
1967)). This 60-day delay is no longer necessary, as we now have 
broader enforcement remedies that may be imposed on all advisers, 
registered or not. See sections 203(i) (fines), (j) (disgorgement), 
and (k) (cease and desist orders) (15 U.S.C. 80b-3(i), (j) and (k)). 
We also propose to amend our procedural rules to delete a provision 
allowing our staff to determine whether a withdrawal should become 
effective ``sooner than the normal 60-day waiting period.'' See rule 
30-11(b)(2)(ii) (17 CFR 200.30-11(b)(2)(ii)).
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    An adviser withdrawing from SEC registration and switching to state 
registration currently has a grace period to allow time for the adviser 
to register with the states.\53\ The preemptive provisions of the 
Advisers Act, however, preclude the states from regulating the adviser 
until it has withdrawn from SEC registration.\54\ We propose to adopt a 
rule amendment that would suspend preemption of a state's laws when the 
adviser registers with that state.\55\ Once registered with a state, an 
adviser would become subject to that state's adviser statute while also 
remaining subject to SEC regulation until it files Form ADV-W to 
withdraw from SEC registration.\56\ Once the adviser has filed Form 
ADV-W with us, the adviser generally would be subject only to state 
regulation.
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    \53\ Rule 203A-1(c) (90 days).
    \54\ 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 
Investment Advisers Act Release No. 1633, supra note 40 at II.H.1.
    \55\ See proposed rule 203A-1(b)(2)(ii). We also are proposing 
minor amendments to the rule for eligibility for SEC registration by 
redrafting the rule in plain English and revising it to reflect our 
interpretation that an adviser is ``regulated or required to be 
regulated'' if its principal office and place of business is in a 
state that has enacted an investment adviser statute. See Investment 
Advisers Act Release No. 1633 supra note 40 at II.E.1.
    \56\ An adviser no longer eligible for SEC registration may 
shorten the time it is subject to regulation by both the Commission 
and states by withdrawing from SEC registration promptly after 
registering with the appropriate states. We adopted a rule similar 
to the switching rule to assist the Ohio Securities Division in 
implementing a new investment adviser statute enacted in that state. 
See rule 203A-6 (17 CFR 275.203A-6) and Transition Rule for Ohio 
Investment Advisers, Investment Advisers Act Release No. 1794 (Mar. 
25, 1999) (64 FR 15860 (Apr. 1, 1999)).
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4. Hardship Exemptions
    In proposing to require advisers to file electronically, we are 
assuming that advisers have computers and access to the Internet, and 
will be able to submit filings through the IARD.\57\ We recognize, 
however, that there may be circumstances under which an adviser cannot 
make an electronic filing, and thus we are proposing two hardship 
exemptions that advisers could request by filing a short form with 
NASDR.\58\
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    \57\ A 1998 industry survey of registered investment advisers 
noted that all respondents use the Internet. According to the 
survey, advisers ``new to the business or those with less than $100 
million of assets under management are more active users of the 
online channel than are higher-net-worth (advisers).'' See Phil 
Clark, Cerrulli Survey; Advisers Flock to Internet for Research and 
Fund Data, Fund Marketing Alert, July 6, 1998 at 1. In 1999, the 
Institute of Certified Financial Planners (ICFP) and Morningstar 
also conducted a survey of financial planners and found that 99% of 
those surveyed had Internet access. See ICFP/Morningstar, Work/
Computer Environment Among RIAs (available in File No. S7-10-00). 
Those advisers that cannot submit electronic filings themselves can 
obtain the assistance of a filing service--a firm that provides 
assistance to advisers and broker-dealers in preparing and making 
regulatory filings. We expect to maintain a list of filing services 
that an adviser may retain to submit filings on the IARD system.
    \58\ All requests for a hardship exemption would be submitted on 
paper to NASDR on proposed Form ADV-H, which is included as Appendix 
C of this Release. The proposed hardship exemptions are similar to 
exemptions for issuers that make filings on our EDGAR system. See 
rules 201 and 202 of Regulation S-T (17 CFR 232.201 and 202).
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    An adviser that files electronically could request a temporary 
hardship exemption if unexpected difficulties prevent it from filing, 
such as a computer malfunction or electrical outage.\59\ The exemption 
would be available upon filing and allow an adviser to delay the 
deadline for an electronic filing for seven business days.\60\ A 
continuing hardship exemption would be available only to an adviser 
that is a ``small business'' \61\ and can demonstrate that the 
electronic filing requirements would create an undue hardship (e.g., 
the adviser does not have a computer and is unable to

[[Page 20529]]

afford a filing service). If we grant a continuing hardship exemption, 
the adviser would file on paper with NASDR, which would then convert 
the filing to electronic format and charge the adviser an additional 
fee to cover conversion costs.\62\ Since primarily larger advisers are 
registered with us, we expect that few would qualify for a continuing 
hardship exemption. We request comment on whether a continuing hardship 
exemption is necessary for SEC-registered advisers.
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    \59\ See proposed rule 203-3(a)(1).
    \60\ See proposed rule 203-3(a)(3). If the circumstances causing 
the temporary hardship persist, the adviser would have to make other 
arrangements to file electronically.
    \61\ An investment adviser generally is a small business if it 
(a) Manages assets of less than $25 million, (b) has total assets of 
$5 million or less, and (c) is not in a control relationship with 
another investment adviser that is not a small business. Rule 0-7 
(17 CFR 275.0-7).
    \62\ Although the adviser would submit Form ADV-H to NASDR, our 
staff, under authority delegated by us, would grant or deny all 
requests for a continuing hardship exemption. See proposed rule 30-
5(e)(7) of our Organization and Program Management Rules (17 CFR 
200.30-5(e)(7)).
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C. Proposed Transition to Electronic Filing

    When we adopt these amendments, we will provide an effective date 
that will correspond to the commencement of operations of the IARD. 
After that date, all applicants for registration must file their Form 
ADV and any amendments electronically through the IARD. We expect to 
publish a schedule by which advisers registered with us on the 
effective date will re-submit their registration forms to us through 
the IARD. We are asking for volunteers to be among the first group of 
advisers to submit their registration to the IARD.\63\ We encourage 
advisers that have used the CRD to volunteer. The experiences of this 
first group will alert us to any problems with the system and allow 
NASDR to make adjustments. We request comment on our proposed 
transition process. How soon after the adoption of the new rules and 
revised form can advisers be ready to submit their Form ADVs through 
the IARD?
---------------------------------------------------------------------------

    \63\ To volunteer, send an e-mail with the adviser's name, SEC 
801 number, CRD number (if any), and the name, phone number, and e-
mail address of a contact person to [email protected].
---------------------------------------------------------------------------

    As discussed above, a later release of the IARD will ultimately 
accept Part 2A of Form ADV.\64\ We propose to require each adviser to 
file its brochure with us when it makes its first annual update after 
the IARD begins to accept Part 2A.\65\ During the interim period, 
advisers will not be required to submit their brochures to us (either 
in electronic or paper form), but will, instead, be required to keep 
them and make them available to our staff.\66\ At the request of NASAA, 
we have included a provision in our proposed rules that a brochure 
retained by the adviser would be considered ``filed'' with us.\67\ As a 
result, until advisers submit Part 2A to the IARD, the state securities 
authorities could require SEC-registered advisers to file a copy of 
Part 2A (on paper) with them.\68\
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    \64\ As discussed in Section II.A.3. of this Release, only the 
firm brochure prepared in response to Part 2A will be submitted 
through the IARD. We are not proposing to require advisers to file 
their brochure supplements prepared in response to Part 2B.
    \65\ We will notify advisers when the IARD begins to accept Part 
2A of Form ADV and anticipate providing a grace period before 
requiring any advisers to file Part 2A electronically. See proposed 
rules 203-1(b)(2) and 204-1(c). Advisers would be required, however, 
to prepare their brochure in accordance with Part 2 of Form ADV, and 
to deliver and offer to deliver these brochures in accordance with 
amended rule 204-3, no later than the date by which all advisers 
must have re-submitted their Part 1A to the IARD. In addition, 
advisers would have a 30-day transition period, beginning on the 
date by which all advisers must have re-submitted their Part 1A to 
the IARD, to provide their new brochures and brochure supplements to 
existing advisory clients. See discussion of Part 2 and rule 204-3, 
infra at Section II.D. of this Release.
    \66\ Proposed rule 203-1(b)(2).
    \67\ Id.
    \68\ See discussion of ``notice filings'' supra note 14 and 
accompanying text. As a result of statutory changes made by NSMIA, a 
state securities authority can only require an SEC-registered 
adviser to file with the state copies of documents the adviser filed 
with us. See section 307(a) of NSMIA. To accommodate the state 
securities authorities' request to receive a copy of a document that 
we do not require SEC-registered advisers to file with us, we are 
proposing to deem that the filing was made with us.
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D. Proposed Revisions to Form ADV

    We are proposing substantial revisions to Form ADV.\69\ We have 
redrafted many items in simpler, more direct language, and have 
included brief explanations (in the form) of why we need the requested 
information. We believe that these changes will make it easier for 
persons to complete the form. The items continue to be drafted broadly 
to apply to the different types of advisory organizations registered 
with us and the state securities authorities. We request comment 
generally on the organization of the form and the clarity of the 
language we have used.
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    \69\ The paper version of Form ADV would only be used by an 
adviser with a continuing hardship exemption from the requirement to 
file the form electronically. The electronic version of the form 
will elicit the same information but will have minor differences 
necessary to reflect and, in some cases take advantage of, an 
electronic environment. For example, the text of Item 2.B. on the 
paper form would require an adviser amending its Form ADV to circle 
the box next to the name of the state that is no longer marked and 
therefore should no longer receive the adviser's notice filings. On 
the electronic form, the adviser would be directed to ``uncheck'' 
the appropriate box.
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1. Part 1
    Part 1 of Form ADV asks for information about the adviser and 
persons associated with the adviser. We need this information to decide 
whether to grant an application for registration or revoke a 
registration, and to manage our regulatory and examination programs. 
Some of the changes we are proposing in Part 1 are necessary to 
accommodate electronic filing. Many are in response to developments 
since Uniform Form ADV was adopted in 1985.\70\ The most significant 
regulatory development affecting investment advisers since 1985 
occurred in 1996 when Congress passed NSMIA, dividing regulatory 
jurisdiction over investment advisers between the Commission and the 
states.\71\ As a result, advisers are no longer required to register 
with both. Larger advisory firms (generally, those with at least $25 
million of assets under management) register only with us, but often 
must send notice filings to the states and pay state fees.\72\ Smaller 
advisers register with one or more states,\73\ not with us, and most of 
our regulatory requirements do not apply to them.
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    \70\ Investment Advisers Act Release No. 991, supra note 42.
    \71\ See section 203A of the Advisers Act (codifying Section 303 
of NSMIA).
    \72\ See discussion of ``notice filings'' supra note 14.
    \73\ All advisers in Wyoming and the U.S. Virgin Islands (the 
only U.S. jurisdictions that do not have an investment adviser 
statute) and those whose principal office and place of business is 
in a foreign country register with us regardless of the amount of 
assets under management. See section 203A(a) of the Advisers Act.
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    The changes made by NSMIA have allowed us to substantially 
reorganize Part 1, which we propose to divide into two parts. All 
advisers would complete Part 1A, while only state-registered advisers 
would complete Part 1B.\74\ This new organization would allow SEC-
registered advisers (and persons applying for SEC registration) to 
avoid responding to items requiring information we do not need.
a. Part 1A
    Part 1A would require an adviser to provide information describing 
itself and its business through a series of fill-in-the-blank, 
multiple-choice, and check-the-box questions. As proposed, Part 1A 
consists of 12 items that request information similar to that requested 
by current Form ADV.\75\ We are proposing a number of changes, the most 
significant of which are discussed below.
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    \74\ Part 1B is discussed in Section II.D.1.b. of this Release.
    \75\ Many of the items in Part 1A appear currently in Part I. 
Part 1A also includes several items that appear currently in Part 
II. See proposed Items 5.D., 5.E., 5.G., 6, 7, and 8. As proposed, 
Part 2 will not require advisers to enter data in discrete fields. 
See discussion of Part 2 of Form ADV infra Section II.D.2. of this 
Release.
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    i. Identifying Information. We propose to revise the identifying 
information we require about the adviser to reflect new information we 
need. For example, we

[[Page 20530]]

would ask for the CRD number of the adviser (if it has one), any web 
site addresses of the adviser,\76\ an e-mail address of a person we can 
contact about the form, and the fax number of the adviser.\77\ The 
identifying information would be included in Item 1 of Part 1A of the 
form, and multiple or additional narrative responses to certain sub-
items would be included on Schedule D.\78\ Schedule I, which currently 
requires information relevant to whether the adviser should be 
registered with us or the state securities authorities, would be 
incorporated into the body of Form ADV in a new Item 2A.\79\
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    \76\ We visit web sites sponsored by advisers registered with us 
as part of our routine examinations.
    \77\ See proposed Items 1.E., 1.I., 1.J. and 1.F(4), 
respectively, of Part 1A of Form ADV. We are proposing to ask for 
the social security number and date of birth of control persons 
reported on Schedules A and B and persons for whom a Disciplinary 
Reporting Page is filed (discussed below) to permit the IARD to 
distinguish between persons who share the same name. To protect the 
privacy of these persons, the social security numbers will not be 
available on the public disclosure system. See Amendments to Forms 
and Schedules to Remove Voluntary Provision of Social Security 
Numbers, Securities Act Release No. 7424 (June 25, 1997) (62 FR 
35338 (July 1, 1997)) (removing social security numbers from filings 
publicly available on EDGAR). Similarly, the public disclosure 
system will not report the home address of a sole proprietor 
(required by proposed Item 1.H.), unless the adviser's home address 
is also its principal office and place of business (required by 
proposed Item 1.F.).
    \78\ Proposed Schedule D would be the continuation schedule for 
Part 1A. Unlike current Schedule E, proposed Schedule D is 
structured and formatted based on the specific information to be 
entered on it.
    \79\ In addition, proposed Item 6.A. would ask whether the 
adviser is actively engaged in business as a bank. Recently-enacted 
legislation requires a bank, or a separately identifiable department 
or division of a bank, that advises a registered investment company 
to register with us as an investment adviser. See section 217 of the 
Gramm-Leach-Bliley Act, Pub. L. No. 106-102 (1999).
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    ii. Educational and Business Background. We propose to delete the 
requirements that an adviser report the educational and business 
background of its personnel.\80\ Instead, advisers would be required to 
provide this information to clients in the adviser's brochure or 
brochure supplements.\81\
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    \80\ Item 12 of Part I of Form ADV currently requires an adviser 
to provide this information to us for certain control individuals, 
and to a ``jurisdiction'' (i.e., a state securities authority) for 
all individuals giving investment advice in that jurisdiction. See 
Investment Advisers Act Release No. 991, supra note 42 at n.5.
    \81\ See discussion of Part 2 infra at Section II.D.2. of this 
Release.
---------------------------------------------------------------------------

    iii. Disciplinary Disclosure. We propose several amendments to the 
item requiring disclosure of disciplinary information about the adviser 
and certain of its advisory personnel.\82\ Many of these amendments 
update the form, and reflect changes that we have made to Form BD over 
the years.\83\ These changes will also permit advisers that are 
registered as broker-dealers to electronically copy and link 
disciplinary disclosure made in response to Form BD on NASDR's CRD 
system without re-typing the data into the IARD.\84\ As proposed, each 
adviser--
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    \82\ Proposed Item 11 of Part 1A.
    \83\ We have substantively amended Form BD several times over 
the years. When we proposed amendments to Form BD in 1991, we noted 
that we were considering proposing similar amendments to Form ADV. 
See Amendments to Form BD, Securities Exchange Act Release No. 29643 
(Sept. 3, 1991) (56 FR 44029 (Sept. 6, 1991)).
    \84\ There will remain, however, differences in the scope of 
disciplinary reporting between advisers and broker-dealers. Form ADV 
would continue to require advisers to disclose information about the 
disciplinary record of the adviser and its ``advisory affiliates.'' 
The term ``advisory affiliate'' would continue to be defined to 
include persons who control or are controlled by the adviser. See 
Item 11 of Part I of Form ADV and proposed Item 11 of Part 1A. Form 
BD requires broker-dealers to disclose disciplinary information 
about the broker-dealer and its ``control affiliates.'' While the 
term ``control affiliate'' is defined to include persons who control 
or are controlled by the broker-dealer, it also includes persons 
under common control with the broker-dealer. See Explanation of 
Terms, Form BD at page 2. This difference results from differences 
between the Advisers Act and the Exchange Act, under which broker-
dealers are regulated. Compare Section 202(a)(17) of the Advisers 
Act (15 U.S.C. 80b-2(a)(17)) (defining ``person associated with an 
investment adviser'') and Section 3(a)(18) of the Exchange Act (15 
U.S.C. 78c(a)(18)) (defining ``person associated with broker'').
    Another difference between the two terms is that ``advisory 
affiliate'' includes all non-clerical employees while ``control 
affiliate'' includes only those employees who perform executive 
duties or have senior policy making authority. Since the 
disciplinary history of registered representatives of broker-dealers 
is submitted to NASDR on Form U-4, we previously concluded that it 
is only necessary for us to require broker-dealers to file on Form 
BD disciplinary information about broker-dealer employees in 
``control-type'' positions. See Requests for Comments on Proposed 
Amendments to Broker-Dealer Successor Rules, Securities Exchange Act 
Release No. 21981 (Apr. 26, 1985) (50 FR 19196 (May 7, 1985)).
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     Would complete a Disciplinary Reporting Page (DRP) if it 
responds affirmatively to any of the disciplinary questions.\85\ We are 
proposing three DRPs, one each for criminal, civil, and regulatory 
actions. The DRPs would elicit details regarding each disciplinary 
event in a structured format and replace current Schedules D and E.\86\ 
The structured format, which we currently use in Form BD, is designed 
to yield better information than the free-text format of the current 
schedules.\87\
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    \85\ In completing Form ADV's disciplinary questions on the 
IARD, an adviser that is registered as a broker-dealer will be 
presented with a list of all disciplinary events reported on 
Disciplinary Reporting Pages (DRPs) to its Form BD. The adviser will 
indicate which of its Form BD DRPs should be included on its Form 
ADV. These linked DRPs will be incorporated into the adviser's Form 
ADV. If the adviser subsequently amends its Form BD and modifies any 
information in a linked DRP, the IARD will alert the adviser that it 
must either accept the change for its Form ADV or reject the change 
and unlink the DRP from its Form BD. If the adviser unlinks a DRP, 
it must maintain separately the Form ADV DRP and the Form BD DRP.
    \86\ We first replaced Form BD's single DRP with six customized 
DRPs in 1996. See Form BD Amendments, Securities Exchange Act 
Release No. 37431 (July 12, 1996) (61 FR 37357 (July 18, 1996)). We 
recently amended Form BD's DRPs for electronic filing in 1999. See 
Securities Exchange Act Release No. 41594, supra note 3. The three 
Form BD DRPs that we are not proposing to include with Part 1A of 
Form ADV relate to disciplinary questions that we are not proposing 
to ask in Part 1A. The state securities authorities have included 
two of these questions (Items 2.C. and 2.D. of Part 1B) and a 
requirement for two corresponding DRPs (bond and judgment/lien) in 
proposed Part 1B. We recently amended Form BD's DRPs for electronic 
filing in 1999. See Securities Exchange Act Release No. 41594, supra 
note 3.
    \87\ Item 11 of Part I currently requires an adviser, for a 
``yes'' answer to one of the disciplinary questions, to describe the 
action on Schedule E (if the action involved a partnership, 
corporation or other organization) or Schedule D (if the action 
involved an individual). Specifically, the adviser must provide the 
names of the individuals or organizations involved, the title and 
date of the action, the court or body taking the action, and a 
description of the action. The information advisers provide has 
been, in many cases, vague and imprecise. Use of the DRPs has 
elicited better information from broker-dealers.
---------------------------------------------------------------------------

     Would only report disciplinary events occurring in the 
past ten years.\88\ Currently, some questions limit reporting to events 
that occurred no more than ten years ago, but others have an unlimited 
reporting period.\89\ Our authority to deny or revoke an adviser's 
registration for the most serious events--those involving criminal 
convictions--is limited to ten years following conviction,\90\ a 
limitation recently reaffirmed by Congress.\91\ Although we have 
authority to deny or revoke registration based upon lesser (civil or 
administrative) sanctions

[[Page 20531]]

occurring more than ten years ago, we typically do not use that 
authority.\92\ Over the years, however, we have received many 
complaints from advisers that are required to report minor disciplinary 
events occurring decades ago, but that have no other disciplinary 
events.\93\
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    \88\ This ten-year limit would apply only to disciplinary 
information required by proposed Item 11 of Part 1A. See proposed 
Item 11 of Part 1A. Advisers may be required to include disciplinary 
events that occurred more than ten years ago in their brochure and 
brochure supplements. See discussion of Part 2A infra at Section 
II.D.2.a. of this Release. At the request of NASAA, state-registered 
advisers would continue to be required to report events more than 
ten years old in response to some questions. Each of the three DRPs 
we are proposing contain the following item: ``This DRP should be 
removed from the ADV record because the event occurred more than ten 
years ago.'' Checking this item would result in the DRP being 
removed from the current information about the adviser. All such 
DRPs, however, would be retained in the IARD.
    \89\ The reporting periods for the current items generally 
reflect our authority to deny or revoke the registration of an 
adviser. See section 203(e) (15 U.S.C. 80b-3(e)).
    \90\ See section 203(e)(2) and (3) (15 U.S.C. 80b-3(e)(2) and 
(3)).
    \91\ See section 305 of NSMIA (expanding to all felonies our 
authority to take action against an adviser, while retaining the ten 
year time limitation) (codified in Section 203(e)(2) and (3) of the 
Advisers Act).
    \92\ In response to amendments we proposed to Form BD in 1992, a 
commenter suggested that we limit all of Form BD's disciplinary 
questions to ten years. At that time, we noted that Form BD also is 
used by the state securities authorities and the self-regulatory 
organizations, which require the disclosure of disciplinary 
information dating beyond ten years. We therefore decided not to 
limit the disciplinary reporting obligation in Form BD. See Adoption 
of Form Amendments, Securities Exchange Act Release No. 30958 (July 
27, 1992) (57 FR 34028 (July 31, 1992)) at n.13.
    \93\ These advisers have pointed out that had they committed a 
more serious infraction and been convicted by a court of a crime, 
Form ADV would not require any reporting.
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     Would not report an unsatisfied judgment or lien; 
bankruptcy; or bond denial, payout, or revocation.\94\ These 
disclosures generally are not relevant to our authority to grant or 
deny registration. An adviser also would not report a finding by a 
self-regulatory organization that the adviser violated a rule 
designated as ``minor'' under a plan approved by the Commission if the 
sanction imposed consists of a fine of $2,500 or less and the 
sanctioned person does not contest the fine.\95\
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    \94\ This information is currently required by Items 11.H., 
11.I., 11.J., and 11.K. of Part I. These reporting requirements were 
originally included in the form to ``accommodate the regulatory 
interests of the (states).'' Investment Advisers Act Release No. 
991, supra note 42 at II.C. We are proposing to amend Part 2 of the 
form to require advisers (and supervised persons) to disclose to 
their clients whether they have been the subject of a bankruptcy 
petition during the past ten years and whether the adviser is in a 
precarious financial condition. See proposed Items 18.B. and 18.C. 
of Part 2A, and proposed Item 7 of Part 2B.
    \95\ See Securities Exchange Act Release No. 30958 (making a 
similar change to Form BD), supra note 92.
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     Would be required to report actions of foreign courts and 
regulatory authorities,\96\ and cease-and-desist orders issued by the 
Commission.\97\ Advisers also would be required to report felony 
criminal indictments and informations, and misdemeanor informations 
involving certain offenses,\98\ as well as report military court 
convictions, misdemeanor perjury convictions, and conspiracy to commit 
certain offenses.\99\
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    \96\ See proposed Items 11.A., 11.B., and 11.D. of Part 1A . The 
International Securities Enforcement Cooperation Act of 1990 (Pub. 
L. No. 101-550, 104 Stat. 2713 (Nov. 15, 1990) (codified in the 
Advisers Act at 15 U.S.C. 80b-2(a) and 80b-3)) gave us explicit 
authority to bar, suspend, or restrict the activities of advisers 
based on the findings of a foreign court or foreign securities 
authority. The Exchange Act was similarly amended (codified at 15 
U.S.C. 78c(a) and 78o(b)), and Form BD contains substantively 
similar disclosure requirements. See Securities Exchange Act Release 
No. 30958, supra note 92 at n.11.
    \97\ See proposed Item 11.C(5) of Part 1A. The Securities 
Enforcement Remedies and Penny Stock Reform Act (Pub. L. No. 101-
429, 104 Stat. 931 (Oct. 15, 1990) (codified in the Advisers Act at 
15 U.S.C. 80b-3 and 80b-9)) (Remedies Act of 1990) gave us authority 
to seek civil monetary penalties in court proceedings and to impose 
monetary penalties and order disgorgement in administrative 
proceedings. The Remedies Act also provided us with both temporary 
and permanent cease-and-desist authority to prevent violations of 
the securities laws. The Exchange Act was similarly amended 
(codified at 15 U.S.C. 78u-2 and 78u-3), and Form BD contains 
substantively similar reporting requirements. See Securities 
Exchange Act Release No. 30958, supra note 92 at n.12.
    \98\ These additional reporting requirements result from our 
proposed definition of the term ``proceeding,'' which we have 
incorporated from Form BD. See Broker-Dealer Registration and 
Reporting, Securities Exchange Act Release No. 31398 (Nov. 4, 1992) 
(57 FR 53261 (Nov. 9, 1992)). We also are proposing to incorporate 
from Form BD definitions of the following terms: ``charged,'' 
``felony,'' ``misdemeanor,'' ``found,'' ``enjoined,'' and ``minor 
rule violation.'' See Securities Exchange Act Release No. 37431, 
supra note 86. See also Glossary of Terms included in Appendix A of 
this Release.
    \99\ These changes further conform Form ADV's disciplinary 
questions to those of Form BD. See Form BD Amendments, Securities 
Exchange Act Release No. 35224 (Jan. 12, 1995) (60 FR 4040 (Jan. 19, 
1995)) (proposing), and Form BD Amendments, Securities Exchange Act 
Release No. 37431, supra note 86 (adopting). Similarly, proposed 
Item 4, asking whether the adviser is succeeding to the business of 
a registered investment adviser, would conform to Form BD Item 5. 
See Adoption of Revised Form BD and Revised Form BDW, Securities 
Exchange Act Release No. 20406 (Nov. 22, 1983) (48 FR 54436 (Dec. 2, 
1983)).
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     Could omit disciplinary information for advisory 
affiliates no longer associated with the adviser.\100\
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    \100\ Form ADV currently provides no easy way for an adviser to 
indicate that a person for whom the adviser has submitted a Schedule 
D reporting a disciplinary event is no longer employed by the 
adviser. Each of the three DRPs we are proposing contains the 
following item: ``This DRP should be removed from the ADV record 
because the advisory affiliate(s) is no longer associated with the 
adviser.'' Checking this item would result in the DRP being removed 
from the current information about the adviser and thus not 
available through the public disclosure system. All such DRPs, 
however, would be retained in the IARD and would be available to 
regulators.
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    iv. Control Person Disclosure. We are proposing revisions to the 
requirements for identifying persons who own or control the investment 
adviser. These changes, which are reflected in proposed Schedules A, B, 
and C, conform to the corresponding schedules of Form BD.\101\ They 
should clarify and simplify the reporting of indirect interests in the 
adviser when, for example, the adviser is part of a large corporate 
structure. An adviser generally would no longer be required to report 
an indirect owner unless the indirect owner owned twenty-five percent 
of a direct owner.\102\ Similarly, the instructions to these schedules 
clarify the requirements for imputing beneficial ownership of an 
adviser for reporting purposes.\103\
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    \101\ These schedules to Form BD were adopted in 1992. See 
Securities Exchange Act Release No. 30958, supra note 92. As part of 
its initial application for registration, an adviser would list its 
direct owners and executive officers on Schedule A, and if an 
adviser had indirect owners, these owners would be listed on 
Schedule B. An adviser with a continuing hardship exemption would 
use Schedule C to amend the information it filed on Schedules A and 
B. Advisers will not ``complete'' Schedule C when filing through the 
IARD; they will simply make changes on Schedules A and B.
    Similar to the way the Form BD DRPs submitted by an adviser that 
also is broker-dealer can be linked to the adviser's Form ADV, the 
Schedules A and B for such an adviser would be linked. Because the 
definition of control is the same for Form BD and Form ADV, however, 
the information submitted in Schedules A and B by an adviser that is 
a registered broker-dealer must be the same. IARD therefore will 
require an adviser that is a registered broker-dealer, in completing 
its Form ADV on the IARD, to acknowledge and accept every change it 
makes to its Schedules A and B of Form BD.
    \102\ For purposes of Schedule B, the 25% ownership interest is 
determined based on the form of organization. For a corporation, 
ownership is based on whether the indirect owner owns 25% or more of 
a class of voting securities. For a partnership or limited liability 
company, ownership is based on whether the indirect owner has the 
right to receive upon dissolution, or has contributed, 25% or more 
of the partnership's or limited liability company's capital.
    In proposing that advisers report only 25% owners of a direct 
owner, we have attempted to strike a balance between our need to 
know who controls an adviser and the burden on advisers to collect 
information about indirect owners. We recognize that it is often 
difficult for foreign-owned advisers, for example, to obtain 
ownership information about remote interests. See Securities 
Exchange Act Release No. 30958, supra note 92 at Section II.C.1 
(describing difficulties for foreign-owned broker-dealers to obtain 
ownership information). An adviser, however, would be required by 
proposed Item 10 of Part 1A to identify an indirect owner who owns 
less than 25% of a direct owner but nonetheless can influence the 
management or policies of the adviser. Cf. Securities Exchange Act 
Release No. 30958, supra note 92 at Section II.C.1(b) (adopting 
similar reporting requirements for Form BD).
    \103\ See Securities Exchange Act Release No. 30958, supra note 
92 at Section II.C.1(a).
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    v. Small Businesses. We are proposing to add a new Item 12 that 
would request information we need to determine whether the adviser is a 
small business. We are required by the Regulatory Flexibility Act to 
consider the effects of our regulations on small businesses and need to 
know how many advisers registered with us are small businesses.\104\ 
Generally, only those SEC-registered advisers with assets under 
management of less than $25 million would be required to respond to 
this item.\105\
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    \104\ 5 U.S.C. 603.
    \105\ See discussion of rule 0-7, supra note 61 (definition of 
``small business'' or ``small entity'' for purposes of the Advisers 
Act).
---------------------------------------------------------------------------

b. Part 1B
    Part 1B of Form ADV has been prepared by NASAA on behalf of the

[[Page 20532]]

state securities authorities. It would require state-registered 
advisers to provide information about bonding, arbitration actions, 
other civil and regulatory actions, and whether sole proprietors have 
taken certain qualifying exams or attained various professional 
designations. Most of this information is currently required by the 
state securities authorities.
    Only state-registered advisers will be required to complete Part 
1B.\106\ Completion of this part of the form, therefore, is not an SEC 
requirement, and Part 1B is not included in this Release as a proposed 
SEC rule. We will accept any comments and forward them to NASAA for 
consideration by the state securities authorities.\107\
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    \106\ State-registered advisers would be required by state 
rather than federal law to complete Part 1B. See proposed General 
Instruction 2 to Form ADV.
    \107\ We request that you clearly indicate in your comment 
letter which of your comments relate to Part 1B.
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2. Part 2
    Currently, Part II of Form ADV contains the requirements for the 
disclosure statement that advisers must provide to prospective clients 
and offer to clients annually. The disclosure statement contains 
information about the adviser's fees, business practices, and conflicts 
of interest. Advisers are required to provide clients either a copy of 
Part II or a narrative brochure that contains at least the information 
required in Part II.\108\ Most advisers provide clients with Part II, 
which asks a series of multiple-choice and fill-in-the-blank questions 
supplemented in some cases by narrative schedules.
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    \108\ Rule 204-3(a) (17 CFR 275.204-3(a)).
---------------------------------------------------------------------------

    Our experience over the 15 years since Uniform Form ADV was adopted 
has convinced us that we need a better approach to client disclosure. 
First, the format of Part II does not lend itself to meaningful, clear 
disclosure. In some cases, an adviser's response to a question may be 
accurate but paint an inaccurate picture of its practices. For example, 
an adviser may truthfully respond to current Item 4.C. by indicating it 
uses all of the strategies listed by the item, but a client may not 
appreciate that the adviser's principal strategy involves, for example, 
risky options trading. In other cases, clients must draw inferences 
from an adviser having checked a box. For example, if an adviser is 
paid through commissions on securities that it advises clients to 
purchase or sell, a checked box in current Item 1.C. will disclose this 
practice, but not the conflict of interest the adviser has as a result. 
Advisers can use Part II's narrative schedules to expand on a check-
the-box answer, but the schedules are physically separate from the 
checked box and are often written in legalese or technical jargon.
    Second, because the information in Part II concerns the advisory 
firm, clients may not receive information they want and need about the 
firm's employees with whom they have contact and on whom they rely for 
investment advice. In the case of smaller firms, the current disclosure 
requirements, which focus on the senior executives of the advisory 
firm, may be adequate.\109\ But in a growing number of large advisory 
firms, clients may never meet the firm's senior executives, who may be 
located in a different city and may have only an indirect effect on the 
advice given to the client. We believe clients of these firms may be 
more interested in the background and qualifications of the individuals 
with whom they are dealing than in the background and qualifications of 
executive officers.
---------------------------------------------------------------------------

    \109\ Items 5 and 6 of current Part II.
---------------------------------------------------------------------------

    We propose to address these concerns (and others, described below) 
by extensively revising the format of advisers' disclosure 
requirements. Under the proposed rules, each adviser would be required 
to give clients a narrative brochure written in plain English.\110\ 
Items in Part 2 would specify the disclosure required in the brochure, 
but advisers would be generally free to structure the disclosure and 
order the topics in a manner that best conveys the required 
information. Our model is Schedule H to Form ADV, which currently 
requires wrap fee program sponsors to give clients a narrative brochure 
describing the wrap program.\111\ Our experience with the wrap fee 
brochure suggests that narrative firm brochures will provide advisers' 
clients with better, more understandable disclosure.
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    \110\ See proposed General Instructions 1 and 2 to Part 2 of 
Form ADV.
    \111\ Schedule H to Form ADV; rule 204-3(f)(1) (17 CFR 275.204-
3(f)(1)).
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    The new adviser brochures would be organized in two parts, a firm 
brochure and a brochure supplement for each individual who provides 
advisory services to clients on the adviser's behalf. As described in 
more detail below, advisers would be required to deliver a brochure to 
each client, and would be required to deliver an individual's 
supplement only to those clients to whom that individual will provide 
advisory services. Part 2A would contain the requirements for the firm 
brochure, and Part 2B for the brochure supplements.
a. Part 2A: The Firm Brochure
    Each adviser registered with us would be required to deliver its 
brochure at the start of the advisory relationship,\112\ and to offer 
to deliver the brochure annually.\113\ Advisers would be required to 
use their new brochures and brochure supplements to meet these delivery 
requirements by the end of the first ``roll out'' phase of the 
IARD.\114\ To allow advisers to make a smooth transition, we are 
proposing a further 30-day transition period to allow advisers to 
provide the new brochures and supplements to existing advisory 
clients.\115\
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    \112\ The adviser would be required to deliver the brochure 
before or at the time it enters into an advisory agreement with the 
client. Proposed amended rule 204-3(b)(1)(A) and Instruction 1 to 
Part 2A. Our proposed rule and the proposed instructions would 
clarify that the brochure must be delivered whether the advisory 
agreement is oral or in writing. For a discussion of proposed 
supplement delivery requirements, see infra text accompanying notes 
212-215.
    \113\ Proposed amended rule 204-3(b)(1)(A) and Instruction 1 to 
Part 2A. Advisers would not be required to deliver or offer a 
brochure to a client that is a registered investment company or to a 
client who receives only impersonal advisory services costing less 
than $500 per year. These exceptions are contained in current rule 
204-3(c)(2) (17 CFR 275.204-3(c)(2)), except that the dollar amount 
threshold would increase from $200 to $500 to reflect the effects of 
inflation since the rule was adopted in 1979. See Investment Adviser 
Requirements Concerning Disclosure, Recordkeeping, Applications for 
Registration and Annual Filings, Investment Advisers Act Release No. 
664 (Jan. 30, 1979) (44 FR 7870 (Feb. 7, 1979)).
    \114\ See proposed rule 204-3(i)(1); see also supra text 
accompanying notes 29-31.
    \115\ See proposed rule 204-3(i)(2).
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    The proposed delivery requirements would be very similar to the 
current ones, with two differences of note.\116\ First, we propose to 
clarify that an adviser acting as the general partner for a limited 
partnership must provide a brochure to each limited partner.\117\

[[Page 20533]]

Second, we propose to require that updates to the brochure be delivered 
to clients whenever information in the brochure becomes materially 
inaccurate.\118\ Currently, our rules require initial delivery of the 
brochure, but require no further brochure delivery unless the client 
accepts the adviser's annual offer.\119\ The anti-fraud provisions of 
the Act require, however, an adviser to fully disclose information 
about all material conflicts, which require the adviser to correct 
previous disclosure about conflicts to clients.\120\
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    \116\ Currently, rule 204-3 requires an adviser to deliver the 
brochure at least 48 hours before entering into the advisory 
agreement, or at the time of entering into the agreement if the 
client has the right to terminate the agreement without penalty 
within five business days thereafter. We are proposing to simply 
require that the adviser deliver the brochure before or at the time 
of entering into the agreement. It is our view that an advisory 
client has a right at any time to terminate the advisory 
relationship and receive a refund of any prepaid advisory fees that 
the adviser has not yet earned. See Jason Baker Tuttle, Sr., Initial 
Decision Release No. 13 (Jan. 8, 1990) (adviser failed to refund 
prepaid fees to clients); see also Monitored Assets Corp., 
Investment Advisers Act Release No. 1195 (Aug. 28, 1989) (advisers 
that refunded prepaid advisory fees only to certain clients violated 
anti-fraud provisions of the Act).
    \117\ Proposed Instruction 3 to Part 2A. We understand that some 
advisers have taken the position that the partnership is the 
``client'' and thus the adviser need only deliver the brochure to 
the general partner, i.e., itself. This position results, for all 
practical purposes, in the delivery of no brochure, and is 
inconsistent with the remedial purposes of the rule. The position 
is, we understand, based on provisions in rule 203(b)(3)-1(a)(2) (17 
CFR 275.203(b)(3)-1(a)(2)), which permit an adviser to treat a 
partnership as a single client under certain conditions. However, 
that rule is limited by its terms to counting clients for 
determining eligibility for the ``small adviser exception'' to the 
registration requirements. See section 203(b)(3) (15 U.S.C. 80b-
3(b)(3)) and Investment Advisers Act Release No. 1633, supra note 40 
at section II.G. (``rule 203(b)(3)-1 * * *  define(s) the term 
`client' only for purposes of counting clients under section 
203(b)(3) * * * (p)ersons that are grouped together for purposes of 
(this) section may be required to be treated as separate clients for 
other purposes under the Advisers Act * * *''). We note the 
application of the anti-fraud provisions of the Advisers Act to 
limited partners. See Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 
1977), cert. denied, 436 U.S. 913 (1978).
    \118\ See proposed rule 204-3(f).
    \119\ The annual offer, and delivery if the client accepts the 
offer, is required under current rules 204-3(c)(1) and (4).
    \120\ We have taken enforcement action against advisers under 
the anti-fraud provisions of the Advisers Act for failing to 
disclose new conflicts of interest. See, e.g., Renaissance Capital 
Advisors, Inc., Investment Advisers Act Release No. 1688 (Dec. 22, 
1997) (adviser failed to inform clients that it had begun paying for 
non-research expenses with soft dollar credits).
---------------------------------------------------------------------------

    We believe it is incumbent upon an adviser, as a fiduciary, to keep 
its clients apprised of material changes in its operations, its fees, 
key advisory personnel, and other information provided in the advisory 
brochure. Mutual fund shareholders are not required to rely on 
information in stale prospectuses; we see no reason why advisory 
clients should rely on stale brochures. Therefore, we are proposing to 
require that an adviser provide clients with written brochure updates 
whenever information in the brochure becomes materially incorrect, and 
include these updates with brochures delivered to prospective 
clients.\121\ These updates can take the form of either a reprinted 
brochure or a ``sticker,'' a piece of paper identifying the stale 
information and providing the current information.\122\ Advisers that 
deliver their brochure to clients electronically could also deliver 
stickers electronically.\123\
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    \121\ As discussed below, advisers would be permitted to use a 
correction slip or ``sticker'' to update their brochure if they 
preferred not to revise the brochure itself. Advisers choosing to 
update using a sticker could deliver just the sticker to existing 
clients; advisers choosing to revise the brochure would be required 
to provide the revised brochure to existing clients in order to 
notify them of the updated information.
    \122\ See proposed Instruction 8 to Part 2A. The adviser's 
choice between reprinting the brochure and using a sticker would 
apply only to the brochure that the adviser distributes to clients 
and maintains in its files under our recordkeeping rules. Once the 
IARD accepts electronic filings of Part 2A, an adviser amending its 
brochure would be required to refile a revised brochure through the 
IARD, regardless of whether the adviser has chosen to give clients a 
sticker or a reprinted brochure. Thus, members of the public viewing 
the brochure on-line would have access to current information about 
the adviser.
    \123\ We have published interpretive guidelines for advisers' 
delivery of disclosure through electronic media. See Use of 
Electronic Media by Broker-Dealers, Transfer Agents, and Investment 
Advisers for Delivery of Information; Additional Examples Under the 
Securities Act of 1933, Securities Exchange Act of 1934, and 
Investment Company Act of 1940, Investment Advisers Act Release No. 
1562 (May 9 1996) (61 FR 24644 (May 15, 1996)) (available at 
www.sec.gov/rules/concept/33-7288.txt> (last visited Mar. 15, 
2000)). Our proposed instructions to Part 2 remind advisers of this 
option, and provide this website address.
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    As proposed, advisers could use stickers to update a firm brochure 
in the same way that sponsors of wrap fee programs currently use 
stickers to update their narrative wrap fee program brochures.\124\ 
Generally, an adviser could use a sticker for any amendment(s) so long 
as the brochure remains readable and clear. We would, however, require 
the adviser to revise (and reprint) its brochure each year as part of 
its annual updating amendment. Thus, the current brochure that the 
adviser offers clients annually would be a ``clean'' document that 
incorporates the text from all existing stickers. We request comment on 
this proposal. How many stickers would advisers expect to accumulate 
over one year? How many changes would those stickers effect, and how 
complex would they be? Would clients be confused if advisers were 
required to reprint their brochures only every two or three years, 
rather than every year?
---------------------------------------------------------------------------

    \124\ See current Schedule H to Form ADV.
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    The information required in a firm brochure would be specified by 
Part 2A of Form ADV.\125\ Part 2A would consist of 19 separate items, 
each of which elicits required disclosure on a distinct topic.\126\ We 
have drawn the items in Part 2A largely from current Part II, 
redrafting them as necessary to reflect the narrative format of the new 
brochure.\127\ Some Part 2A items are new, or have been revised to 
reflect new concerns or developments in the investment adviser 
industry. Much of the information required in the proposed narrative 
brochure concerns an adviser's conflicts of interest with its clients, 
and is disclosure the adviser already must make to clients, as a 
fiduciary, under the anti-fraud provisions of the Advisers Act.\128\ 
Thus, many of the proposed disclosure items will serve to give advisers 
guidance on fulfilling their statutory disclosure obligations to 
clients.
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    \125\ Advisers would be permitted to include non-required 
information in their brochures, provided it does not obscure 
required information. For example, an adviser could elect to include 
in its brochure the annual privacy notice required under section 504 
of the Gramm-Leach-Bliley Act. P.L. No. 106-102, 113 Stat. 1338 
(1999). The Gramm-Leach-Bliley Act, which was signed into law last 
November, requires investment advisers (among other financial 
service providers) in certain circumstances to provide initial and 
annual privacy notices to individuals. The notices must state (i) 
the adviser's policies and practices regarding its disclosure of 
nonpublic personal information to other parties, and (ii) how 
individuals can ``opt-out,'' that is, prevent the adviser from 
disclosing their information to nonaffiliated third parties. The 
Commission proposed rules implementing these privacy notice 
requirements on March 2, 2000. See Privacy of Consumer Financial 
Information (Regulation S-P), Investment Advisers Act Release No. 
1856 (Mar. 2, 2000) [65 FR 12354 (Mar. 8, 2000)]. Advisers that use 
their brochure to transmit their annual privacy notice would, of 
course, need to deliver, not merely offer, the brochure each year.
    \126\ Proposed Part 2A has a main body and an appendix, Appendix 
1. Appendix 1 contains the requirements for a specialized type of 
firm brochure--a wrap fee program brochure. As discussed below, 
Appendix 1 would require disclosure similar to that required by 
current Schedule H. In the main body of Part 2A, an additional item, 
Item 20, sets out additional disclosure that state securities 
authorities will require of advisers registered with them. Advisers 
registered only with us would be required to respond only to Items 1 
through 19. Item 20 of Part 2A would be a state, rather than an SEC, 
requirement and therefore we are not requesting comment on it. We 
will, however, pass on to NASAA any comments we receive on Item 20.
    \127\ In addition, we propose to move other disclosure 
requirements from current Part II into new Part 2B, for the brochure 
supplement, and to delete some current Part II items we believe are 
no longer necessary. We have redrafted the instructions to Part 2 to 
make them easier to understand and to clarify advisers' obligations 
under the Advisers Act. The proposed instructions remind advisers 
that they are fiduciaries and have an obligation to make full and 
fair disclosure of all material conflicts with clients. The 
instructions require advisers to use plain English principles in 
drafting their brochures, provide guidance on preparing different 
brochures for different clients, explain the special rules for 
preparing wrap fee brochures, and explain how advisers without an 
operating history should respond to items. The instructions also 
explain the brochure rule's delivery requirements, explain brochure 
updating requirements, remind advisers that under certain conditions 
they can deliver the brochure electronically, and explain our filing 
requirements.
    \128\ Section 206 (15 U.S.C. 80b-6).
---------------------------------------------------------------------------

    The items in proposed Part 2A will not, of course, cover every 
possible conflict. As a result, delivering a brochure (and supplements) 
prepared in accordance with Part 2 may not fully satisfy an adviser's 
disclosure obligations. We make this point clear in both the proposed 
Form and brochure

[[Page 20534]]

rule.\129\ We request comment whether there are other common 
disclosures advisers make to clients that we should also include in the 
items of Part 2.
---------------------------------------------------------------------------

    \129\ See proposed General Instruction 3 to Part 2; proposed 
rule 204-3(g).
---------------------------------------------------------------------------

    Item 1. Cover Page. The brochure cover page would be required to 
identify the advisory firm, its business address, and telephone number; 
the date of the brochure; and the name of a person who can be contacted 
for further information. The cover page would also include a statement 
that the brochure has not been approved by the Commission or any state 
securities authority. If the adviser holds itself out as being 
``registered,'' the cover page must also explain that registration does 
not imply that the adviser possesses a certain level of skill or 
training.\130\ The cover page would also provide the address of a web 
site so that a client or prospective client can obtain additional 
information about the adviser through the IARD.
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    \130\ We have observed that the emphasis on SEC registration, in 
some advisers' marketing materials, appears to suggest that 
registration either carries some official imprimatur or indicates 
that the adviser has attained a particular level of skill or 
ability. Section 208(a) of the Advisers Act (15 U.S.C. 80b-8(a)) 
makes such suggestions unlawful. See, e.g., Money Machine, 
Investment Advisers Act Release No. 783 (Nov. 12, 1981) (adviser 
violated section 208(a) by representing or implying that the 
Commission had passed upon the adviser's abilities and 
qualifications); Advanced Analysis, Inc., Investment Advisers Act 
Release No. 397 (Jan. 18, 1974) (adviser violated section 208(a) by 
representing that the Commission had passed upon the adviser's 
qualifications and methods of security analysis).
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    Item 2. Material Changes. The brochure would include a summary of 
material changes since its last annual update, to help clients identify 
new or revised information. The summary would appear on the cover page 
of the brochure or immediately thereafter, or could be included in a 
separate letter sent to clients accompanying the brochure.\131\
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    \131\ An adviser including the summary in a separate letter to 
clients would not be required to file the letter with us, but a 
proposed amendment to our recordkeeping rule would require the 
adviser to preserve a copy. See proposed rule 204(a)(14)(i).
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    Item 3. Table of Contents. The new brochures would include a table 
of contents detailed enough to permit clients to locate topics easily.
    Item 4. Advisory Business. Advisers would be required to include 
background information about the advisory firm, including how long it 
has been in business and the names of its principal owners. The 
brochure would also describe the firm's advisory business--the types of 
advisory services offered, whether the adviser tailors services to 
clients' individual needs, and whether clients may impose individual 
investment restrictions.\132\
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    \132\ Proposed Item 4, together with proposed Item 7, 
incorporate requirements of current Item 3 of Part II. Proposed Item 
4 also incorporates requirements of current Items 1.A. and 1.D. of 
Part II.
---------------------------------------------------------------------------

    We are not proposing to require all advisers to disclose the 
details of how they manage client assets. For many advisers, 
descriptions of how they formulate advice or manage client portfolios 
are likely to be either too generalized or too client-specific to be 
helpful. However, we propose to require an adviser that holds itself 
out as specializing in a particular service to explain its specialty in 
detail,\133\ and to require an adviser that provides advice about only 
limited types of securities to explain its services and their 
limitations. In addition, advisers that manage assets would disclose 
the amount they manage with investment discretion, and the amount 
without. Wrap fee portfolio managers would explain any differences in 
their portfolio management for wrap fee and non-wrap clients, as well 
as identifying the wrap programs they participate in and disclosing 
that they receive part of the wrap fee.\134\
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    \133\ In response to proposed Item 7, advisers offering 
specialized services would also be required to disclose any specific 
risks their specialty involves. See discussion of proposed Item 7, 
infra, text accompanying notes 143-144.
    \134\ Proposed Item 4.F. Item 4.F. would apply only to advisers 
that manage portfolios in wrap fee programs; these advisers would 
provide wrap fee clients with their regular firm brochure. Advisers 
that sponsor wrap fee programs would prepare a separate ``wrap fee 
brochure'' for their wrap fee clients in compliance with Part 2A 
Appendix 1. See infra text accompanying note 202.
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    Item 5. Fees and Compensation. The brochure would describe how the 
adviser is paid for providing advisory services.\135\ The adviser would 
be required to disclose its fee schedule, disclose whether fees are 
negotiable, discuss whether the firm bills clients or deducts fees 
directly from the clients' accounts, and explain how often the firm 
assesses fees. Advisers charging fees in advance would also be required 
to explain how they calculate and refund prepaid fees when a client 
contract terminates.\136\
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    \135\ Proposed Item 5 incorporates requirements of current Items 
1.C., 1.D., and 9.B. of Part II.
    \136\ Advisers must refund prepaid unearned advisory fees to 
clients when the advisory relationship terminates. See, e.g., Jason 
Baker Tuttle, Sr., supra note 116.
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    Advisory clients may not appreciate that they will bear other costs 
in addition to advisory fees. Thus, in addition to information about 
advisory fees, we propose to require the brochure to describe the types 
and amounts (or ranges) of other costs, such as brokerage, custody 
fees, and fund expenses, that clients may pay in connection with 
advisory services.
    In some cases, the type of compensation an adviser receives will 
involve a conflict of interest. An adviser that receives commissions or 
other payments for sales of securities to clients (transaction-based 
compensation) has a serious conflict of interest with its clients.\137\ 
This practice gives the adviser and its personnel an incentive to base 
investment recommendations on the amount of compensation they will 
receive rather than on the client's best interests.\138\ We propose to 
require advisers who receive transaction-based compensation (or whose 
personnel receive transaction-based compensation) to disclose this 
practice and the conflict of interest, and to describe the firm's 
control procedures for addressing the conflict.\139\ Item 5 would also 
require these advisers to disclose that clients may purchase the same 
securities or investment products from other brokers.\140\ Should 
proposed Item 5 also require an adviser to discuss its conflict of 
interest in charging performance or incentive fees, or should

[[Page 20535]]

we continue to rely on anti-fraud provisions to require disclosure when 
this type of fee structure presents a material conflict? \141\
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    \137\ A congressional committee has characterized the practice 
of an adviser receiving transaction-based compensation as ``(o)ne of 
the most serious and frequent conflicts of interest that advisers 
have with clients.'' H.R. Rep. No. 75, 103d Cong., 1st Sess. 19 
(1993).
    \138\ Because of this conflict, advisers are required by the 
anti-fraud provisions of the Advisers Act to disclose their receipt 
of such compensation to clients. We have brought enforcement actions 
against advisers who failed to make such disclosures. See Carona & 
Hodges Management, Inc., and James G. Carona, Investment Advisers 
Act Release No. 1403 (Feb. 8, 1994) (adviser invested client assets 
in risky, developmental-stage companies without disclosing that the 
adviser received loan fees from those companies for doing so); 
Westmark Financial Services Corp., Investment Advisers Act Release 
No. 1117 (May 17, 1988) (adviser and principal failed to state that 
they would receive commissions on certain securities they 
recommended to clients); and John S. Lalonde, Investment Advisers 
Act Release No. 1103 (Jan. 25, 1988) (adviser failed to disclose 
commissions received on sales of limited partnership interests).
    \139\ As discussed below, advisers may engage in practices that 
must be disclosed under both proposed Item 5 and proposed Item 
10.A., which would require disclosure when the adviser has a 
financial interest in securities that it recommends to clients, or 
under both proposed Item 5 and proposed Item 13, which would require 
disclosure when the adviser receives an economic benefit from a non-
client. A brochure would not need to repeat information simply 
because the information is responsive to more than one item.
    \140\ E.g., Westmark Financial Services Corp., Investment 
Advisers Act Release No. 1117 (May 16, 1988) (adviser failed to 
disclose that clients could purchase securities from other broker-
dealer). In addition, an adviser that receives more than 50% of its 
revenue from commissions and other sales-based compensation would 
explain that commissions are the firm's primary (or, if applicable, 
exclusive) form of compensation, and an adviser that charges both 
advisory fees and commissions would disclose whether it reduces its 
fees to offset the commissions.
    \141\ See Exemption To Allow Investment Advisers To Charge Fees 
Based Upon a Share of Capital Gains Upon or Capital Appreciation of 
a Client's Account, Investment Advisers Act Release No. 1731 (July 
15, 1998) (63 FR 39022 (July 21, 1998)).
---------------------------------------------------------------------------

    Item 6. Types of Clients. The brochure would describe the types of 
advisory clients the firm generally has. The adviser would also 
disclose its requirements, such as minimum account size, for opening or 
maintaining an account.\142\
---------------------------------------------------------------------------

    \142\ Proposed Item 6 incorporates requirements of current Items 
2 and 10 of Part II.
---------------------------------------------------------------------------

    Item 7. Methods of Analysis, Investment Strategies and Risk of 
Loss. Item 7 would require the brochure to describe the adviser's 
methods of analysis and investment strategies. As noted earlier, Item 4 
of Part II currently asks for the adviser's methods of analysis, 
sources of information, and investment strategies through a series of 
check boxes. The current format necessarily covers a limited number of 
analytical methods and strategies. Moreover, clients may not appreciate 
the meaning of the methods listed, or may not understand the 
implications for how client accounts are actually managed using a 
particular method.\143\ We believe that an adviser's narrative 
description will provide clients with more useful information.
---------------------------------------------------------------------------

    \143\ See current Item 4 of Part II. Proposed Item 7 also 
incorporates requirements of current Item 3 of Part II.
---------------------------------------------------------------------------

    We are also proposing that the brochure discuss the risks clients 
face in following the adviser's advice or permitting the adviser to 
manage assets. Advisers that offer a wide variety of advisory services 
could simply explain that investing in securities involves a risk of 
loss; we would not require these advisers to list the risks involved in 
each type of security or trading strategy. Advisers that use primarily 
a particular method of analysis, strategy, or type of security would be 
required to explain the specific risks involved,\144\ with more detail 
if those risks are significant or unusual.
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    \144\ Advisers whose primary strategy involves frequent trading 
would have to explain how the strategy may affect performance, due 
to higher transaction costs and taxes.
---------------------------------------------------------------------------

    Item 8. Disciplinary Information. We propose to require an 
adviser's brochure to disclose information about the firm's 
disciplinary history. This disclosure would include descriptions of, 
among other events, any convictions for theft, fraud, bribery, perjury, 
forgery and violations of securities laws by the adviser or one of its 
executives. Disciplinary events such as these reflect on the integrity 
of the adviser and its management persons. Thus, disclosure of this 
information is material to clients.
    Although we have long viewed the anti-fraud provisions of the 
Advisers Act as requiring advisers to disclose disciplinary 
information,\145\ we have not required this disclosure to be included 
in Part II of Form ADV or the client brochure.\146\ One of our anti-
fraud rules, rule 206(4)-4, requires advisers to inform clients and 
prospective clients promptly about any ``legal or disciplinary event 
that is material to an evaluation of the adviser's integrity or ability 
to meet contractual commitments to clients.'' \147\ The rule provides a 
list of events that are presumed to be material if they occurred in the 
previous ten years.\148\ The adviser may (but is not required to) make 
this disclosure in its brochure, and may make it orally.
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    \145\ See, e.g., Jesse Rosenblum, Investment Advisers Act 
Release No. 913 (May 17, 1984) (adviser who failed to tell 
prospective clients about an injunction obtained against the adviser 
by state securities authority ``omitted a material fact that was 
essential to an evaluation of his qualifications as an investment 
adviser * * * (and that) investors surely would have wanted to know 
(about the injunction) before entrusting their funds to (the 
adviser's) management'').
    \146\ When we proposed Uniform Form ADV in 1985, we considered 
requiring advisers' brochures to contain substantially the same 
disciplinary information advisers must report to us, which includes 
disciplinary information not only about the adviser and its 
management persons but also about its advisory personnel. Uniform 
Investment Adviser Registration Application Form, Investment 
Advisers Act Release No. 967 (Apr. 24, 1985) (50 FR 18500 (May 1, 
1985)). When we adopted Uniform Form ADV later in 1985, we excluded 
this requirement because of concerns that, in some cases, the 
information could be voluminous. Investment Advisers Act Release No. 
991, supra note 42. Under the current proposal, as discussed above, 
the disciplinary information in the firm's brochure would be limited 
to information about the firm and its management persons and, as 
discussed below, would be similar to that currently presumed to be 
material under rule 206(4)-4. Disciplinary information about 
advisory personnel would be included in brochure supplements. See 
discussion of proposed Item 3 of Part 2B, infra Section II.D.2.b. of 
this Release.
    \147\ Rule 206(4)-4(a)(2) (17 CFR 275.206(4)-4(a)(2)).
    \148\ Rule 206(4)-4(b) (17 CFR 275.206(4)-4(b)).
---------------------------------------------------------------------------

    Information about an adviser's illegal or unethical conduct is very 
important to a client who is deciding whether to engage or continue to 
engage the adviser. When assessing whether an adviser will fulfill its 
obligations to clients, an investor would likely give great weight to 
whether the adviser has met its fiduciary and other legal obligations 
in the past. Because of the importance of this information to clients, 
we are proposing to require it be in writing and included in the 
brochure along with other material information about the adviser.\149\ 
A writing requirement will also permit us to better monitor compliance 
with this disclosure requirement.\150\ We request comment on this 
proposal, specifically whether disciplinary information should appear 
in a separate written document accompanying the brochure, rather than 
the brochure itself, in order to highlight its importance to advisory 
clients. We also request comment whether there are other approaches to 
achieve these same disclosure and compliance objectives.
---------------------------------------------------------------------------

    \149\ In addition, the IARD will permit a client or prospective 
client to view an adviser's reports of disciplinary events in 
response to proposed Item 11 of Part 1A of Form ADV. However, we 
would not rely on the IARD to inform clients and prospective clients 
of disciplinary events. We believe that advisers have an affirmative 
obligation under the Advisers Act to disclose material disciplinary 
events to clients and prospective clients, and that clients and 
prospective clients should not bear the burden of engaging in such a 
search (and updating it continuously). We also note that proposed 
Item 8 of Part 2A and current rule 206(4)-4 both require disclosure 
of all material disciplinary events, which is broader than proposed 
Item 11 of Part 1A would require.
    \150\ Under rule 206(4)-4, an adviser must disclose a 
disciplinary event to clients ``promptly.'' As a result, including 
this information in the brochure (under current rules) may not 
satisfy rule 206(4)-4, because the brochure must only be delivered 
to clients at the beginning of the advisory relationship and offered 
annually thereafter. See note appended to rule 206(4)-4. Our 
proposed revisions to the updating requirement would resolve the 
differences in the delivery requirements. See supra Section 
II.D.2.a. of this Release.
---------------------------------------------------------------------------

    We have modeled proposed Item 8 on rule 206(4)-4, which we propose 
to rescind. Item 8 would require an adviser's brochure to disclose all 
material facts about any legal or disciplinary event material to 
evaluating the adviser's business or the integrity of its management. 
An adviser must presume that certain disciplinary events described in 
Item 8 are material if the event involved the adviser or a management 
person and occurred in the previous ten years.\151\ The adviser may 
overcome (rebut) this presumption, in which case no disclosure is 
required. A note in Item 8 would explain four factors the adviser 
should consider when assessing whether the presumption can be 
rebutted.\152\ We

[[Page 20536]]

propose to require advisers registered with us to keep a file 
memorandum if the adviser does not disclose an event described in Item 
8. The memorandum will memorialize the adviser's determination, avoid 
later disagreements as to the basis for the determination, and better 
permit our staff to monitor compliance with this important disclosure 
requirement.\153\
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    \151\ An adviser's ``management persons'' are anyone with the 
power to exercise, directly or indirectly, a controlling influence 
over the adviser's management or policies, or to determine the 
general investment advice given to the adviser's clients. See 
Glossary of Terms, definition of ``management person.''
    \152\ These factors are: (1) The proximity of the person 
involved in the disciplinary event to the advisory function; (2) the 
nature of the infraction that led to the disciplinary event; (3) the 
severity of the disciplinary sanction; and (4) the time elapsed 
since the date of the disciplinary event. These are the same factors 
advisers use to determine materiality under current rule 206(4)-4. 
See Financial and Disciplinary Information that Investment Advisers 
Must Disclose to Clients, Investment Advisers Act Release No. 1083 
(Sept. 25, 1987) (52 FR 36915 (Oct. 2, 1987)).
    \153\ The memorandum would be required to explain the adviser's 
determination and to discuss the four factors set forth in Item 8. 
Proposed rule 204-2(a)(14)(ii). Proposed Item 3 of Part 2B requires 
a brochure supplement to contain disclosure of legal or disciplinary 
events involving the adviser's supervised persons. Proposed rule 
204-2(a)(14)(ii) would require the same memorandum in the event the 
adviser does not disclose an event described in Item 3 of Part 2B.
---------------------------------------------------------------------------

    We are proposing several revisions to the provisions in the list of 
disciplinary events that would move from rule 206(4)-4 into new Item 8. 
First, we would update some of the provisions to reflect changes in the 
law.\154\ Second, we would make certain clarifying revisions to the 
listed events.\155\ Finally, we would require an adviser subject to one 
of our administrative orders to provide clients and prospective clients 
with a copy of that order for a period of one year following the date 
of the order.\156\
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    \154\ First, all felonies (not only those involving investment-
related statutes) would be presumed material. Congress amended 
section 203 of the Advisers Act in 1996 to permit us to deny or 
revoke an adviser's registration, or bar, suspend or limit an 
adviser's activities, if the adviser has been convicted of any 
felony within the past ten years. Section 305 of NSMIA, supra note 
91. Current Item 11.A. of Part I already requires advisers to report 
all felonies to us. Second, actions of foreign courts and financial 
regulatory authorities would be included. Congress's 1990 amendments 
to the Advisers Act permit us to deny or revoke an adviser's 
registration, or bar, suspend or limit an adviser's activities based 
on the findings of a foreign court or foreign securities authority. 
See supra note 96. Third, monetary penalties in administrative 
proceedings would be required to be disclosed. Congress gave us 
authority to impose monetary penalties in administrative proceedings 
in the Remedies Act of 1990. See supra note 97.
    \155\ These proposed changes clarify that: (a) A conviction for 
conspiracy to commit any felony or to commit any listed misdemeanor 
is a criminal conviction that must be disclosed; (b) a military 
court is a court of competent jurisdiction; and (c) an order 
enjoining the adviser or a management person from violating an 
investment-related statute, rule, or order must be disclosed. See 
proposed Item 8.A. We have also added explanatory text to the 
definition of ``management person.'' See Glossary of Terms, 
definition of ``management person.''
    \156\ This requirement would apply if the date of the order is 
on or after the effective date of these revisions to Form ADV. As a 
condition of settlement in administrative proceedings against 
certain investment advisers, we have required the advisers to send 
copies of our orders to existing clients and, for one year, to 
prospective clients. E.g., Capital Markets Research Co., Investment 
Advisers Act Release No. 1834 (Sept. 27, 1999); Boston Investment 
Counsel, Inc., Investment Advisers Act Release No. 1801 (June 10, 
1999); Valicenti Advisory Services, Inc., Investment Advisers Act 
Release No. 1774 (Nov. 18, 1998); Renaissance Capital Advisors, 
Inc., Investment Advisers Act Release No. 1688 (Dec. 22, 1997); 
Account Management Corporation, Investment Advisers Act Release No. 
1529 (Sept. 29, 1995). Because our orders include findings of the 
facts underlying the violations, requiring that a client receive a 
copy of that order provides us with greater assurance that the 
client will be accurately informed of the adviser's behavior. The 
Second Circuit recently affirmed our authority to impose this form 
of remedy. Valicenti Advisory Services, Inc. v. SEC, No. 99-4002, 
1999 U.S. App. LEXIS 35879 (Nov. 30, 1999, amended Feb. 9, 2000) 
(per curiam).
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    Rule 206(4)-4 requires an adviser to disclose a civil action in 
which the adviser is found to have violated an investment-related 
statute.\157\ Today, however, many disputes between securities firms 
and their customers are resolved through arbitration or other 
alternative dispute resolution, rather than civil lawsuits. As a 
result, there may now be more violations of investment-related statutes 
that are not presumed to be material under rule 206(4)-4 and therefore 
are not typically disclosed to clients. In Item 20 of Part 2A, state 
securities authorities have included a requirement that state-
registered advisers disclose certain arbitration liability if the claim 
was in excess of $2,500. Should we include a similar requirement in 
Item 8? If so, should our requirement be limited to arbitration awards 
for $2,500 rather than claims for $2,500? Should the amount be higher? 
Since some arbitrators may not issue reports of their findings, how 
should we draft Item 8 to distinguish arbitrations involving matters 
that do not reflect upon the integrity of the adviser (such as some 
contract disputes), from those that do? Should we limit the requirement 
to arbitrations in which the arbitrator finds a violation of an 
investment-related statute? If we do, will advisers and their 
affiliates decline to agree to use arbitrators who make findings?
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    \157\ Rule 206(4)-4(b)(1)(ii) (17 CFR 275.206(4)-4(b)(1)(ii)).
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    Item 9. Other Financial Industry Activities and Affiliations. We 
propose to require advisers to disclose information about their other 
financial industry activities and affiliations. These other activities 
and affiliations may create conflicts of interest between the advisory 
firm and its clients, and may impair the objectivity of the investment 
advice given.
    Proposed Item 9 would require an adviser to disclose whether it (or 
any of its management persons) is registered or has applied to register 
as a broker or commodities professional. The brochure would also 
describe material arrangements the adviser (or any of its management 
persons) has with related financial industry participants. Advisers 
must currently provide similar disclosure under Item 8 of Part II. The 
brochure would also describe any material conflict of interest with 
advisory clients that the relationship or arrangement creates with 
clients, and the restrictions or other control procedures the adviser 
uses to address the conflict.\158\ In addition, if the adviser selects 
or recommends other advisers for clients, proposed Item 9 would require 
disclosure of any compensation arrangements and other business 
relationships between the two advisory firms, as well as of the 
conflicts created.
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    \158\ Brochure supplements would be required to contain similar 
disclosure, concerning the other business activities of the 
adviser's supervised persons. See proposed Item 4 of Part 2B and the 
discussion below at Section II.D.2.b. of this Release.
---------------------------------------------------------------------------

    Item 10. Participation or Interest in Client Transactions; Personal 
Trading. Item 10 would require the brochure to discuss the conflicts of 
interest the adviser faces when the advisory firm or a ``related 
person'' has a financial interest in, or trades in, securities they 
recommend to clients.\159\ Advisers would be required to disclose any 
practices giving rise to these conflicts, the nature of the conflicts 
presented, and any procedures and controls the adviser uses to address 
the conflicts.\160\
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    \159\ This item incorporates many of the disclosure requirements 
of Item 9 of Part II. An adviser's related persons are: (1) the 
adviser's officers, partners, or directors (or any person performing 
similar functions); (2) all persons directly or indirectly 
controlling, controlled by, or under common control with the 
adviser; (3) all of the adviser's current employees; and (4) any 
person providing investment advice on the adviser's behalf.
    \160\ Many advisers have extensive procedures in place to 
monitor and control employees' personal securities trades and 
financial interests; these procedures may include pre-clearance, 
restricted lists, blackout periods, or periodic reporting. Section 
204A (15 U.S.C. 80b-204a) of the Advisers Act requires most advisers 
to establish policies and procedures to prevent misuse of material, 
nonpublic information, and rules 204-2(a)(12) and (13) (17 CFR 
275.204-2(a)(12) and (13)) require advisers to keep records of their 
securities transactions and those of their ``adviser 
representatives.'' In addition, our rules under the Investment 
Company Act require advisory firms that advise registered investment 
companies to adopt a written ``code of ethics'' to address conflicts 
arising out of personal trading, and to file those codes with us. We 
recently revised those rules in order to provide greater protection 
against improper personal trading by persons who have access to 
information about mutual funds' purchases and sales of securities. 
Investment Company Release No. 23958 (adopting amendments to rule 
17j-1 under the Investment Company Act (17 CFR 270.17j-1)), supra 
note 2.
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    Proposed Item 10 is designed to shed sunlight on two types of 
practices that can harm advisory clients. The first is

[[Page 20537]]

when an advisory firm (or a related person) has a material financial 
interest in an issuer of securities it recommends to clients. For 
example, the adviser may recommend that clients invest in an investment 
company that the firm advises, or a partnership for which the firm is 
the general partner.\161\ Similarly, the adviser may recommend that a 
client buy securities in a public offering underwritten by the 
adviser's affiliate. Or, an adviser with a material financial interest 
in a company may recommend that a client buy shares in that company's 
public offering, when the success of the offering could increase the 
value of the adviser's investment.\162\ An adviser engaging in these 
practices has an incentive to base its advice on its own financial 
interests rather than the interests of clients, and the proposed item 
is designed to help a client understand the conflict. Item 10.A. would 
require full disclosure of these conflicts and provide guidance on the 
types of conflicts covered.\163\ We request comment whether additional 
guidance would be useful to advisers.
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    \161\ See Thomson McKinnon Asset Management, L.P., Investment 
Advisers Act Release No. 1243 (July 26, 1990) (adviser failed to 
disclose that it received advisory fees from a money market fund 
into which it ``swept'' clients' cash balances).
    \162\ See, e.g., Chancellor Capital Management, Inc., Investment 
Advisers Act Release No. 1447 (Oct. 18, 1994) (adviser failed to 
disclose, when recommending publicly traded securities of an issuer 
to client, that adviser's related person owned non-publicly traded 
securities of the same issuer).
    \163\ We are proposing an exception, in Item 10.A., for 
advisers' investments in mutual funds that they recommend to 
clients. These investments typically do not raise conflicts because 
the securities are valued at their net asset value; however, an 
adviser would still be required to disclose the conflict created 
when it receives a fee from a fund it recommends to clients. See 
Example 3 of proposed Item 10.A. See Thomson McKinnon, supra note 
161.
---------------------------------------------------------------------------

    The second practice involves personal trading abuses. Because of 
the information they have, advisers and their personnel can ``front 
run'' client trades or otherwise abuse their positions. For example, an 
adviser may be able to sell (or sell short) its own position in a 
security in advance of large client sell orders that could be expected 
to drive down the price of that security. Similarly, an adviser may 
acquire a position in a stock, advise clients to buy the same stock, 
and profit by the resulting increase in price.\164\ These practices not 
only may affect the adviser's recommendations, but also can harm 
clients by affecting adversely the prices at which clients buy or sell 
securities.
---------------------------------------------------------------------------

    \164\ See Roger Honour, Investment Advisers Act Release No. 1527 
(Sept. 29, 1995).
---------------------------------------------------------------------------

    Under proposed Item 10.B., an adviser would disclose whether it or 
a related person (e.g., advisory personnel) invest--or are permitted to 
invest--in the same securities as their clients, or in related 
securities such as options or other derivatives.\165\ Firms engaging in 
or permitting this practice would discuss the conflicts presented, and 
describe the firm's restrictions and/or internal procedures to address 
the conflicts. Item 10.C. would require a similar discussion, but focus 
on the specific conflicts an adviser has when it (or a related person) 
trades in the same securities at or about the same time as a client. In 
response to this item, an adviser might explain how its internal 
controls prevent the firm and its staff from buying or selling 
securities in advance of client transactions.
    Item 11. Brokerage Practices. Item 11 would require the brochure to 
describe the adviser's policies and practices in selecting brokers for 
client transactions, and in determining the reasonableness of brokers' 
compensation. As we explain in more detail below, the item would 
require the adviser to disclose its policies and practices with respect 
to ``soft dollars,'' i.e., the receipt of benefits such as research for 
the allocation of client brokerage.
    Soft Dollar Practices. Advisers often receive ``soft dollar'' 
benefits from using particular brokers for client trades.\166\ Client 
brokerage, however, is an asset of the client--not of the adviser. 
When, in connection with client brokerage, an adviser receives products 
or services that it would otherwise have to produce itself (or pay 
for), the adviser's interest may conflict with those of its clients. 
For example, soft dollar arrangements may cause an adviser to violate 
its best execution obligation by directing client transactions to 
brokers who are not able to adequately execute the transactions, or may 
give the adviser incentive to trade client securities more often than 
it would absent the benefits the adviser receives. Because of these 
conflicts, we have required advisers to disclose their policies and 
practices on use of client brokerage to obtain soft dollar 
benefits.\167\
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    \165\ Some situations, such as when an adviser owns shares in a 
company it recommends to clients, may be covered by both proposed 
Items 10.A. and 10.B. Others, such as when an adviser sells its 
holdings of a security it purchases for clients, would come under 
10.B, and potentially 10.C. A brochure would not need to repeat 
disclosure simply because it is responsive to more than one item.
    \166\ Section 28(e) of the Exchange Act (15 U.S.C. 78bb(e)) 
provides a limited ``safe harbor'' for advisers with discretionary 
authority in connection with their receipt of soft dollar benefits. 
See discussion of this safe harbor, infra note 176.
    \167\ Item 12 of current Part II.
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    During 1997-98, our staff conducted a wide-ranging examination of 
advisers' soft dollar practices and disclosure. Our Office of 
Compliance Inspections and Examinations found widespread use of soft 
dollars by investment advisers that manage client portfolios.\168\ The 
Office concluded that advisers' disclosure often failed to provide 
sufficient information for clients or potential clients to understand 
the adviser's soft dollar practices and the conflicts those practices 
present. In its report, the Office noted that most advisers' 
descriptions were simply boilerplate, and urged that we consider 
amending Form ADV to require better disclosure.\169\ Today we are 
acting on those recommendations.\170\
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    \168\ Inspection Report on the Soft Dollar Practices of Broker-
Dealers, Investment Advisers and Mutual Funds (Sept. 22, 1998) (Soft 
Dollar Report).
    \169\ Id. at 3, 50-51.
    \170\ The Office also recommended further rulemaking in this 
area, which we may consider in the future. Among the suggestions 
detailed in the Soft Dollar Report were: (a) requiring advisers to 
provide clients with client-specific itemizations of soft dollar 
benefits the adviser received during the previous period, and (b) 
requiring advisers to maintain certain records of soft dollar 
benefits received and the adviser's allocation of so-called ``mixed-
use'' items between research and non-research functions. Id. at 49-
51.
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    Item 11 would require an adviser that receives research or other 
products or services in connection with client securities transactions 
(soft dollar benefits) to disclose the adviser's practices and discuss 
the conflicts of interest that result.\171\ The brochure's description 
of soft dollar practices must be specific enough for clients to 
understand the types of products or services the adviser is acquiring 
and permit them to evaluate conflicts. \172\ Disclosure must be more 
detailed for products or services not used in the adviser's investment 
decision-making process.
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    \171\ The soft dollar benefits covered include any research, 
products or services, whether created or developed by the broker-
dealer itself or by a third party. See note to proposed Item 11.A.1. 
of Part 2A.
    \172\ In this regard, the proposed item would incorporate the 
standard for advisers we set out in our 1986 interpretive release on 
soft dollars. Interpretive Release Concerning the Scope of Section 
28(e) of the Securities Exchange Act of 1934 and Related Matters, 
Exchange Act Release No. 23170 (Apr. 23, 1986) (1986 Soft Dollar 
Release).
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    Item 11 would describe the types of conflicts the adviser must 
disclose when it accepts soft dollar benefits,\173\ and

[[Page 20538]]

require the adviser to disclose its procedures for directing client 
transactions to brokers in return for soft dollar benefits.\174\ The 
item would require the adviser to explain whether it uses soft dollars 
to benefit all clients \175\ or just those accounts whose brokerage 
``pays'' for the benefits, and whether the adviser seeks to allocate 
the benefits to client accounts proportionately to the brokerage 
credits those accounts generate. The item would also require the 
adviser to explain whether it ``pays up'' for soft dollar 
benefits.\176\
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    \173\ An adviser accepting soft dollar benefits would have to 
explain that (a) the adviser benefits because it does not have to 
produce or pay for the research, other products, or services 
acquired with soft dollars, and (b) the adviser therefore has an 
incentive to select or recommend broker-dealers based on the 
adviser's interest in receiving these benefits, rather than on the 
client's interest in getting the best execution services at the 
lowest available rates.
    \174\ See proposed Item 11.A.1.e. of Part 2A, which is 
substantively the same as current Item 12.B. of Part II.
    \175\ Using one client's brokerage to obtain research or other 
products that benefit another client's account is often called 
``cross-subsidization.''
    \176\ ``Paying up'' refers to a manager causing a client account 
to pay more than the lowest available commission rate. Section 28(e) 
of the Securities Exchange Act of 1934 provides a safe harbor for 
managers who pay up to obtain research from brokers. Under section 
28(e), someone who exercises investment discretion over a client 
account has not acted unlawfully or breached a fiduciary duty solely 
by causing the account to pay more than the lowest commission rate 
available, so long as that person determines in good faith that the 
commission amount is reasonable in relation to the value of the 
brokerage and research services provided. The 1986 Soft Dollar 
Release clarified the Commission's interpretation of section 28(e). 
Section 28(e), however, does not speak to an adviser's disclosure 
obligations--advisers must disclose their receipt of soft dollar 
benefits to clients whether the benefits fall inside or outside of 
the safe harbor. See 1986 Soft Dollar Release, supra note 172.
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    Client Referrals. The brochure would also be required to discuss 
the adviser's practice in using client brokerage to reward brokers that 
refer clients.\177\ This practice also presents advisers with serious 
conflicts of interest since they may have a bias towards referring 
brokers. The brochure would have to disclose this practice, the 
conflict it creates, and any procedures the adviser used to direct 
client brokerage to referring brokers during the last fiscal year, 
i.e., the system of controls used by the adviser when allocating 
brokerage.
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    \177\ Proposed Item 11.A.2. of Part 2A. See Fleet Investment 
Advisors, Inc., Investment Advisers Act Release No. 1821 (Sept. 9, 
1999) (adviser failed to disclose to clients that it directed 
brokerage commissions in exchange for client referrals).
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    Transaction Costs. Clients engaging an adviser can benefit when the 
adviser negotiates lower commissions or ``bunches'' trades to obtain 
volume discounts on execution costs.\178\ Item 11 would require the 
adviser to describe these practices. If the adviser does not bunch 
trades when it has the opportunity, the brochure would be required to 
explain that clients may pay higher brokerage costs. Similarly, if the 
adviser does not negotiate commissions, or limits the extent to which 
it negotiates them, the brochure would be required to explain that 
clients may pay higher brokerage costs as a result.\179\
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    \178\ Broker-dealers may, for example, offer better prices, 
including lower commission costs, and/or better execution for larger 
orders. Generally, our staff has not recommended enforcement action 
against advisers that aggregate trade orders on behalf of clients, 
so long as the adviser allocates the trades in a way that treats all 
clients fairly. E.g., Pretzel & Stouffer, SEC No-Action Letter (Dec. 
1, 1995); SMC Capital Inc., SEC No-Action Letter (Sept. 5, 1995). 
However, advisers violate the Advisers Act's anti-fraud provisions 
if they fail to disclose allocation policies that disadvantage a 
client. See Account Management Corporation, supra note 156 (adviser 
failed to disclose that it allocated shares in ``hot'' initial 
public offerings only to limited number of eligible client 
accounts); cf. Nicholas Applegate Capital Management, Investment 
Advisers Act Release No. 1741 (Aug. 12, 1998) (adviser failed to 
supervise senior trader who allocated profitable day trades to his 
own personal account rather than to client account).
    \179\ Proposed Item 11.B. See Mark Bailey & Co., Investment 
Advisers Act Release No. 1105 (Feb. 24, 1988) (adviser that failed 
to disclose that it did not negotiate commissions on directed 
trades, failed to disclose that the adviser would be in a better 
position to negotiate commissions in batched transactions for non-
directed trades, and failed to inform clients that commissions might 
be lower on non-directed trades, violated anti-fraud provisions of 
Advisers Act).
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    Directed Brokerage. Clients sometimes instruct their adviser to 
send transactions through a specific broker. Clients may initiate this 
type of arrangement for a variety of reasons: the client may wish to 
favor a family member or friend, or the client may be using its own 
brokerage to pay for services the broker provides to the client.\180\ 
But the arrangement may also be initiated by the adviser, who may 
benefit, for example, when brokerage is directed to its affiliated 
broker-dealer. In either case, clients directing (or agreeing to 
direct) brokerage need to understand the consequences of directing 
brokerage, including the possibility that their accounts will pay 
higher commissions and receive less favorable execution.\181\
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    \180\ A client may also direct its transactions to a broker that 
agrees to make cash rebates to the client. As noted in the Soft 
Dollar Report, this directed brokerage practice is referred to as 
``commission recapture.'' Soft Dollar Report, supra note 168 at 
n.42. We are proposing a separate disclosure requirement, discussed 
below, relating to commission recapture.
    \181\ 1986 Soft Dollar Release, supra note 172 at n.44.
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    If an adviser permits clients to direct brokerage, we would require 
the brochure to explain that the adviser may be unable to get best 
execution, and that directing brokerage may cost clients more money. 
If, however, the adviser routinely requests or requires clients to 
direct brokerage, the brochure would also be required to describe the 
adviser's policy or practice, to disclose that not all advisers require 
directed brokerage, and to discuss any broker-dealer relationship that 
creates a material conflict of interest.\182\
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    \182\ Proposed Item 11.A.3.b. of Part 2A.
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    Commission Recapture.\183\ An adviser that sends brokerage to a 
firm providing commission recapture would describe how recapture works, 
explain the benefits of recapture, and explain how a client could 
participate in recapture. We request comment on this disclosure 
requirement: which types of clients can generally participate in 
commission recapture programs, and how do clients currently learn that 
such programs are available?
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    \183\ As discussed supra at note 180, commission recapture 
involves directing brokerage in exchange for cash rebates made to 
the client.
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    Item 12. Review of Accounts. The brochure would disclose whether, 
and how often, the adviser reviews clients' accounts or financial 
plans, and would identify who conducts the review.\184\ Advisers that 
review accounts, but not regularly, would explain what circumstances 
would trigger an account review.
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    \184\ Proposed Item 12 of Part 2A incorporates requirements 
currently in Item 11 of Part II.
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    Item 13. Payment for Client Referrals. The brochure would describe 
any payment, whether in cash or otherwise, that the adviser or a 
related person makes for client referrals. The brochure would also 
disclose whether the adviser receives any benefit, including sales 
awards or prizes, from a non-client for providing advisory services to 
clients.\185\
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    \185\ Proposed Item 13 of Part 2A incorporates requirements in 
current Item 13 of Part II. Proposed Item 13 would require advisers 
to disclose economic benefits to the firm; as discussed below, 
proposed Item 5 of Part 2B would require advisers to disclose 
economic benefits to a supervised person. See infra Section 
II.D.2.b. of this Release.
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    Item 14. Custody. Advisers that accept custody of client funds or 
securities would say so in their brochure and would describe any 
special reports they give to those clients.\186\ Advisers that

[[Page 20539]]

require custody of client assets would also explain that most advisers 
do not impose this requirement.\187\ The brochure would also disclose 
that clients face greater risk than if an independent custodian held 
their assets.\188\
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    \186\ Item 14 would retain the same definition of ``custody'' as 
now in Form ADV. See Glossary of Terms to proposed Form ADV and 
Instruction 5 to current Form ADV. Advisers have custody if, for 
example, they hold client funds or securities or they have the 
ability to appropriate client assets such as having signatory power 
over a client's checking account. Advisers also may be deemed to 
have custody of client assets because a related person of the 
adviser has custody of those assets. Our staff has provided guidance 
on the factors to be considered in determining whether an adviser in 
this circumstance is deemed to have custody. See Crocker Investment 
Management Corp., SEC No-Action Letter (Apr. 14, 1978) (setting out 
a five-factor test). See also Investment Advisers Act Release No. 
1000 (Dec. 3, 1985) (50 FR 49835 (Dec. 5, 1985)) at question II.E.5. 
(whether an adviser is deemed to have custody because it is 
affiliated with the custodian is a factual matter based on the 
actual relationship between the adviser and affiliate). Part II of 
Form ADV does not currently require advisers to tell clients whether 
they accept custody. We, however, receive this information under 
current Item 13 of Part I.
    \187\ An adviser that ``requires'' clients to give it custody 
solely because it acts as general partner for a limited partnership, 
serves as trustee for client accounts, or deducts advisory fees 
directly from client accounts would not be required to provide this 
disclosure.
    \188\ An adviser would not be required to make this risk 
disclosure if it is a bank, an insurance company, or a broker-dealer 
that is excepted from rule 206(4)-2 (17 CFR 275.206(4)-2). Rule 
206(4)-2 sets out requirements with regard to custody of advisory 
client assets and securities, and is intended to ensure that client 
funds and securities are maintained so that they are insulated from 
and not jeopardized by unlawful activities or financial reverses of 
the adviser. See Investment Advisers Act Release No. 122 (Nov. 3, 
1961) (26 FR 10607 (Nov. 10, 1961)) (proposing rule 206(4)-2). As 
discussed infra at the text accompanying notes 196 to 197 (and 
discussing Item 18 of proposed Part 2A), banks, insurers, and 
registered broker-dealers have capital and regulatory requirements 
that provide protections against the same types of losses that rule 
206(4)-2 was designed to prevent.
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    Item 15. Investment Discretion. Advisers with discretionary 
authority over client accounts would be required to disclose that fact 
in their brochure,\189\ and any limitations clients may (or customarily 
do) place on this authority.\190\
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    \189\ Currently, Items 12.A. and 12.B. of Part II require 
information about the adviser's investment discretion and any 
limitations on it. We propose to continue requiring this information 
but to clarify, through our proposed definitions in Form ADV, that 
an adviser has ``discretionary authority'' if it is authorized to 
make purchase and sale decisions for client accounts. This 
definition of discretionary authority is derived from section 
3(a)(35) of the Exchange Act (15 U.S.C. 78b(a)(35)). An adviser also 
has discretionary authority if it is authorized to select other 
advisers for the client.
    \190\ For example, clients may not understand that they may ask 
the adviser not to invest in securities of particular issuers.
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    Item 16. Proxy Voting Policies. Item 16 would require advisers to 
disclose their proxy voting practices. This would be a new disclosure 
requirement, which we propose to add so that clients will be fully 
informed about who is responsible for voting their proxies and how 
their interests in proxy voting decisions are protected.
    We propose to require advisers to state whether they vote proxies 
for clients.\191\ Advisers that vote client proxies would disclose 
their voting policies, practices, and procedures.\192\ These advisers 
would also explain whether a client can direct the vote in a proxy 
solicitation, and whether clients can find out how the adviser voted 
their securities on a given issue.\193\ Advisers that do not vote 
client proxies would explain how clients will receive proxies (for 
example, directly from a transfer agent or custodian or through the 
adviser), and whether the client can discuss particular proxy 
solicitations with the adviser.
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    \191\ Without appropriate disclosure, some clients may 
incorrectly assume their adviser is voting their proxies.
    \192\ In some cases, advisers have conflicts of interest in 
voting proxies. For example, the adviser may manage money for a 
public issuer and may recommend that its other clients invest in the 
issuer's securities. The public issuer client may want the adviser 
to vote proxies in a manner that conflicts with the best interests 
of the adviser's other clients. Or, an adviser's affiliates may have 
a substantial business relationship with an issuer in which advisory 
clients invest, and those affiliates may pressure the adviser to 
vote in favor of the issuer's management. Many advisers already have 
policies designed to protect their clients' interest in these 
circumstances. Proposed Item 16 would require the brochure to 
disclose those policies.
    \193\ We understand that advisers to ERISA plans may be required 
to maintain voting records for individual proxy solicitations on the 
client's account, and to provide the plan fiduciary with those 
records. See Department of Labor Interpretive Bulletin 92-4 (July 
21, 1994).
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    Item 17. Investment Performance. Advisers that advertise or report 
their investment performance would be required to describe any 
standards they use to calculate (or present) performance. ``Standards'' 
may include industry standards, but would also include any proprietary 
standards used solely by the adviser.\194\ The brochure would also 
discuss whether a third party reviews the adviser's performance 
information for accuracy or for compliance with presentation 
standards.\195\
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    \194\ Organizations such as the Association for Investment 
Management and Research (AIMR) have established guidelines for 
advisers to use in presenting performance information. Some advisers 
may be able to claim compliance with the AIMR Performance 
Presentation StandardsTm (AIMR-PPS). AIMR-PPS specify 
minimum calculation requirements, although the standards themselves 
are primarily performance presentation standards rather than 
performance measurement standards. AIMR Performance Presentation 
Standards Handbook 1 (2nd ed., 1997).
    \195\ Proposed Item 17 incorporates requirements currently in 
Item 7(h) of Schedule H; under Schedule H, wrap fee sponsors must 
provide similar disclosure about review of portfolio managers' 
performance information and standards used to calculate that 
information.
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    Item 18. Financial Information. We are proposing to require the 
brochure to include certain financial information about the adviser 
when material to clients. An adviser that has custody of client assets 
or requires prepayment of fees exposes clients to the risk that the 
firm may become insolvent and unable to return the assets or refund 
unearned fees. We propose to continue requiring advisers to give 
clients an audited balance sheet showing the adviser's assets and 
liabilities at the end of its most recent fiscal year.\196\ We propose 
to exclude from the balance sheet requirement advisers that have 
custody, but are banks, insurance companies, or broker-dealers 
registered with us.\197\ These firms have capital and regulatory 
requirements that provide protections against these types of losses.
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    \196\ Currently Item 14 of Part II (through Schedule G) requires 
an audited balance sheet if the adviser has custody of client funds 
or securities, or requires prepayment of more than $500 in fees per 
client and six or more months in advance. We would increase the 
threshold amount from $500 to $1,200 to reflect the effects of 
inflation since we adopted Uniform Form ADV in 1985. We also propose 
to require this disclosure from advisers that solicit clients to 
prepay fees, which would include providing an economic incentive to 
prepay fees. Our staff has previously provided guidance consistent 
with this proposed requirement. See Sunbelt Farm Investment Report, 
SEC No-Action Letter (Mar. 18, 1985); see also Seger-Elvekrog, Inc., 
SEC No-Action Letter (Oct. 13, 1998) (adviser that allowed clients 
to prepay fees, at clients' initiative and contrary to adviser's 
usual billing practices, was not required to provide an audited 
balance sheet).
    \197\ Advisers also may be deemed to have custody of client 
assets when their affiliates have custody of those assets. See 
discussion of proposed Item 14, supra at notes 186 to 188 and 
accompanying text. We have excluded an adviser from the balance 
sheet requirement if the adviser is deemed to have custody but the 
affiliate having custody of client assets is itself a bank, 
insurance company or registered broker-dealer.
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    We are also proposing to require advisers with discretionary 
authority over client assets to disclose, in their brochures, any 
financial condition reasonably likely to impair the adviser's ability 
to meet contractual commitments to clients. These clients are exposed 
to the risk that their assets may not be properly managed for a period 
of time if the adviser becomes insolvent and ceases to do business. 
This disclosure is currently required by rule 206(4)-4, which, as 
discussed above, we propose to rescind.
    Finally, we would require an adviser that has been the subject of a 
bankruptcy petition during the past ten years to disclose that fact to 
clients. Clients would likely find this information material to their 
decision whether to hire the adviser.\198\ We request comment on other 
disclosures

[[Page 20540]]

concerning bankruptcies. Should Item 18 require disclosure if the 
subject of a bankruptcy petition was a predecessor adviser? A 
management person? \199\ Another firm under common control with the 
adviser?
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    \198\ Part II does not currently require advisers to disclose 
this information to clients. Current Item 11.K. of Part I requests 
similar information, but is not limited to bankruptcies occurring 
within ten years.
    \199\ Brochure supplements would be required to disclose whether 
a supervised person has been the subject of a bankruptcy petition. 
See proposed Item 7 of Part 2B. A client, however, would not 
necessarily receive a supplement for all management persons.
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    Item 19. Index. The brochure filed with us would be required to 
include an index of the items required by Part 2A.\200\ This index is 
intended to facilitate review by our staff for compliance with the 
requirements of Part 2A; the adviser would not need to provide it to 
clients.
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    \200\ This requirement is similar to the index Schedule H now 
requires.
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    Part 2A Appendix 1: The Wrap Fee Program Brochure. Advisers that 
sponsor wrap fee programs \201\ would be required to prepare a 
separate, specialized firm brochure referred to as a ``wrap fee program 
brochure'' or ``wrap brochure,'' and would be required to give the wrap 
brochure to clients of the wrap fee program, in lieu of the sponsor's 
standard advisory firm brochure.\202\ The ten items in Part 2A Appendix 
1 contain the proposed requirements for a wrap fee program brochure, 
which are substantially similar to those currently in Schedule H, with 
changes to incorporate many of the proposed revised requirements for 
other firm brochures.
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    \201\ Under a wrap fee program, advisory clients pay a specified 
fee for investment advisory services and the execution of 
transactions. The advisory services may include portfolio management 
and/or advice concerning selection of other advisers, and the fee is 
not based directly upon transactions in the client's account.
    \202\ We adopted the requirement for a separate brochure for 
wrap fee clients in 1994, and we continue to believe that wrap fee 
program clients should receive a separate brochure containing only 
information relevant to wrap fee program clients. See Disclosure by 
Investment Advisers Regarding Wrap Fee Programs, Investment Advisers 
Act Release No. 1411 (Apr. 19, 1994) (59 FR 27659 (May 27, 1994)) 
(adopting rules to require wrap fee sponsors to give wrap fee 
clients separate brochures); Disclosure by Investment Advisers 
Regarding Wrap Fee Programs, Investment Advisers Act Release No. 
1401 (Jan. 13, 1994) (59 FR 3033 (Jan. 20, 1994) (proposing wrap fee 
brochure rules). Advisers whose entire advisory business is 
sponsoring wrap fee programs would prepare a wrap brochure but would 
not be required to prepare a standard advisory firm brochure. Wrap 
fee sponsors would, like other advisers, be required to provide 
brochure supplements to their wrap fee clients.
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b. Part 2B: The Brochure Supplement
    As discussed above, we are proposing that adviser brochures be 
accompanied by brochure supplements providing information about the 
adviser's advisory personnel. We believe that clients want and need 
information about the individuals on whom they will rely for investment 
advice.
    The current brochure requirements of Form ADV consist of a series 
of compromises on disclosure about advisory personnel that we believe 
can be improved on. We currently require brochures to include 
background information only on firm executives and members of the 
firm's ``investment committee,'' \203\ which does not include most 
advisory personnel of the growing number of larger advisory firms 
registered with us.\204\ It is unclear to us whether the information 
provided about executives and investment committee members is useful to 
most clients of these firms. Moreover, brochures contain no information 
about the disciplinary backgrounds of advisory personnel--information 
that may be of key importance to a client who may be entrusting his 
investments to the care of the individual.\205\ When we considered 
Uniform Form ADV in 1985, we recognized these shortcomings of the 
brochure, and proposed expanding the required background information on 
advisory personnel.\206\ We decided not to do so after commenters 
objected that many advisers' brochures would become lengthy and less 
readable.\207\
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    \203\ Item 6 of Part II of Form ADV. If the firm has no 
investment committee, we require that background information be 
provided for each individual who determines general investment 
advice given to clients. If there are more than five of these 
persons, then information need only be provided for their 
supervisors. Id.
    \204\ In the case of a small firm consisting of an owner and a 
few employees, the current disclosure requirements may require 
disclosure of all the firm's advisory personnel. After the enactment 
of NSMIA in 1996, most of the smaller firms withdrew their 
registrations with us and are now regulated by state securities 
authorities.
    \205\ Brochures currently are not required to contain 
information about the adviser's disciplinary history either. See 
discussion supra, at section II.D.2.b. of this Release.
    \206\ Investment Advisers Act Release No. 967, supra note 146.
    \207\ Investment Advisers Act Release No. 991, supra note 42.
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    Today we are proposing a different approach to resolving the same 
concerns that led to the 1985 proposals. We propose to require advisers 
to prepare separate supplements for advisory personnel--called 
``supervised persons.'' \208\ Each supplement would contain background 
information about an individual or group.\209\ Advisers would be 
required to give a client a supplement only for a supervised person who 
will provide advisory services to that client. Thus, a client would 
receive information about supervised persons who are specifically 
relevant to that client. The supplements should only be a page or so in 
length, and each supervised person could provide clients with his own 
supplement along with the firm's brochure as he would a resume.\210\ 
Supplements would not have to be filed with us, but would be kept by 
advisers for review by our examiners.\211\ We are not proposing to 
require that advisers file supplements with us, in part because of the 
additional cost of building the IARD to accept supplements. The 
additional cost would have to be reflected in higher filing fees. The 
most important information in the supplements--the supervised person's 
disciplinary history--would be reported on the DRP Schedules in Part 1 
of Form ADV and available through the IARD. Moreover, prospective 
clients could obtain supplements from advisers. On balance, we 
concluded that the additional costs of requiring advisers to file 
supplements with us exceeded the benefits. We request comment on this 
conclusion.
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    \208\ Under our proposed rule 204-3 and proposed Glossary of 
Terms to Form ADV, a ``supervised person'' means any of the 
adviser's officers, partners or directors (or other persons 
occupying a similar status or performing similar functions) or 
employees, or any other person who provides investment advice on the 
adviser's behalf. This is substantially similar to the definition in 
section 202(a)(25) of the Advisers Act (15 U.S.C. 80b-2(a)(25)).
    \209\ A smaller advisory firm that chose to include information 
about all advisory personnel in its firm brochure would not need any 
supplements. See Instruction 5 to Part 2B. Advisers would be free to 
determine whether they wish to provide the background information on 
advisory personnel in supplements or as part of its firm brochure.
    \210\ Pursuant to our authority under section 204 of the 
Advisers Act, our proposed rule 204-3 would require the adviser to 
deliver the supplements as well as the firm's brochure. We recognize 
that in most cases, however, the adviser will have supervised 
persons deliver their supplements to clients and may have a 
supervised person deliver the brochure. In proposed rule 204-3(b)(1) 
and proposed Instruction 2 to Part 2B, we make it clear that the 
firm can delegate this responsibility to a supervised person.
    \211\ Our recordkeeping rules would require the adviser to 
preserve a copy of each supplement, including any revised 
supplements or stickers, and to make them available to SEC staff. 
See proposed rule 204-2(a)(14), General Instruction 5 to Part 2, and 
Instruction 7 to Part 2B.
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    Under our proposed amendments to rule 204-3, an adviser must 
deliver a supplement for a supervised person to a client before or at 
the same time the supervised person begins to provide advisory services 
for the client.\212\ The proposed rule would require delivery to a 
client only if it is expected that the supervised person will either 
(i)

[[Page 20541]]

regularly communicate investment advice to that client,\213\ or (ii) 
formulate investment advice for that client, including exercising 
investment discretion over that client's assets.\214\ Advisers would 
not have to deliver a supplement for a supervised person who has no 
client contact and formulates advice only as part of a team. This 
provision is designed to require information about persons who have 
substantial responsibility for the investment advice clients receive. 
The requirements for updating a brochure supplement and delivering the 
corrected information to clients would be essentially the same as for 
the firm's brochure.\215\ We request comment on the scope of the 
delivery requirement. Are there better ways to provide clients with 
information about a firm's advisory personnel?
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    \212\ Supplements will likely be given to the client along with 
the firm brochure, at the start of the advisory relationship. If a 
supervised person will not provide advisory services until later, 
however, the supplement for that individual can be delivered at that 
time.
    \213\ We have included the term ``regularly'' in the proposed 
rule, to prevent casual communications from causing a violation of 
the delivery requirement. We would intend the term to be interpreted 
in the context of the overall advisory relationship with the client. 
For example, a supervised person who provides a financial plan to a 
client would be regularly communicating advice to the client even if 
they meet only once or twice.
    \214\ Proposed rule 204-3(b)(1)(B). If a supervised person 
neither communicates investment advice regularly to any client nor 
formulates investment advice for any client, no supplement would be 
required for that supervised person. Instruction 1 to Part 2B of 
Form ADV.
    \215\ See supra text accompanying notes 112-123.
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    The contents of brochure supplements would be specified by Part 2B, 
which would consist of seven items. Where Part 2A would require 
disclosure about the advisory firm, Part 2B would require disclosure 
about certain supervised persons of the advisory firm. We request 
comment on the scope of proposed Part 2B. Will clients find this to be 
useful information? Is there other information about supervised persons 
that clients need and that we should require in brochure supplements?
    Item 1. Cover Page. The supplement's cover page would include 
information identifying the supervised person and the advisory firm.
    Item 2. Educational Background and Business Experience. The 
supplement would be required to describe the supervised person's formal 
education and business background for the past five years.\216\ 
Professional designations have also become important to a client's 
understanding of the supervised person's qualifications in the 
investment adviser industry. We are therefore proposing that the 
supplement identify the supervised person's professional designations 
or attainments.
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    \216\ Currently, Item 6 of Part II of Form ADV requires this 
information about the adviser's principal executive officers and 
about individuals who determine general investment advice on behalf 
of the adviser.
---------------------------------------------------------------------------

    Item 3. Disciplinary Information. The supplement would be required 
to disclose the disciplinary history of the supervised person. We are 
proposing substantially the same disclosure requirements for the 
supervised person's disciplinary history as we are proposing for the 
firm's disciplinary history. \217\ Item 3 would also require, again 
because of the importance of professional designations, that the 
supplement disclose any proceeding revoking or suspending a 
professional attainment, designation, or license of the supervised 
person.
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    \217\ See proposed Item 8 of Part 2A. As discussed earlier, 
supra note 153, proposed rule 204-2(a)(14)(ii) would require an 
adviser to keep a file memorandum if the adviser determines not to 
disclose an event of the type described in Item 3 of Part 2B.
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    In the case of a supplement for a single individual, a client 
receiving an updated supplement should be able to identify any new 
disciplinary disclosure easily. We request comment, however, on whether 
this information might be obscured in supplements prepared for groups 
of supervised persons. Should a supplement for a group be required to 
highlight any changes to disciplinary disclosure, or otherwise alert 
clients to the change? If so, should the alert appear on the cover page 
of the supplement, or should it accompany the disciplinary disclosure 
itself?
    Item 4. Other Business Activities. We would require the supplement 
to describe any other business activities of the supervised person, 
particularly other capacities in which the supervised person 
participates in the financial markets.\218\ A relationship between the 
business of the advisory firm and other business of the supervised 
person may create a material conflict of interest with the adviser's 
clients. If this occurs, the supplement would be required to describe 
the nature of the conflict and any procedures the adviser uses to 
address the conflict.
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    \218\ Item 4 of Part 2B would be similar to proposed Item 9 of 
Part 2A. The supplement would, however, also disclose information 
regarding any other business activities or occupation that the 
supervised person engages in for pay. Clients may have different 
expectations of an individual whose sole business is providing 
investment advice than of an individual for whom advisory services 
are a sideline. We are proposing this requirement so that clients 
can evaluate the importance of the advisory business to the 
supervised person. If another line of business provides the 
supervised person's primary source of income, the supplement would 
say so explicitly.
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    The supplement would also disclose whether the supervised person 
receives transaction-based compensation, including bonuses and non-cash 
compensation. As discussed earlier,\219\ this practice creates an 
incentive for the individual to base investment recommendations on his 
own compensation rather than on clients' best interests. If the 
supervised person receives transaction-based compensation, we would 
require the supplement to explain this incentive.
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    \219\ See proposed Item 5 of Part 2A.
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    Item 5. Additional Compensation. A supplement would be required to 
describe arrangements in which someone other than a client gives the 
supervised person an economic benefit (such as a sales award or other 
prize) for providing advisory services.\220\
    Item 6. Investment Advice and Supervision. Not all supervised 
persons formulate the investment advice they give to their clients, so 
we propose to require the supplement to discuss who formulates that 
advice. If the supervised person does formulate advice for clients, the 
supplement would also explain how the firm monitors the advice 
provided.
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    \220\ The proposed item would specify that regular salary need 
not be disclosed. Bonuses based (in part or whole) on sales, client 
referrals or new accounts would trigger required disclosure, but 
other bonuses would not.
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    We would also require the supplement to provide the client with the 
name, title and telephone number of the person responsible for 
supervising the advisory activities of the supervised person. This 
information would permit the client to contact other advisory personnel 
when necessary to address any problems in the advisory relationship.
    Item 7. Financial Information. The supplement would be required to 
disclose whether the supervised person was the subject of a bankruptcy 
petition during the past ten years.
3. Execution Pages
    Form ADV would be electronically ``signed'' by an authorized person 
of the adviser before the form could be submitted to the IARD. The 
authorized person would sign the form by typing his or her name and 
submitting the filing on behalf of the adviser.\221\ Under the proposed 
amendments, an authorized person would sign one of three different 
execution pages, depending on whether the adviser is resident in the 
United States or another country and whether it is registered or 
registering with the Commission or the states.\222\ As under current 
Form ADV,

[[Page 20542]]

by signing the form, the authorized person would affirm that the 
information in the form is true and complete, and would appoint certain 
officials as agents for service of process in states where the adviser 
conducts business.\223\ These appointments allow state securities 
authorities, private parties, and us to bring actions against the 
adviser by delivering necessary papers to any or all of the appointed 
agents.\224\
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    \221\ See supra note 47 (noting that the electronic signature 
required by the IARD is not a digital signature).
    \222\ The IARD will select the proper execution page for an 
adviser depending upon identifying information the adviser will have 
provided on the form. An adviser that chooses to register both with 
the Commission and one or more states would be required to complete 
two execution pages, one for SEC registration and one for state 
registration.
    \223\ Currently, an adviser appoints an official of each state 
in which the adviser is registered (or has a registration pending, 
or, within the past ten years, either withdrew before registration 
or was previously registered). See Item 7 and the Execution Section 
of Part I of Form ADV. As proposed, an adviser would appoint an 
official in the state where it maintains its principal office and 
place of business, and each state where it submits a notice filing 
(if SEC-registered) or is registered or registering (if state-
registered).
    \224\ Each agent currently can receive service of process for 
``any action or proceeding.'' As proposed, the agent also could 
receive service for administrative and arbitration proceedings. By 
including arbitration proceedings in the form, we are not addressing 
whether advisers may require clients to resolve disputes under the 
Advisers Act through arbitration or other alternate dispute 
resolution forum. Cf. Rodriguez de Quijas v. Shearson/American 
Express, Inc., 490 U.S. 477 (1989) (upholding the arbitrability of 
disputes arising under the Securities Act); Shearson/American 
Express, Inc. v. McMahon, 482 U.S. 220 (1987) (upholding the 
arbitrability of disputes arising under the Exchange Act).
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    Non-resident advisers,\225\ in addition to executing Form ADV, 
currently must submit a separate form appointing the Commission as 
their agent for service of process.\226\ Non-resident advisers also 
submit a separate undertaking to provide required books and records to 
our staff.\227\ We propose to incorporate both of these requirements 
into a Form ADV execution page that would be used by non-resident 
advisers, and thereby eliminate the additional filings non-resident 
advisers currently make.\228\ In addition, non-resident general 
partners or managing agents of all SEC-registered advisers must appoint 
the Commission \229\ as their agent for service of process on Form 7-
R.\230\ We propose to revise Form 7-R and rename it Form ADV-NR. The 
form would be filed with us in paper format.\231\
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    \225\ A non-resident adviser has its principal office and place 
of business in a location outside of the United States. Rule 0-
2(d)(3) (17 CFR 0-2(d)(3)). Non-resident advisers generally register 
with the Commission and not the state securities authorities, 
because their principal office and place of business is not in a 
state that regulates advisers. See section 203A(a) and proposed Item 
2.A(3) of Part 1A.
    \226\ Rule 0-2. Each non-resident adviser currently is required 
to appoint an agent for service of process on Form 4-R (for a sole 
proprietor) (17 CFR 279.4), Form 5-R (for a corporation) (17 CFR 
279.5), or Form 6-R (for a partnership) (17 CFR 279.6).
    \227\ Rule 204-2(j)(3) (17 CFR 275.204-2(j)(3)) requires a non-
resident adviser to provide this undertaking unless it agrees to 
keep a duplicate, ``shadow'' set of books and records in the United 
States.
    \228\ We are proposing to eliminate Forms 4-R, 5-R and 6-R, and 
to amend the corresponding rule to delete unnecessary text. See 
proposed amendment to rule 0-2.
    \229\ See proposed rule 0-2(a). This appointment does not change 
based on whether the adviser is located in the United States or in 
another country. A general partner or managing agent of an adviser 
is ``non-resident'' if he or she resides in a place not subject to 
the jurisdiction of the United States. Rule 0-2(d)(4) (17 CFR 0-
2(d)(4)).
    \230\ This appointment is intended to make the Advisers Act as 
enforceable against a non-resident person as it is against a person 
resident in the United States. See Consent to Service of Process to 
Be Furnished by Non-Resident Investment Advisers and by Non-Resident 
Investment General Partners or Managing Agents of Investment 
Advisers, Investment Advisers Act Release No. 74 (June 30, 1954) (19 
FR 4300 (July 14, 1954)).
    \231\ We propose to require partners and agents to file Form 
ADV-NR with us on paper due to the limited number of filings we 
expect. See discussion of forms that will be filed on paper, supra 
note 38. Non-resident general partners and agents would appoint the 
same agents (the Commission and various state officials) as a non-
resident adviser.
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    A separate execution page for state-registered advisers has been 
prepared by NASAA. It is similar to the one for SEC-registered 
advisers, but includes affirmations that would be required for state 
registration.\232\
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    \232\ The state-registered adviser execution page is included in 
Appendix A of this Release. Completing this execution page would be 
a state, rather than an SEC, requirement, and therefore we are not 
requesting comment on it. We will, however, pass your comments on to 
NASAA.
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E. Proposed Revisions to Form ADV-W

    Form ADV-W was designed for an adviser to use to withdraw its 
registration after ceasing operations.\233\ Today, SEC-registered 
advisers also use the form to switch to state registration,\234\ and 
state-registered advisers use it to withdraw their registration with 
one or more states while remaining registered with others. We propose 
to amend Form ADV-W to reflect this expanded use.\235\ As proposed, an 
adviser could file Form ADV-W to withdraw from some (partial 
withdrawal) \236\ or all (full withdrawal) jurisdictions in which it is 
registered. An adviser ceasing operations would complete the entire 
form to file for full withdrawal.\237\ An adviser filing for partial 
withdrawal would omit certain items, such as the location of its books 
and records, that we do not need from an adviser continuing in business 
as a state-registered adviser.\238\ We request comment on these 
proposed revisions.
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    \233\ See Investment Advisers Act Release No. 213, supra note 
52.
    \234\ See discussion on ``switching'' to state registration, 
supra notes 53 to 56 and accompanying text.
    \235\ Form ADV-W is attached to this Release as Appendix B of 
this Release.
    \236\ A state-registered adviser withdrawing from registration 
with some states, for example, would file a partial withdrawal, as 
would an adviser switching to SEC or to state registration.
    \237\ We would require advisers filing for withdrawal to affirm 
the accuracy and completeness of their Form ADV when filing Form 
ADV-W. Proposed Form ADV-W would, however, no longer require certain 
information that we no longer need.
    \238\ An SEC-registered adviser switching to state registration 
would complete part of Item 1 and electronically sign the form. See 
page 1 of proposed Form ADV-W at Appendix B of this Release. At the 
request of NASAA, state-registered advisers filing for partial 
withdrawal would complete additional items. See id. These additional 
requirements would be a state, rather than an SEC, requirement, and 
therefore we are not requesting comment on them.
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F. General Request for Comment

    Any interested persons wishing to submit written comments on the 
proposed rule and forms, and the proposed rule and form amendments that 
are the subject of this Release, or 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 
suggesting alternative approaches are encouraged to submit proposed 
rule text.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, we also are requesting information regarding the potential 
impact of the proposed rule on the economy on an annual basis. 
Commenters should provide empirical data to support their views.

III. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits of its rules 
and has, in preparing this proposal, carefully balanced the two. As 
described in more detail below, electronic filing will impose some 
costs on advisers, particularly the filing fees that advisers will pay 
to the operator of the system. We believe that electronic filing will 
yield substantially greater benefits to advisers and investors. The 
new, improved disclosure requirements will also impose additional 
costs. These costs are chiefly transitional costs, as advisers prepare 
new brochures and brochure supplements for the first time. We believe 
that, over time, these costs will be more than justified by the ongoing 
benefits to clients who receive better, more useful disclosure.

A. Electronic Filing Requirements

    The rules we are proposing will require advisers to make filings 
with us through the Investment Adviser Registration Depository (IARD). 
Although advisers will pay fees to

[[Page 20543]]

submit certain filings through the system, the IARD will also provide 
substantial benefits to advisers, including eliminating many of the 
costs advisers currently incur in filing their Form ADV. Today, 
advisers must prepare registration materials on paper, copy them, and 
submit the paper copies to both the SEC and states. Many of these 
copies must be manually signed and notarized. Correcting a mistake 
requires the adviser to repeat this entire process. The IARD, in 
contrast, would permit an adviser to satisfy all of these filing 
obligations by submitting a single electronic filing prepared using a 
personal computer in its office.\239\ Electronic signatures could be 
used, and mistakes could be corrected by simply typing over incorrect 
information and re-sending the electronic submission.\240\ Today, 
advisers must determine the amount of filing fees due each state, 
prepare checks and mail them so that they are delivered in a timely 
manner.\241\ Errors can result in penalties or cause disruptions in 
business. The IARD, in contrast, would eliminate these costs by 
automatically determining the amount of filing fees owed and debiting 
the adviser's account when those fees are due.\242\ These benefits 
should more than justify the filing fees and other expenses for the 
typical adviser registered with the Commission.
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    \239\ See discussion of electronic filing requirements supra at 
Section II.A.1. of this Release.
    \240\ The IARD will also prevent advisers from making incomplete 
filings. Submitting an incomplete filing is a common error by new 
advisers applying for registration, and is one that can 
substantially delay the registration process and thus the business 
plans of applicants. See discussion of electronic filing 
requirements, supra Section II.A.1. of this Release.
    \241\ Postage expenses alone can cost an SEC-registered firm 
$750 per year. This estimate assumes an average overnight mail cost 
of $10 per mailing in each of 50 states and an average of 1.5 
amendments filed per year ($10  x  50  x  1.5) = $750.
    \242\ The Commission does not charge any filing or other fees. 
See supra note 36 (discussing elimination of investment adviser 
registration fees charged by the Commission).
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    In drafting the new form, we have sought additional ways to reduce 
costs. An adviser may save a partially completed form as a ``draft'' 
that the adviser can access and complete at a later time. Our proposed 
on-line glossary would allow an advisers' personnel to refer to 
explanations of key terms while completing Form ADV, and we would also 
provide an on-line ``help'' function, to answer frequently-asked 
questions and provide guidance on completing the form.\243\ When an 
adviser prepares an amendment to its Form ADV, the IARD will pre-
populate most of the items from the adviser's previous filings, 
reducing the adviser's time (and therefore expense) in completing the 
amendment. Further, we have designed the IARD so that advisers that 
also are registered as broker-dealers will complete Schedules to their 
Form ADV by ``linking'' to parallel responses in their Form BD already 
on file. Thus, these firms will recognize additional cost savings by 
avoiding entering certain data twice.\244\
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    \243\ See discussion of electronic filing requirements supra at 
Section II.A.1. of this Release.
    \244\ Approximately 900 SEC-registered advisers also are 
registered with us as broker-dealers.
---------------------------------------------------------------------------

    We have taken into consideration that not all advisers may have 
access to the Internet. A continuing hardship exemption would be 
available to certain ``small advisers'' that are unable to file through 
the IARD without undue burden and expense (if, for example, the adviser 
does not have Internet access and is unable to afford a filing 
service).\245\ The continuing hardship exemption is intended to 
minimize any burden imposed by the electronic filing requirements.
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    \245\ See discussion of proposed hardship exemptions supra at 
Section II.B.4. of this Release.
---------------------------------------------------------------------------

    The IARD also has the potential to speed the registration process 
for investment adviser representatives of SEC-registered advisers. 
Registration of investment adviser representatives on the IARD will be 
a matter for state securities authorities; we do not register or 
license investment adviser representatives. Our experience with the CRD 
system, however, provides an analogy. Our understanding of how broker-
dealer agent filings on the CRD system are processed suggests that 
electronic filings on the IARD for investment adviser representatives 
are likely to be more efficient and cost effective than the current 
system of paper filings.
    Electronic filing also will produce substantial benefits for 
investors. First, and most important, the information on these filings 
will be available for investors to view, without cost, on a web 
site.\246\ Investors will be able to determine, for example, whether a 
prospective adviser has reported disciplinary events, what types of 
fees it charges, and whether the types of advisory services it offers 
are designed to meet their needs. As a result, investors--potential 
clients--will be in a better position to make informed decisions.
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    \246\ Investment adviser information is publicly available from 
us, but until now we have been unable to provide this information to 
the public without charge. We currently charge $.24 per page for 
copies and, upon receipt of the required fee, mail the Form ADV to 
the requester.
---------------------------------------------------------------------------

    The added ``sunlight'' the web disclosure will shine on advisers 
may have additional, secondary benefits. Information from advisers' 
filings will be available through a web site, and easy availability of 
information about advisers and advisory affiliates may, for example, 
discourage advisers from engaging in certain practices or hiring 
certain persons (such as those with disciplinary history or limited 
qualifications). Investors' access to information may also facilitate 
greater competition among advisers, which may in turn lower prices or 
encourage the development of different fee structures or different 
kinds of services that may benefit clients. These types of benefits are 
difficult to isolate or to quantify, but our experience is that they 
are real and are often the result of better disclosure.
    Electronic filing will also give us better access to information 
about advisers to administer our regulatory programs. We expect this 
information will permit us to increase both the efficiency and 
effectiveness of our programs and thus increase investor protection. 
The IARD will permit us to better monitor advisers' failure to make 
required filings, identify advisers whose activities suggest a need for 
closer scrutiny, and manage our regulatory programs. The IARD will 
generate reports on the industry, its characteristics and trends. These 
reports will help us anticipate regulatory problems, allocate and 
reallocate our resources, and more fully evaluate and anticipate the 
implications of various regulatory actions we may consider taking.

B. Proposed Form ADV

    We have divided proposed Form ADV into two parts, Part 1 and Part 
2. For purposes of assessing costs and benefits, each part is discussed 
separately below.
1. Part 1
    SEC-registered advisers would experience few additional costs in 
completing revised Part 1. We have re-drafted Part 1A in plain English, 
improved its organization, and added instructions to clarify some 
items. Proposed Part 1A would require no additional information that 
should not be readily available to an adviser. The revised Schedules 
would make it much simpler, in comparison to current Schedules A, B, 
and C, to provide information about control persons.\247\

[[Page 20544]]

While smaller advisers may find these benefits limited, larger advisers 
(particularly advisers that are part of a larger, more intricate 
corporate structure) should see cost savings from the proposed changes 
to the Schedules. The proposed new Disciplinary Reporting Pages (DRPs) 
would require substantially more detailed information about 
disciplinary events than is specified in the current form, but the new 
DRPs should serve mainly to clarify existing disclosure obligations, 
which are worded more generally.\248\ Moreover, we would only require 
an adviser to report disciplinary events occurring in the past ten 
years,\249\ and would remove information about the educational and 
business background of employees.\250\ We expect that these changes 
will justify any additional costs associated with amendments to Part 
1A.
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    \247\ An adviser generally would no longer be required to report 
an indirect owner unless the indirect owner owned 25% of a direct 
owner. See discussion of proposed Schedules, supra Section II.D.1. 
of this Release. See supra note 102 (describing difficulties for 
foreign-owned broker-dealers to obtain ownership information).
    \248\ Moreover, most advisers do not have disciplinary events to 
report.
    \249\ See discussion of disciplinary disclosure requirements 
supra at Section II.D.1.a.ii. of this Release. We also are proposing 
to stop requiring advisers to report unsatisfied judgments or liens; 
bankruptcies; bond denials, payouts, or revocations; or any 
``minor'' rule violations. See discussion of ``minor'' rule 
violations, supra Section II.D.1.a.ii. of this Release, and note 95 
and accompanying text (discussing ``minor'' rule violations).
    \250\ For many supervised persons providing advisory services, 
this information would appear in the proposed brochure supplements. 
See discussion of proposed brochure supplements, supra at Section 
II.D.2.b. of this Release.
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2. Part 2
    An analysis of the costs and benefits of Part 2 is more complex. 
Most advisers would be required to replace their current Part II with a 
narrative brochure in plain English, and to re-file this new brochure 
with us. In addition, the disclosure in the new brochure may be more 
complete, and in some cases more detailed, than Form ADV currently 
requires. Thus, drafting the new narrative brochure will likely entail 
additional expenses.
    Most of the cost associated with preparing a brochure would be 
incurred in the initial preparation, specifically in drafting the 
narrative brochure. Advisers are already required to provide us and/or 
their clients with much of the information required in the new 
brochure,\251\ so we do not expect advisers to have substantial 
expenses in gathering this information. In addition, since most of the 
costs of redrafting the new brochure will be incurred in the first 
year, we do not expect proposed Part 2A to result in any significant 
cost increase over time. The cost of preparing a narrative firm 
brochure is likely to vary substantially among advisers, in part 
because proposed Part 2A would give an adviser considerable flexibility 
in structuring its disclosure. Drafting a brochure to describe the 
adviser's business practices and disclose conflicts of interest need 
not be a long or an expensive process. Some advisory firms, however, 
may elect to use their brochure to market their services, as well as to 
make required disclosure. These firms will likely face significantly 
higher expenses, particularly if they bring in legal, design and 
marketing professionals. Other firms may choose to prepare multiple 
brochures, which would also require higher drafting costs.
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    \251\ See discussion of the firm brochure, supra Section 
II.D.2.a. of this Release.
---------------------------------------------------------------------------

    Under the proposed rules, the brochure would have to be reprinted 
annually to incorporate all interim amendments. The cost of printing a 
narrative brochure, however, should not be substantially different from 
the current cost of printing Part II; the narrative brochure is not 
required to be professionally printed. Further, we have sought to make 
interim amendments inexpensive by permitting advisers to use 
``stickers'' to correct a brochure. We also do not anticipate that the 
costs of distributing the proposed brochures (and stickers) would be 
significantly higher than the costs of distributing Part II or a 
brochure under existing delivery requirements. These costs currently 
vary among advisers, depending on how the adviser delivers the brochure 
and the number of advisory clients who receive it.\252\ Because of this 
large number of variables--initial drafting costs, number and extent of 
corrections, mode of distribution, number of clients, and others--
quantifying the overall costs to advisers of the proposed narrative 
brochure is not practicable.
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    \252\ For example, if the adviser has arranged to deliver the 
firm brochure (and written brochure updates) to its advisory clients 
by electronic media, it would not incur costs to print and mail the 
brochure to its clients (or to offer it to them each year). See 
Investment Advisers Act Release No. 1562, supra note 123.
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    Advisers also would incur some costs to prepare brochure 
supplements for supervised persons, but the supplements would provide 
important disclosure to advisory clients about relevant advisory 
personnel. Many supervised persons are already subject to state 
regulation as investment adviser representatives, and much of the 
information needed for the brochure supplement can be obtained from the 
adviser's current Form ADV and the representative's registration 
application.\253\ The costs of preparing brochure supplements would 
also vary widely from one adviser to the next, depending on the number 
of supervised persons of the adviser, the extent of a supervised 
person's professional and educational background, and the amount of 
disciplinary information required to be disclosed. The aggregate cost 
to the investment adviser industry in preparing the proposed brochure 
supplements therefore is not readily quantifiable. The proposed 
amendments would, however, include several options to minimize 
advisers' costs in preparing and distributing the brochure 
supplements.\254\
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    \253\ Investment adviser representatives typically apply for 
state registration by filing Form U-4. See supra note 27.
    \254\ A small adviser, for example, could choose to include all 
required information for each supervised person in its firm brochure 
and thus not prepare any brochure supplements. Firms that have one 
or more groups of supervised persons providing advisory services 
could consolidate information about all members of a particular 
group into one brochure supplement. See discussion of Part 2B, supra 
Section II.D.2.b. of this Release. Advisers whose services did not 
trigger a delivery requirement (for example, advising registered 
investment companies or providing only impersonal investment advice) 
would not be required to prepare brochure supplements.
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C. Form ADV-W

    Advisers would incur less cost in completing proposed Form ADV-W 
than in completing the current form. Under proposed amended Form ADV-W, 
the adviser would complete only those items needed to process the 
withdrawal.\255\ Form ADV-W would also become effective immediately, 
rather than after a sixty-day ``waiting period,'' thereby smoothing the 
transition period for advisers switching to state registration.
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    \255\ See discussion of Form ADV-W, supra Section II.E. of this 
Release.
---------------------------------------------------------------------------

D. Request for Comment

    We request comment on the effects of the proposed rule and form 
amendments on individual investment advisers and on the advisory 
profession as a whole, and request data to quantify the costs and value 
of the benefits associated with these proposed amendments. 
Specifically, we request comment on the cost savings for advisers (and 
their representatives) filing through the IARD. We also request data on 
advisers' current costs of complying with state notice filing and 
investment adviser representative registration requirements. We also 
request comment on the costs of completing and re-filing Part 1A of 
proposed Form ADV, and of preparing and delivering the firm brochure, 
wrap

[[Page 20545]]

brochure, and brochure supplement(s). Commenters should provide 
analysis and empirical data to support their views on the costs and 
benefits associated with this proposal.

IV. Paperwork Reduction Act

    The proposed rule and form amendments contain several ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995,\256\ and the Commission has submitted the 
amendments 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,'' ``Schedule I to Form 
ADV,'' ``Rule 206(4)-4,'' ``Form ADV-W and Rule 203-2,'' ``Rule 0-2 and 
Forms 4-R through 7-R,'' ``Rule 204-2,'' and ``Rule 204-3,'' all under 
the Advisers Act. We are proposing to amend Form ADV, Schedule I to 
Form ADV, Rule 206(4)-4, Form ADV-W and Rule 203-2, Rule 0-2 and Forms 
4-R through 7-R, Rule 204-2, and Rule 204-3. These rules and forms 
contain currently approved collection of information numbers under OMB 
control numbers 3235-0049, 3235-0490, 3235-0345, 3235-0313, 3235-0240, 
3235-0278, and 3235-0047, respectively. We also are proposing new rule 
203-3 and new Form ADV-H, which both would contain a collection of 
information requirements. An agency may not sponsor, conduct, or 
require response to an information collection unless a currently valid 
OMB number is displayed.
---------------------------------------------------------------------------

    \256\ 44 U.S.C. 3501 to 3520.
---------------------------------------------------------------------------

Form ADV

    Form ADV contains collection of information requirements. Rule 203-
1 requires every person applying for investment adviser registration 
with the Commission to file Form ADV. Rule 204-1 requires each 
registered adviser to file amendments to Form ADV at least annually, 
and also would require advisers to begin submitting electronic filings 
through the IARD. This collection of information is found at 17 CFR 
275.203-1, 275.204-1, and 279.1 and is mandatory. Responses are not 
kept confidential. The likely respondents to this information 
collection would be all advisers registered with us or applying for 
registration after advisers begin making filings through the IARD.
    An increase in the number of respondents to the collection of 
information for Form ADV will increase the currently approved burden of 
the collection of information. The current burden for new registrants 
is approximately 6,848 hours,\257\ and assumes approximately 760 new 
applicants per year and a weighted average of 9.01 hours per adviser. 
The current burden also applies to current registrants amending their 
Form ADV, is approximately 1.07 hours per amendment, and is based on 
approximately 7,300 advisers registered with us and filing 11,810 
amendments annually. The current total burden for all advisers filing 
Form ADV is 19,448 hours.
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    \257\ This current burden does not include the burden imposed by 
rule 206(4)-4 of 6,755 burden hours per year. Under the proposed 
amendments, the collection of information under this rule would be 
incorporated into Form ADV's collection of information requirements, 
and is reflected in the estimates below.
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    Based, however, on the Commission's recent experience in processing 
investment adviser registration applications, the Commission now 
estimates that approximately 1,000 advisers each year are new 
applicants for SEC registration, increasing the total burden by 2,162 
hours.\258\ Also, approximately 8,100 advisers are registered with us, 
increasing the current burden of filing amendments to Form ADV by 1,541 
hours.\259\ The total increase in the collection of information for 
Form ADV resulting from an increase in the number of respondents is 
3,703 hours.\260\
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    \258\ (240 more advisers applying for registration x 9.01 hours) 
= 2,162.4 hours.
    \259\ ((800 more currently-registered advisers  x  1.5 
amendments) + (240 new applicants  x  1 amendment))  x  1.07 hours = 
(1,200 + 240)  x  1.07 = 1,440  x  1.07 = 1,540.8.
    \260\ 1,541 hours + 2,162 hours = 3,703 hours.
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    The collection of information for Form ADV would incorporate the 
burdens of rule 206(4)-4 and Schedule I into Form ADV. The collections 
of information for rule 206(4)-4 and Schedule I to Form ADV are 
discussed below.
    The proposed amendments to Form ADV at first would increase the 
paperwork burden, as most advisers would have to redraft and 
disseminate a narrative brochure and brochure supplements. The 
paperwork burdens of preparing a narrative firm brochure is likely to 
vary substantially among advisers, in part because proposed Part 2A 
would give an adviser considerable flexibility in structuring its 
disclosure, and also because the amount of disclosure required would 
vary among advisers. Most of the new paperwork burden would be incurred 
in this initial preparation, specifically in drafting the narrative 
text. Once the adviser has redrafted its narrative brochure, proposed 
Parts 2A and 2B are not expected to result in any significant burden 
increase over time (except for changes to the brochure that are 
necessitated by changes in the adviser's business).\261\ Part 1A is 
expected to impose a minimal paperwork burden, as none of the new items 
requests information that should not be readily available to the 
adviser. The efficiencies of filing through the IARD, over time, are 
expected to reduce the initial burdens associated with completing the 
revised Form ADV.
---------------------------------------------------------------------------

    \261\ The burden of amending Form ADV to reflect these changes 
in the brochure is expected to be similar to the current burden of 
reflecting these changes in the adviser's Part II of Form ADV.
---------------------------------------------------------------------------

    The burdens associated with using the revised form would be 
amortized over the estimated period that advisers would use their 
revised brochure. We adopted significant changes to Form ADV in 
1985,\262\ and required advisers to re-file their amended Form ADV, and 
to prepare and begin using a new brochure. At that time, advisers 
incurred paperwork burdens in the ``start-up'' costs of the revised 
Form ADV. Once advisers re-filed their Form ADV, advisers' paperwork 
burdens generally were limited to amending the form as needed. Advisers 
thus have used current Form ADV (and thus the current brochure) for 
approximately the past fifteen years (depending on exactly when they 
re-filed their Form ADV with us). The paperwork burdens of the revised 
form would be amortized over a similar fifteen-year period.\263\
---------------------------------------------------------------------------

    \262\ Since 1985, we have amended sections of Form ADV and added 
Schedules H and I, but not revised the form in its entirety.
    \263\ The Commission staff chose a fifteen-year amortization 
period to reflect the anticipated period of time that advisers would 
use the revised form. If the Commission adopts significant revisions 
to Form ADV within the next fifteen years, the actual collection of 
information burden may be higher than the estimates contained in 
this analysis and we would revise the Form ADV collection of 
information burden accordingly.
---------------------------------------------------------------------------

    The additional burdens that would be imposed by the revised form 
also would be reflected in the revised collection of information. 
During the first year that an adviser uses new Form ADV, the burden of 
completing the revised form for the first time would result in a new 
total collection of information burden of an estimated 22 hours per 
adviser, including preparation of brochure supplements. This total 
collection of information would total 22,000 hours for new registrants 
and 178,200 hours for currently registered advisers that re-file Form 
ADV through the IARD system, for a total of 200,200 hours.\264\

[[Page 20546]]

Amortizing this total burden imposed by Form ADV over a fifteen-year 
period would result in an average burden increase of an estimated 
13,346.67 hours per year,\265\ or 1.47 hours per year for each new 
applicant and for each adviser currently registered with the Commission 
that would re-file through the IARD.\266\
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    \264\ (8,100 current registrants  x  22) + (1,000 new applicants 
 x  22) = 178,200 + 22,000 = 200,200 hours. The revised collection 
of information estimate includes the burdens of rule 206(4)-4 and 
Schedule I to Form ADV in addition to the other collection of 
information imposed by the proposed form.
    \265\ 200,200 hours/15 years = 13,346.67. An amortization period 
of less than fifteen years would yield a higher collection of 
information burden. For example, if the amortization period was ten 
years instead of fifteen years, the collection of information burden 
of re-filing Form ADV would be 20,020 burden hours, or 2.2 hours per 
adviser. (200,200 hours/10 years = 20,020 hours; 20,020 hours/9,100 
advisers = 2.2 hours per adviser.)
    \266\ 13,346.67/9,100 advisers = 1.47 hours per adviser.
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    In addition, during the first year the IARD is operational, 
advisers filing through the system would likely amend their Form ADV at 
least once.\267\ Electronic filing, however, should yield significant 
benefits to advisers filing amendments, and is estimated to reduce the 
information collection burden of filing an amendment to Form ADV by 
approximately thirty percent. The collection of information burden for 
amendments therefore would be 0.75 hours per amendment.\268\ Based on 
the Commission's experience in processing investment adviser 
amendments, new registrants are estimated to amend their Form ADV once 
in the first year they are registered, currently-registered newly-
formed advisers relying on the exemption found at rule 203A-2(d) \269\ 
are estimated to amend their Form ADV twice per year, currently-
registered advisers relying on the multi-state exemption found at rule 
203A-2(e) \270\ are estimated to amend their Form ADV once per year, 
and other currently-registered advisers are estimated to amend their 
Form ADV, on average, 1.5 times per year. Advisers thus file an 
estimated total of 13,250 \271\ amendments per year for an estimated 
total paperwork burden of 9,938 hours per year.\272\
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    \267\ See discussion of the collection of information burdens 
for amendments to Form ADV infra at notes 268 through 272 and 
accompanying text.
    \268\ 1.07  x  .70 = .749 hours per amendment.
    \269\ 17 CFR 275.203A-2(d).
    \270\ 17 CFR 275.203A-2(e).
    \271\ (890 new registrants  x  1 amendment) + (100 new-applicant 
newly-formed advisers  x  2 amendments) + (10 new-applicant multi-
state advisers  x  1 amendment) + (8,100 other currently-registered 
advisers  x  1.5 amendments) = 890 + 200 + 10 + 12,150 = 13,250 
responses.
    \272\ 13,250 responses  x  0.75 hours = 9,937.5 hours.
---------------------------------------------------------------------------

    The total collection of information burden for advisers to file and 
complete the revised Form ADV therefore would be approximately 23,315 
hours per year.\273\ The total collection of information burden 
therefore would be 27,018 hours.\274\
---------------------------------------------------------------------------

    \273\ 9,938 hours per year attributable to amendments + (1,000 
new registrants each year  x  1.47 hours (similarly amortized over a 
fifteen year period)) + (1.47 hours from the continued amortization 
from the first year the revised form is used  x  8,100 advisers) = 
9,938 hours + 1,470 hours + 11,907 hours = 23,315 hours.
    \274\ 23,315 hours due to rulemaking + 3,703 hours due to an 
increase in the number of advisers = 27,018 total burden hours.
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Rule 206(4)-4; Schedule I to Form ADV

    The collection of information requirements for both rule 206(4)-4 
and Schedule I to Form ADV would be incorporated in the collection of 
information requirements for Form ADV, discussed above. The new burden 
estimate for Form ADV includes these collection of information burdens. 
Rule 206(4)-4 and Schedule I to Form ADV currently contain collection 
of information requirements. Rule 206(4)-4 requires advisers to 
disclose certain disciplinary and financial information to clients. 
Advisers file Schedule I to Form ADV to claim eligibility for SEC 
registration (if applying for SEC registration) or to reaffirm their 
eligibility for SEC registration (if currently registered). These 
collections of information are found at 17 CFR 275.206(4)-4 and 17 CFR 
279.1, are mandatory, and responses are not kept confidential.
    We are proposing to rescind rule 206(4)-4 and incorporate its 
substantive provisions into Part 2A of Form ADV. We also are proposing 
to incorporate the substantive requirements of Schedule I into Part 1A 
of Form ADV. The collection of information requirements for rule 
206(4)-4 and Schedule I to Form ADV would be eliminated.

Form ADV-W and Rule 203-2

    Form ADV-W and Rule 203-2 contain collection of information 
requirements. Rule 203-2 requires every person withdrawing from 
investment adviser registration with the Commission to file Form ADV-W. 
This collection of information is found at 17 CFR 275.203-2 and 17 CFR 
279.2 and is mandatory. Responses are not kept confidential. The likely 
respondents to this information collection would be all advisers 
registered with the Commission once the transition period to electronic 
filing is complete.
    A decrease in the number of advisers filing to withdraw from SEC 
registration will decrease the current burden. The currently approved 
collection of information is one hour. The Commission in the past 
received approximately 616 notices of withdrawal on Form ADV-W per 
year. The weighted average burden hours for completing Form ADV-W is 
one hour, and the total annual burden hours currently approved by OMB 
for this form are 616 hours. Based on the Commission's recent 
experience in processing investment adviser withdrawals, the Commission 
estimates that approximately 1,300 withdraw from SEC registration each 
year, decreasing the total burden by 684 hours.\275\
---------------------------------------------------------------------------

    \275\ (684 more advisers  x  1 hour) = 684 hours.
---------------------------------------------------------------------------

    The Commission is proposing to amend rule 203-2 to (a) require 
advisers to file Form ADV-W through the IARD and (b) make investment 
adviser withdrawals effective upon filing (rather than after a sixty-
day period, as provided in the current rule). The Commission also is 
proposing to amend Form ADV-W. The proposed form amendments would 
tailor the required items to the reason for the adviser's withdrawal. 
An adviser ceasing operations would complete the entire form to 
withdraw from all jurisdictions in which it is registered (full 
withdrawal), while an adviser withdrawing from some, but not all, of 
the jurisdictions in which it is registered would omit certain items 
that we do not need from an adviser continuing in business as a state-
registered adviser.\276\
---------------------------------------------------------------------------

    \276\ See discussion of Form ADV-W, supra Section II.E. of this 
Release.
---------------------------------------------------------------------------

    The proposed amendments to Form ADV-W are expected to reduce the 
collection of information burden for advisers filing for withdrawal. An 
adviser filing for partial withdrawal (e.g., the adviser is switching 
to state registration) would omit certain items, such as the location 
of its books and records that we do not need from an adviser continuing 
in business as a state-registered adviser; an adviser filing for full 
withdrawal (i.e., the adviser is ceasing operations) would complete the 
entire form. For purposes of this Paperwork Reduction Act analysis, the 
Commission staff estimates that approximately 50 percent of the 
advisers filing for withdrawal would file for full withdrawal and the 
remaining 50 percent would file for partial withdrawal. Compliance with 
the requirement to complete Form ADV-W would impose a total burden of 
approximately 0.75 hours (45 minutes) for an adviser filing for full 
withdrawal and approximately 0.25 hours (15 minutes) for an adviser 
filing for partial withdrawal. The weighted average total time for each 
applicant to complete revised Form ADV-W therefore is

[[Page 20547]]

estimated to be 0.5 hours (30 minutes), for a total collection of 
information burden of 650 hours.\277\
---------------------------------------------------------------------------

    \277\ (650 advisers filing for full withdrawal  x  .75 hours) + 
(650 advisers filing for partial withdrawal  x  .25 hours) = 487.5 + 
162.5 = 650 hours.
---------------------------------------------------------------------------

Rule 0-2 and Forms 4-R Through 7-R

    Rule 0-2 and Forms 4-R, 5-R, 6-R, and 7-R contain collection of 
information requirements. Rule 0-2 requires non-resident advisers to 
furnish us with a written irrevocable consent and power of attorney 
that designates the Commission as an agent for service of process, and 
that stipulates and agrees that any civil suit or action against such 
person may be commenced by service of process on the Commission. Rules 
279.4, 279.5, 279.6 and 279.7 (17 CFR 279.4, 279.5, 279.6 and 279.7) 
designate Forms 4-R through 7-R as the irrevocable appointments of 
agent for service of process, pleadings and other papers to be 
filed.\278\ It is necessary for us to obtain appropriate consent to 
permit the Commission and other parties to bring actions against non-
resident advisers and non-resident partners or agents of investment 
advisers for violations of the federal securities laws. The likely 
respondents to this information collection would be each non-resident 
adviser, and each non-resident partner or agent of an SEC-registered 
adviser.
---------------------------------------------------------------------------

    \278\ The nature of the adviser's business structure will 
determine whether it files Form 4-R, 5-R, or 6-R: a non-resident 
adviser that is an individual or an unincorporated adviser must file 
Form 4-R; a non-resident adviser that is a corporation must file 
Form 5-R; a non-resident adviser that is a partnership must file 6-
R. A non-resident general files form 7-R partner or a non-resident 
managing agent of an SEC-registered adviser.
---------------------------------------------------------------------------

    An increase in the number of non-resident advisers registered with 
the SEC will increase the current collection of information burden. 
Forms 4-R through 6-R are required by rule 0-2 to be filed by non-
resident advisers, and Form 7-R is required by rule 0-2 to be filed by 
a non-resident general partner or managing agent of an SEC-registered 
adviser. The Commission in the past received approximately 300 filings 
pursuant to rule 0-2. The weighted average burden for Forms 4-R, 5-R, 
6-R, and 7-R is one hour per form, and the total annual burden hours 
currently approved by OMB for these forms is 300 hours. Our records 
indicate that we receive approximately 475 filings per year from non-
resident advisers, partners and agents, increasing the current burden 
to 475 hours.
    The paperwork burdens of Forms 4-R through 6-R are incorporated 
into the collection of information requirements for Form ADV, discussed 
above. We are proposing to amend rule 0-2 and delete Forms 4-R, 5-R, 6-
R and 7-R. The substance of Forms 4-R through 6-R would be contained in 
the execution page to Form ADV. The substance of Form 7-R would be 
contained in new Form AVD-NR. The Commission staff estimates that 
approximately 380 respondents would be subject to rule 0-2, with 
approximately 285 respondents being non-resident advisers that would 
execute Form ADV to comply with rule 0-2.
    The remaining approximately 95 respondents are non-resident general 
partners or managing agents of SEC-registered investment advisers, and 
would be required to file Form AVD-NR with the Commission. A non-
resident general partner or managing agent would be required to file 
Form AVD-NR only once. SEC staff estimates that the preparation and 
filing of Form AVD-NR would require approximately one hour of the non-
resident general partner's or managing agent's time. The total 
estimated burden therefore would be 95 hours.

Rule 204-2

    Section 204 of the Advisers Act provides that investment advisers 
required to register with the Commission must make and keep certain 
records for prescribed periods, and make and disseminate certain 
reports. Rule 204-2 sets forth the requirements for maintaining and 
preserving specified books and records. This collection of information 
is mandatory. The Commission staff uses this collection of information 
in its examination and oversight program, and the information generally 
is kept confidential.\279\ The likely respondents to this collection of 
information requirement are all advisers registered with the 
Commission.
---------------------------------------------------------------------------

    \279\ See section 210(b) of the Advisers Act (15 U.S.C. 80b-
10(b)).
---------------------------------------------------------------------------

    A reduction in the number of advisers registered with us will 
reduce the current burden. Currently, compliance with rule 204-2 
requires approximately 195.29 hours each year per Commission-registered 
adviser, for a total of 1,601,378 burden hours. The current total 
burden is based on 8,200 potential respondents. Commission records 
indicate that there currently are approximately 8,100 potential 
respondents to the collection of information imposed by rule 204-2. As 
a result of a decrease in the number of advisers registered with the 
Commission, the total burden is decreased by 19,529.\280\
---------------------------------------------------------------------------

    \280\ (100 fewer advisers  x  195.29 hours) = 19,529 hours.
---------------------------------------------------------------------------

    The proposed amendments to rule 204-2 would require registered 
investment advisers to prepare and preserve a memorandum describing any 
legal or disciplinary event listed in Item 8 of Part 2A or Item 3 of 
Part 2B of proposed Form ADV (and presumed to be material), if the 
event involved the adviser or any of its supervised persons and is not 
disclosed in the adviser's brochure or a brochure supplement. These 
books and records will be required to be maintained in the manner, and 
for the period of time, as other books and records are required to be 
maintained under rule 204-2(a). This collection of information would be 
found at 17 CFR 275.204-2.
    Based on disciplinary items reported on Form ADV, approximately 
1,120 advisers currently report disciplinary information. It is 
anticipated that most of these advisers would include all disciplinary 
information in their brochure, and approximately ten percent of these 
advisers, or 110 advisers, would conclude that the materiality 
presumption is overcome with respect to a legal or disciplinary event, 
would determine not to disclose that event, and therefore would be 
required to prepare and preserve a memorandum describing the event. 
Under the proposed amendments, each respondent would be required to 
retain the records on an ongoing basis. The proposed amendments to rule 
204-2 are estimated to increase the burden by four hours, to 199.29, 
per Commission-registered adviser that would be required to prepare and 
preserve these additional records. The annual aggregate burden for all 
respondents to the recordkeeping requirements under rule 204-2 thus is 
estimated to be 1,582,293 total hours.\281\ The weighted average burden 
per Commission-registered adviser would be 195.34 hours.\282\
---------------------------------------------------------------------------

    \281\ (1,601,382 current burden hours-19,529 hours due to a 
decrease in number of advisers) + 440 hours increase from 
rulemaking=1,582,293 total hours.
    \282\ 1,582,293 total hours/8,100 advisers = 195.34 hours per 
adviser.
---------------------------------------------------------------------------

Rule 204-3

    Rule 204-3 contains a collection of information requirement. Rule 
204-3, the ``brochure rule,'' currently requires an investment adviser 
to deliver, or offer, to prospective clients a disclosure statement 
containing specified information as to the business practices and 
background of the adviser. The brochure assists the client in

[[Page 20548]]

determining whether to retain, or continue employing, the adviser. Rule 
204-3 also currently requires that an investment adviser deliver, or 
offer, its brochure on an annual basis to existing clients in order to 
provide them with current information about the adviser. Under Rule 
204-3, the investment adviser must furnish the required information to 
clients and prospective clients by providing either a copy of Part II 
of Form ADV, the investment adviser registration form, or a written 
document containing at least the information required by Part II of 
Form ADV. This collection of information is found at 17 CFR 204-3 and 
is mandatory. Responses are not kept confidential. The likely 
respondents to this information collection are every investment adviser 
registered with the Commission.
    A reduction in the number of respondents will reduce the current 
collection of information burden. The total annual burden currently 
approved by OMB for rule 204-3 is approximately 203,350 hours for the 
approximately 8,300 advisers registered with us when the collection of 
information was last extended. Our records indicate that approximately 
8,100 advisers currently are registered with the Commission. The 
currently approved collection of information estimates that each 
adviser requires, on average, approximately 24.5 hours to provide its 
clients with the required information.\283\ As a result of a decrease 
in the number of advisers registered with the Commission, the total 
burden is decreased by 4,900 hours.\284\
---------------------------------------------------------------------------

    \283\ This estimate assumes that an adviser requires no more 
than one half hour to distribute its brochure to a client.
    \284\ (200 fewer advisers  x  24.5 hours) = 4,900 hours.
---------------------------------------------------------------------------

    The proposed amendments to rule 204-3 would require SEC-registered 
advisers to deliver their brochure and appropriate brochure supplements 
at the start of the advisory relationship, and to offer to deliver the 
brochure and brochure supplements annually.\285\ The proposed rule 
amendments also would require that advisers deliver updates to the 
brochure and brochure supplements to clients whenever information in 
the brochure becomes materially inaccurate.\286\ The updates could take 
the form of a reprinted brochure or a ``sticker'' containing the 
updated information. Currently, our rules require initial delivery of 
the brochure, but require no further brochure delivery unless the 
client accepts the adviser's annual offer.\287\ The rule proposal is 
necessary for an adviser to keep its clients apprised of material 
changes in its operations, its fees, key advisory personnel, and other 
information provided in the advisory brochure.
---------------------------------------------------------------------------

    \285\ Proposed amended rule 204-3(b)(1)(A) and Instruction 1 to 
Part 2A.
    \286\ See proposed rule 204-3(f).
    \287\ The annual offer, and delivery if the client accepts the 
offer, is required under current rules 204-3(c)(1) and (4).
---------------------------------------------------------------------------

    The proposed rule amendments include transition rules that would 
require each adviser to deliver their revised brochure and any brochure 
supplements to its current clients. We expect that advisers would send 
the new brochures and brochure supplements in a ``bulk mailing.'' It is 
estimated that each adviser has, on average 49 clients and that an 
adviser requires no more than 0.25 hours to send a package consisting 
of the adviser's revised brochure and any required brochure supplements 
to each existing client. The total burden hours for advisers to 
distribute the revised brochure and any brochure supplements is 
therefore estimated to be 99,225 hours.\288\ The Commission staff 
estimates that an advisory client engages an adviser for an average of 
seven years. Amortizing the burden of the initial distribution of the 
brochure and any brochure supplements over this seven-year period 
results in an annual collection of information burden of 14,175 hours.
---------------------------------------------------------------------------

    \288\ (0.25 hours  x  49 clients)  x  8,100 advisers = 12.25  x  
8,100 advisers = 99,225 hours.
---------------------------------------------------------------------------

    After the initial distribution, an adviser would be required to 
distribute an update (either a ``sticker'' or a revised brochure or 
brochure supplement) approximately 2 times per year.\289\ This estimate 
is based on our experience under rule 204-1 and 206(4)-4. It again is 
estimated that each adviser has an average of 49 clients, and after the 
adviser distributes a revised brochure and any brochure supplements to 
their clients, the adviser would require no more than one half hour 
each time it is required to provide each client with a brochure, a 
brochure supplement, or an update. This represents about 49 hours per 
year for each adviser registered with the Commission.\290\ Thus, the 
annual hour burden to meet the requirements of rule 204-3, as proposed 
to be amended, would be approximately 396,900 hours,\291\ not including 
the initial distribution of the revised brochure and any brochure 
supplements.
---------------------------------------------------------------------------

    \289\ The proposed rule amendment providing the transition from 
paper filings to electronic filings would require each adviser to 
distribute a revised brochure (and any brochure supplements) to its 
existing clients within thirty days from the end of the transition 
period. See proposed rule 204-3(i).
    \290\ 49 clients  x  .5 hours  x  2 distributions per year = 49 
hours.
    \291\ 8,100 advisers  x  49 hours = 396,900 hours.
---------------------------------------------------------------------------

    The total estimated collection of information burden imposed by 
rule 204-3, as proposed to be amended, is 411,075 hours per year.\292\
---------------------------------------------------------------------------

    \292\ 14,175 hours + 396,900 hours = 411,075 hours.
---------------------------------------------------------------------------

Rule 203-3 and Form ADV-H

    We are proposing one new rule (proposed rule 203-3) and one new 
form (proposed Form ADV-H) that would contain a collection of 
information requirement. Rule 203-3 requires that advisers requesting 
either a temporary or continuing hardship exemption submit the request 
on Form ADV-H. An adviser requesting a temporary hardship would be 
required to file Form ADV-H, providing a brief explanation of the 
nature and extent of the temporary technical difficulties.\293\ Form 
ADV-H would require an adviser requesting a continuing hardship 
exemption to indicate the reasons the adviser is unable to submit 
electronic filings without undue burden and expense.\294\ A continuing 
hardship exemption would be available only to an adviser that is a 
small entity.\295\
---------------------------------------------------------------------------

    \293\ Similarly, issuers that submit electronic filings on EDGAR 
apply for a temporary hardship exemption on Form TH. 17 CFR 232.201. 
Form ADV-H is based on Form TH, which is filed by issuers relying on 
the temporary hardship exemption.
    \294\ See proposed Form ADV-H. The adviser applying for a 
continuing hardship exemption also would be required to indicate the 
reasons that the necessary hardware and software are unavailable, 
and propose a time period for which the exemption would be in 
effect.
    \295\ See supra note 61 for the definition of ``small entity.''
---------------------------------------------------------------------------

    Commission records indicate that approximately 1,500 advisers are 
small entities and therefore 1,500 potential respondents that could 
apply for a continuing hardship exemption, and approximately 8,100 
potential respondents that could apply for a temporary hardship 
exemption.\296\ Based on our experience with hardship filings made by 
investment companies through our EDGAR system, approximately 50 
advisers would request a temporary hardship exemption and approximately 
20 would apply for a continuing hardship exemption each year. Proposed 
Form ADV-H and rule 203-3 are estimated to create a collection of 
information burden of approximately 60 minutes per respondent, for a 
total of 70 hours.\297\
---------------------------------------------------------------------------

    \296\ A temporary hardship exemption would be available to 
advisers that submit electronic filings but are temporarily unable 
to do so. An adviser that receives a continuing hardship exemption 
could not apply for a temporary hardship exemption.
    \297\ (50  x  1)+(20  x  1) = 50+20 = 70 hours.
---------------------------------------------------------------------------

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to (i)

[[Page 20549]]

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., Washington, D.C. 20549-0609 with reference to File No. S7-10-00. 
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.

V. Summary of Initial Regulatory Flexibility Analysis

    We have prepared an Initial Regulatory Flexibility Analysis (IRFA) 
in accordance with section 3(a) of the Regulatory Flexibility Act (RFA) 
\298\ regarding the proposed amendments to Form ADV and other rules and 
forms under the Advisers Act.
---------------------------------------------------------------------------

    \298\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for the Proposed Action

    As discussed in more detail in the IRFA, and above, we are 
proposing the rule and form amendments: (i) to facilitate the 
development of a system of electronic filing by investment advisers; 
(ii) to develop a database of information about advisers that is easily 
accessible to investors; and (iii) to improve the quality of disclosure 
advisers provide to their clients.

B. Objectives

    The IRFA explains that the rule proposal has three distinct, but 
related objectives. The first is to begin the process of creating a 
more efficient system of regulatory filing for investment advisers. The 
IARD will reduce regulatory costs for advisers by permitting them to 
satisfy both state and SEC filing requirements by making a single, 
electronic filing through the Internet. The IARD will also give us a 
more effective tool to administer the federal securities laws as they 
apply to advisers.
    The second objective is to improve public access to information 
about advisers. Currently, adviser filings are generally not available 
from commercial sources, and not otherwise easily available to 
investors. In 1996, Congress directed us to pursue this objective by 
requiring that we establish ``a readily accessible * * * electronic 
process to receive inquiries * * * involving investment advisers * * 
*.'' \299\ The IARD will satisfy this directive by providing investors 
with direct access to information about advisers, at no cost, through 
the Internet. The third objective is to improve the quality of 
information investors receive from advisers about their fees, business 
practices and conflicts of interest. Advisers would be required to 
provide a narrative brochure that is written in plain English, and 
would be required to keep the brochure current.
---------------------------------------------------------------------------

    \299\ See supra note 4.
---------------------------------------------------------------------------

    To further these objectives, the proposals are designed to make 
full use of information technologies that are readily available to both 
large and small advisers. The IRFA explains that the proposed 
amendments also are designed to further our mandate under the federal 
securities laws to prevent fraud and require full disclosure of 
material information by participants in the securities markets.

C. Small Entities Subject to the Rules

    In developing these proposals, we have considered their potential 
effect on small entities that may be affected, which is discussed in 
the IRFA. The proposals would not affect most advisers that are small 
entities \300\ (small advisers) because they are registered with one or 
more state securities authorities and not with us. Congress amended the 
Advisers Act in 1996 so that small advisers are generally regulated by 
states regulators and not the Commission. \301\ Those small advisers 
that remain registered with us are located in Wyoming (which does not 
have an advisers statute), or are eligible for an exemption that 
permits SEC registration. Of the approximately 20,000 advisers in the 
United States, 8,000 (40%) are registered with us. Of those 8,000, the 
IRFA estimates that only 1,500 (19%) qualify as small advisers. We have 
based this estimate on registration information advisers file with the 
Commission.
---------------------------------------------------------------------------

    \300\ For purposes of the Advisers Act and the RFA, an 
investment adviser generally is a small entity if (a) it manages 
assets of less than $25 million reported on its most recent Schedule 
I to Form ADV, (b) it does not have total assets of $5 million or 
more on the last day of the most recent fiscal year, and (c) it is 
not in a control relationship with another investment adviser that 
is not a small entity. Advisers Act rule 0-7.
    \301\ See supra note 4 (citing amendments to the Advisers Act 
that divide regulatory authority over investment advisers between 
the Commission and the states).
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The IRFA states that the proposal would impose certain reporting 
and compliance requirements on small advisers, requiring them: (i) to 
file electronically through the IARD; (ii) to use amended Form ADV when 
applying for registration (or amending an existing registration); and 
(iii) to update and deliver certain information to clients (the 
``brochure'' rule). These requirements are discussed more fully in the 
IRFA and Section II of this Release,\302\ and the burdens on small 
advisers are discussed below.
---------------------------------------------------------------------------

    \302\ Specifically, the electronic filing requirements are 
discussed supra at Section II.B. and C. of this Release; the 
proposed amendments to Form ADV are discussed supra at Section II.D. 
of this Release; and the proposed information delivery requirements 
are discussed at Section II.D.2. of this Release.
---------------------------------------------------------------------------

1. Electronic Filing Requirements
    The IRFA explains that electronic filing is likely to impose two 
types of burdens on small advisers--filing fees and the time and 
expense of familiarizing themselves with the system.
    Filing Fees. The operator of the IARD will charge filing fees to 
all advisers, including small advisers.\303\ Small advisers will pay 
substantially smaller fees than larger advisers. Use of this sliding 
scale is designed to minimize the burdens of electronic filing on small 
advisers while maintaining the economic viability of the IARD. It also 
recognized that larger advisers, which are more likely to have filing 
requirements in multiple states, will benefit more from the IARD than 
small advisers.
---------------------------------------------------------------------------

    \303\ The rules we are proposing today will not themselves 
impose or authorize NASDR to impose any filing fee on advisers using 
the IARD. Section 203A(d) authorizes us to designate an operator of 
the filing system, and we expect to designate NASDR. The proposal 
would require advisers to use the system. Nonetheless, we have 
included the amount of the filing fees we estimate that NASDR will 
charge as part of our IRFA.
---------------------------------------------------------------------------

    Other Burdens. The IRFA explains that use of the IARD will impose 
other burdens on small advisers that must establish an account with 
NASDR,

[[Page 20550]]

devote time to familiarizing themselves with the IARD's filing rules, 
and perhaps obtain Internet access. We believe that these burdens are 
small and that advisers would incur most of the costs when they begin 
to use the IARD. Thereafter, use of the IARD should actually reduce 
regulatory burdens for all advisers, including small advisers.
    Our information suggests that almost all investment advisers, 
including small advisers, currently have Internet access, and use the 
Internet for various purposes.\304\ Nonetheless, our proposals would 
provide for a hardship exemption, available only to small advisers, 
which would permit them to continue to file on paper if using the IARD 
would impose an ``unreasonable burden or expense.'' \305\ The operator 
of the IARD would convert the paper filing to electronic format and 
charge the adviser an additional fee to cover conversion costs. In 
addition, the IARD will accommodate the use of commercial filing 
services, which we understand many small advisers currently use to make 
regulatory filings. We have included these alternative means of making 
filings to minimize the burdens the proposed electronic filing rules 
will have on small advisers.
---------------------------------------------------------------------------

    \304\ See supra note 57 (discussing advisers' use of the 
Internet).
    \305\ See Proposed Form ADV-H, infra Appendix C of this Release.
---------------------------------------------------------------------------

    Many small advisers today use filing services because they cannot 
hire professional compliance staff, and do not themselves have the 
knowledge, time, or expertise to understand the details of the various 
federal and state forms, deadlines, and fees. The IARD will have a 
number of features designed to make it easy for persons to complete 
Form ADV, even if they are unfamiliar with the form. We have written 
the new instructions in plain English and re-organized the form in a 
simpler manner. We have re-drafted questions that have presented 
interpretive difficulties for small advisers, and have added an on-line 
``help'' function that will provide advisers with easy access to 
answers to questions frequently asked about the form. Advisers using 
the system will also have easy on-line access to the text of the 
Advisers Act and our rules. Together, these features should 
substantially benefit small advisers that do not have lawyers or other 
professional compliance personnel or staff.
    The IRFA concludes that, although small advisers will experience 
some modest start-up costs and burdens in using the IARD, over time the 
system will actually reduce overall burdens. As advisers become more 
familiar with it, use of the system should substantially reduce 
administrative costs associated with making regulatory filings, and 
improve advisers' compliance with regulatory requirements, allowing 
them to reduce their dependence, in more routine matters, on lawyers, 
compliance firms and others who assist them in meeting their regulatory 
obligations.
2. Proposed Amendments to Form ADV
    Part 1. The IRFA explains that the proposed amendments to Part 1A 
of Form ADV would have a minimal effect on small advisers. None of the 
new items requests information that should not be readily available to 
the advisers. For example, advisers would be asked for the e-mail 
address of a contact person (if she has one) and the address of any web 
site the adviser sponsors. Further, because small advisers tend to have 
simpler business arrangements, fewer control persons, and fewer 
employees, the burdens of completing Part 1A should be significantly 
less for small advisers than for larger advisers.
    The IRFA acknowledges that small advisers whose control persons 
have disciplinary history would likely spend more resources in 
completing the necessary DRPs for reporting of disciplinary events. 
Based on information filed on current Form ADV, we estimate that only 
approximately fourteen percent of advisers would be required to report 
disciplinary information, and thus most small advisers would be 
unaffected by this proposed requirement.\306\ Even fewer advisers would 
be required to report disciplinary events on the revised form--we have 
proposed to eliminate certain items and limit advisers' reporting 
obligations to those disciplinary events occurring in the past ten 
years.
---------------------------------------------------------------------------

    \306\ The 14% estimate is based on responses to Item 11 of 
current Form ADV. Item 11 currently includes several items that have 
an unlimited reporting period and other items that are unnecessary 
for our registration program.
---------------------------------------------------------------------------

    Part 2. The IRFA explains that the proposed amendments to Part 2, 
because they require advisers to begin preparing and disseminating 
narrative brochures, will impose additional costs on advisers, 
including small advisers. The IRFA assumes that all small advisers 
currently distribute Part II of Form ADV and will have to completely 
redraft their brochures, although some information in Part II may be 
transferable to the new brochures.
    The costs associated with preparing the new brochures will depend 
on the size of the adviser, the complexity of its operations, and the 
extent to which its operations present conflicts of interest with 
clients. Many of the new items imposing the most rigorous disclosure 
requirements may not apply to a small adviser because, for example, the 
adviser does not have soft dollar or directed brokerage arrangements, 
or does not have custody of client assets. To the extent that some of 
the new disclosure burdens do apply to small advisers, these advisers 
are already obligated to make the disclosures to clients under the 
Act's anti-fraud provisions (although not required to be in the 
brochure).
    The IRFA explains that advisers would, for the first time, be 
required to prepare and disseminate brochure supplements for their 
supervised persons. To reduce the burdens on small advisers, we drafted 
the new supplement rules so that firms with few employees can include 
the information in their firm brochures and avoid preparing separate 
brochure supplements.\307\
---------------------------------------------------------------------------

    \307\ See discussion of proposed part 2B, supra Section 
II.D.2.b. of this Release.
---------------------------------------------------------------------------

3. Updating and Delivery Requirements
    The IRFA explains that, in addition to proposing revisions to the 
brochure, we also propose to require advisers to update their brochure, 
deliver the updates to clients whenever the information becomes 
materially inaccurate, and offer a revised brochure annually.\308\ 
These proposed requirements would impose some burdens on small 
advisers. To minimize these burdens, we would permit an adviser to 
deliver a ``sticker'' containing the updated information instead of 
requiring the adviser to reprint the entire brochure. In addition, 
advisers that deliver their brochures in electronic format also may 
deliver stickers and revised brochures in the same manner.\309\ The 
IRFA states that small advisers are more likely to have fewer advisory 
clients than larger advisers, and thus the proposed updating and 
delivery requirements should impose lower variable costs on small 
advisers.
---------------------------------------------------------------------------

    \308\ See discussion of the proposed delivery and updating 
requirements, supra at Section II.D.2.a. of this Release.
    \309\ See Investment Advisers Act Release No. 1562, supra note 
123.
---------------------------------------------------------------------------

E. Significant Alternatives

    The IRFA discusses the various alternatives that the Commission 
considered in connection with the proposed rule and form amendments 
that might minimize the effect on small advisers, including (a) 
establishing different compliance or reporting requirements or 
timetables that take into

[[Page 20551]]

account the resources available to small advisers; (b) clarifying, 
consolidating, or simplifying compliance and reporting requirements 
under the proposed rule and rule amendments for small advisers; (c) 
using performance rather than design standards; and (d) exempting small 
advisers from coverage of all or part of the proposed rule and rule 
amendments.
    Regarding the first alternative, the Commission considered 
establishing different compliance or reporting requirements for small 
advisers. As explained more fully in the IRFA, establishing different 
compliance or reporting requirements would be inconsistent with our 
mandate to provide a system of public disclosure of investment adviser 
information. The IRFA states that a small-entity adviser, by the nature 
of its business, would likely spend fewer resources in completing the 
new Form ADV, and will pay lower filing fees than those paid by a 
larger adviser.
    Regarding the second alternative, it does not appear that the 
proposed rule and form amendments can be formatted differently for 
small advisers and still achieve the stated objectives of the proposal. 
Nonetheless, the proposed amendments would clarify and simplify the 
form for all advisers, including small advisers. As discussed more 
fully in the IRFA, we are also proposing to add a new item to Form ADV 
to capture specific information about small advisers so we can better 
assess the number of small advisers registered with us and the burdens 
imposed by our rules.
    Regarding the third alternative, the IRFA explains that the 
proposed rule and form amendments would permit advisers to use 
performance rather than design standards in some instances. For 
example, we do not specify the means by which an adviser would deliver 
its brochure to clients.\310\ In other contexts, however, the use of 
performance rather than design standards would be inconsistent with our 
statutory mandate to protect investors, as advisers must provide 
certain registration information in a uniform and quantifiable manner 
so that it is useful to our regulatory and examination programs. Design 
standards, therefore, are necessary to achieve many objectives of the 
proposal.
---------------------------------------------------------------------------

    \310\ See Investment Advisers Act Release No. 1562, supra note 
123.
---------------------------------------------------------------------------

    Regarding the fourth alternative, the IRFA states that it would be 
inconsistent with the purposes of the Advisers Act to exempt small 
advisers from the proposed rule and form amendments. The information in 
the adviser's brochure is necessary for the client to evaluate the 
adviser's background, qualifications and services, and to apprise the 
client of potential conflicts of interest and of the adviser's 
financial condition. Clients of small advisers are entitled to the same 
disclosure required of larger advisers, and exempting small advisers 
from any of the proposed rule and form amendments would be inconsistent 
with a central purpose of the Advisers Act. We have incorporated 
several features intended to minimize the burden on small-entity 
investment advisers, such as the fact that any adviser with Internet 
access can file through the IARD, and that the system will have a 
``help'' function to assist advisers. Smaller advisers can also apply 
for a continuing hardship exemption from the electronic filing 
requirements, as discussed above.
    The IRFA states that, having considered the above alternatives in 
the context of the proposed rule and form amendments, and after taking 
into account the resources available to small advisers and the 
potential burden the proposal could place on investment advisers, the 
alternatives, except as noted above, would not accomplish the stated 
objectives of the proposal.
    The Commission encourages the submission of comments on matters 
discussed in the IRFA. Comment specifically is requested on the number 
of small advisers that would be affected by the proposals and the 
burdens the proposals would impose on small advisers. Commenters are 
asked to describe the nature of any burden and provide empirical data 
supporting the extent of the impact. These comments will be placed in 
the same public comment file as comments on the proposals. A copy of 
the IFRA may be obtained by contacting Jeffrey O. Himstreet, Attorney, 
Securities and Exchange Commission, 450 5th Street, N.W., Washington, 
DC 20549-0506.

VI. Statutory Authority

    We are proposing new rule 203-3 under sections 203(c)(1) and 211(a) 
of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(c)(1) and 80b-
11(a)).
    We are proposing amendments to rules 30-5 and 30-11 of our 
Organization and Program Management rules under sections 4A and 4B of 
the Securities Exchange Act of 1934 (15 U.S.C. 78d-1 and 78d-2).
    We are proposing amendments to rule 0-2 under section 19(a) of the 
Securities Act of 1933 (15 U.S.C. 77s(a)), section 23(a) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78w(a)), section 319(a) of 
the Trust Indenture Act of 1939 (15 U.S.C. 77sss(a)), section 38(a) of 
the Investment Company Act of 1940 (15 U.S.C. 78a-37(a)), and sections 
203(c)(1), 204, and 211(a) of the Investment Advisers Act of 1940 (15 
U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)).
    We are proposing amendments to rule 0-7 under chapter 6 of title 5 
of the United States Code (particularly section 601 of that chapter (5 
U.S.C. 601)) and section 211(a) of the Investment Advisers Act of 1940 
(15 U.S.C. 80b-11(a)).
    We are proposing amendments to rules 203-1 and 203-2 under sections 
203(c)(1), 204, and 211(a) of the Investment Advisers Act of 1940 (15 
U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)).
    We are proposing amendments to rule 203A-1 under sections 
203A(a)(1)(A), 203A(c), and section 211(a) of the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-3a(a)(1)(A), 80b-3a(c), and 80b-11(a)).
    We are proposing amendments to rule 203A-2 under section 203A(c) of 
the Investment Advisers Act of 1940 (15 U.S.C. 80b-3a(c)).
    We are proposing amendments to rules 204-1 under sections 203(c)(1) 
and 204 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(c)(1) 
and 80b-4).
    We are proposing amendments to rule 204-2 under sections 204 and 
206(4) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-4 and 80b-
6(4)).
    We are proposing amendments to rule 204-3 under sections 204, 
206(4), and 211(a) of the Investment Advisers Act of 1940 (15 U.S.C. 
80b-4, 80b-6(4), and 80b-11(a)).
    We are proposing new Form ADV-H under sections 203(c)(1), 204, and 
211(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(c)(1), 
80b-4, and 80b-11(a)).
    We are proposing amendments to rule 279.1, Form ADV, under section 
19(a) of the Securities Act of 1933 (15 U.S.C. 77s(a)), sections 23(a) 
and 28(e)(2) of the Securities Exchange Act of 1934 (15 U.S.C. 78w(a) 
and 78bb(e)(2)), section 319(a) of the Trust Indenture Act of 1939 (15 
U.S.C. 77sss(a)), section 38(a) of the Investment Company Act of 1940 
(15 U.S.C. 78a-37(a)), and sections 203(c)(1), 204, and 211(a) of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)).
    We are proposing amendments to rule 279.2, Form ADV-W, under 
sections 203(c)(1), 204, and 211(a) of the Investment Advisers Act of 
1940 (15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)).
    We are proposing to amend rule 279.4, Form 4-R, by replacing it 
with proposed Form ADV-NR under section

[[Page 20552]]

19(a) of the Securities Act of 1933 (15 U.S.C. 77s(a)), section 23(a) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78w(a)), section 
319(a) of the Trust Indenture Act of 1939 (15 U.S.C. 77sss(a)), section 
38(a) of the Investment Company Act of 1940 (15 U.S.C. 78a-37(a)), and 
sections 203(c)(1), 204, and 211(a) of the Investment Advisers Act of 
1940 (15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)).
    We are proposing to withdraw rule 204-5 under section 211(a) under 
the Investment Advisers Act of 1940 (15 U.S.C. 80b-11(a)).
    We are proposing to withdraw rule 206(4)-4 under section 206(4) 
under the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(4)).
    We are proposing to remove and reserve rules 279.5, 279.6 and 279.7 
and proposing to remove Forms 5-R, 6-R, and 7-R under section 19(a) of 
the Securities Act of 1933 (15 U.S.C. 77s(a)), section 23(a) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78w(a)), section 319(a) of 
the Trust Indenture Act of 1939 (15 U.S.C. 77sss(a)), section 38(a) of 
the Investment Company Act of 1940 (15 U.S.C. 78a-37(a)), and sections 
203(c)(1), 204, and 211(a) of the Investment Advisers Act of 1940 (15 
U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)).
    We are proposing to remove and reserve rule 279.9 and proposing to 
remove Form ADV-Y2K under section 211(a) of the Investment Advisers Act 
of 1940 (15 U.S.C. 80b-11(a)).

List of Subjects

17 CFR Part 200

    Administrative practice and procedure; Authority delegations 
(Government agencies).

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 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

    1. The authority section for Part 200 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 78ll(d), 78mm, 79t, 
77sss, 80a-37, 80b-11, unless otherwise noted.
* * * * *
    2. In Sec. 200.30-5, the introductory text of paragraph (e) is 
revised and paragraph (e)(7) is added to read as follows:


Sec. 200.30-5  Delegation of authority to Director of Division of 
Investment Management.

* * * * *
    (e) With respect to the Investment Advisers Act of 1940 (15 U.S.C. 
80b-1 to 80b-22):
* * * * *
    (7) Pursuant to section 203A(d) of the Act (15 U.S.C. 80b-3a(d)), 
to set the terms of, and grant or deny as appropriate, continuing 
hardship exemptions under Sec. 275.203-3 of this chapter.
    3. Section 200.30-11 is amended by revising paragraph (b)(2) to 
read as follows:


Sec. 200.30-11  Delegation of authority to Associate Executive Director 
of the Office of Filings and Information Services.

* * * * *
    (b) * * *
    (2) Under section 203(h) of the Act (15 U.S.C. 80b-3(h)), to 
authorize the issuance of orders canceling registrations of investment 
advisers, or pending applications for registration, if such investment 
advisers or applicants for registration are no longer in existence or 
are not engaged in business as investment advisers.
* * * * *

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

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

    Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3, 80b-
4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *
    5. Section 275.0-2 is revised to read as follows:


Sec. 275.0-2  General procedures for serving non-residents.

    (a) General procedures for serving process, pleadings, or other 
papers on non-resident investment advisers, general partners and 
managing agents. Under Forms ADV and ADV-NR (17 CFR 279.1 and 279.4), a 
person may serve process, pleadings, or other papers on a non-resident 
investment adviser, or on a non-resident general partner or non-
resident managing agent of an investment adviser by serving any or all 
of its appointed agents:
    (1) A person may serve a non-resident investment adviser, non-
resident general partner, or non-resident managing agent by furnishing 
the Commission with one copy of the process, pleadings, or papers, for 
each named party, and one additional copy for the Commission's records.
    (2) If process, pleadings, or other papers are served on the 
Commission as described in this section, the Secretary of the 
Commission (Secretary) will promptly forward a copy to each named party 
by registered or certified mail at that party's last address filed with 
the Commission.
    (3) If the Secretary certifies that the Commission was served with 
process, pleadings, or other papers pursuant to paragraph (a)(1) of 
this section and forwarded these documents to a named party pursuant to 
paragraph (a)(2) of this section, this certification constitutes 
evidence of service upon that party.
    (b) Definitions. For purposes of this section:
    (1) Managing agent means any person, including a trustee, who 
directs or manages, or who participates in directing or managing, the 
affairs of any unincorporated organization or association other than a 
partnership.
    (2) Non-resident means:
    (i) An individual who resides in any place not subject to the 
jurisdiction of the United States;
    (ii) A corporation that is incorporated in or that has its 
principal office and place of business in any place not subject to the 
jurisdiction of the United States; and
    (iii) A partnership or other unincorporated organization or 
association that has its principal office and place of business in any 
place not subject to the jurisdiction of the United States.
    (3) Principal office and place of business has the same meaning as 
in Sec. 275.203A-3(c) of this chapter.
    6. In Sec. 275.0-7, the introductory text of paragraph (a) is 
republished and paragraphs (a)(1) and (b)(1) are revised to read as 
follows:


Sec. 275.0-7  Small entities under the Investment Advisers Act for 
purposes of the Regulatory Flexibility Act.

    (a) For purposes of Commission rulemaking in accordance with the 
provisions of Chapter Six of the Administrative Procedure Act (5 U.S.C. 
601 et seq.) and unless otherwise defined for purposes of a particular 
rulemaking proceeding, the term small business or small organization 
for purposes of the Investment Advisers Act of 1940 shall mean an 
investment adviser that:
    (1) Has assets under management, as defined under Section 
203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)) and reported on its 
annual updating amendment to Form ADV (17 CFR 279.1), of less than $25 
million, or such

[[Page 20553]]

higher amount as the Commission may by rule deem appropriate under 
Section 203A(a)(1)(A) of the Act (15 U.S.C. 80b-3a(a)(1)(A));
* * * * *
    (b) For purposes of this section:
    (1) Control means the power, directly or indirectly, to direct the 
management or policies of a person, whether through ownership of 
securities, by contract, or otherwise.
    (i) A person is presumed to control a corporation if the person:
    (A) Directly or indirectly has the right to vote 25 percent or more 
of a class of the corporation's voting securities; or
    (B) Has the power to sell or direct the sale of 25 percent or more 
of a class of the corporation's voting securities.
    (ii) A person is presumed to control a partnership if the person 
has the right to receive upon dissolution, or has contributed, 25 
percent or more of the capital of the partnership.
    (iii) A person is presumed to control a limited liability company 
(LLC) if the person:
    (A) Directly or indirectly has the right to vote 25 percent or more 
of a class of the interests of the LLC;
    (B) Has the right to receive upon dissolution, or has contributed, 
25 percent or more of the capital of the LLC; or
    (C) Is an elected manager of the LLC.
    (iv) A person is presumed to control a trust if the person is a 
trustee or managing agent of the trust.
* * * * *
    7. Section 275.203-1 is revised to read as follows:


Sec. 275.203-1  Application for investment adviser registration.

    (a) Form ADV. To apply for registration with the Commission as an 
investment adviser, you must complete and file Form ADV (17 CFR 279.1) 
by following the instructions in the Form.
    (b) Electronic filing.
    (1) If you apply for registration on or after ___ _, 2000, you must 
file electronically with the Investment Adviser Registration Depository 
(IARD), unless you have received a hardship exemption under 
Sec. 275.203-3.

    Note to Paragraph (b): Information on how to file with the IARD 
is available on our website at http://www.sec.gov/__.

    (2) Until the IARD begins to accept Part 2A of Form ADV (the 
brochure), you are not required to submit Part 2A with the Commission. 
Instead, you must maintain a copy of each amended form of brochure you 
use and provide it to SEC staff upon request. The brochure you maintain 
is considered filed with the Commission. We will notify you when the 
IARD begins to accept Part 2A, and you will have a grace period before 
you are required to file Part 2A with the IARD.
    (c) When filed. Each Form ADV is considered filed with the 
Commission upon acceptance by the IARD.
    (d) Filing fees. You must pay NASD Regulation, Inc. (NASDR) (the 
operator of the IARD) a filing fee, the amount of which is provided in 
the instructions to Form ADV, no portion of which is refundable. Your 
completed application for registration will not be accepted by NASDR, 
and thus will not be considered filed with the Commission, until you 
have paid the filing fee.
    8. Section 275.203-2 is revised to read as follows:


Sec. 275.203-2  Withdrawal from investment adviser registration.

    (a) Form ADV-W. You must file Form ADV-W (17 CFR 279.2) to withdraw 
from investment adviser registration with the Commission (or to 
withdraw a pending registration application).
    (b) Electronic filing. Once you have filed your Form ADV (17 CFR 
279.1) (or any amendments to Form ADV) electronically with the 
Investment Adviser Registration Depository (IARD), any Form ADV-W you 
file must be filed with the IARD, unless you have received a hardship 
exemption under Sec. 275.203-3.
    (c) Effective date--upon filing. Each Form ADV-W filed under this 
section is effective upon acceptance by the IARD.
    (d) Filing fees. You do not have to pay a fee to file Form ADV-W on 
the IARD.
    (e) Form ADV-W is a report. Each Form ADV-W required to be filed 
under this section is a ``report'' within the meaning of sections 204 
and 207 of the Act (15 U.S.C. 80b-4 and 80b-7).
    9. Section 275.203-3 is added to read as follows:


Sec. 275.203-3  Hardship exemptions.

    This section provides two ``hardship exemptions'' from the 
requirement to make Advisers Act filings electronically.
    (a) Temporary hardship exemption.
    (1) Eligibility for exemption. If you are registered with the 
Commission as an investment adviser and submit electronic filings on 
the Investment Adviser Registration Depository (IARD) system, but have 
unanticipated technical difficulties that prevent you from submitting a 
filing to the IARD system, you may request a temporary hardship 
exemption from the requirements of this chapter to file electronically.
    (2) Application procedures. To request a temporary hardship 
exemption, you must:
    (i) File Form ADV-H (17 CFR 279.3) in paper format with NASD 
Regulation, Inc. (NASDR) no later than one business day after the 
filing that is the subject of the ADV-H was due; and
    (ii) Submit the filing that is the subject of the Form ADV-H in 
electronic format to NASDR no later than seven business days after the 
filing was due.
    (3) Effective date--upon filing. The temporary hardship exemption 
will be granted when you file a completed Form ADV-H with NASDR.
    (b) Continuing hardship exemption.
    (1) Eligibility for exemption. If you are a ``small business'' (as 
described in paragraph (b)(5) of this section), you may apply for a 
continuing hardship exemption. The period of the exemption may be no 
longer than one year after the date on which you apply for the 
exemption.
    (2) Application procedures. To apply for a continuing hardship 
exemption, you must file Form ADV-H with NASDR at least ten business 
days before a filing is due. The Commission will grant or deny your 
application within ten business days after filing Form ADV-H.
    (3) Effective date--upon approval. You are not exempt from the 
electronic filing requirements until and unless the Commission approves 
your application. If the Commission approves your application, you may 
submit your filings to NASDR in paper format for the period of time for 
which the exemption is granted.
    (4) Criteria for exemption. Your application will be granted only 
if you are able to demonstrate that the electronic filing requirements 
of this chapter are prohibitively burdensome or expensive.
    (5) Small business. You are a ``small business'' for purposes of 
this section if you are required to answer Item 12 of Form ADV (17 CFR 
279.1) and checked ``no'' to each question in Item 12 that you were 
required to answer.

    Note to Paragraphs (a) and (b): NASDR will charge you an 
additional fee covering its cost to convert to electronic format a 
filing made in reliance on a continuing hardship exemption.

    10. Section 275.203A-1 is revised to read as follows:


Sec. 275.203A-1  Eligibility for SEC registration; switching to or from 
SEC registration.

    (a) Eligibility for SEC registration.
    (1) Threshold for SEC registration--$30 million of assets under 
management. If the State where you maintain your principal office and 
place of business has enacted an investment

[[Page 20554]]

adviser statute, you are not required to register with the Commission, 
unless:
    (i) You have assets under management of at least $30,000,000, as 
reported on your Form ADV (17 CFR 279.1); or
    (ii) You are an investment adviser to an investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 to 
80a-64).
    (2) Exemption for investment advisers having between $25 and $30 
million of assets under management. If the State where you maintain 
your principal office and place of business has enacted an investment 
adviser statute, you may register with the Commission if you have 
assets under management of at least $25,000,000 but less than 
$30,000,000, as reported on your Form ADV (17 CFR 279.1). This 
paragraph (a)(2) shall not apply if:
    (i) You are an investment adviser to an investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 to 
80a-64); or
    (ii) You are eligible for an exemption described in Sec. 275.203A-2 
of this chapter.

    Note to Paragraphs (a)(1) and (a)(2): Paragraphs (a)(1) and 
(a)(2) of this section together make SEC registration optional for 
certain investment advisers that have between $25 and $30 million of 
assets under management.

    (b) Switching to or from SEC registration.
    (1) State-registered advisers--switching to SEC registration. If 
you are registered with a State securities authority, you must apply 
for registration with the Commission within 90 days of filing an annual 
updating amendment to your Form ADV reporting that you have at least 
$30 million of assets under management.
    (2) SEC-registered advisers--switching to State registration. If 
you are registered with the Commission and file an annual updating 
amendment to your Form ADV reporting that you no longer have $25 
million of assets under management (or are not otherwise eligible for 
SEC registration), you must file Form ADV-W (17 CFR 279.2) to withdraw 
your SEC registration within 180 days of your fiscal year end (unless 
you then have at least $25 million of assets under management or are 
otherwise eligible for SEC registration). During this period while you 
are registered with both the Commission and one or more State 
securities authorities, the Investment Advisers Act of 1940 and 
applicable State law will apply to your advisory activities.
    11. Section 275.203A-2 is amended as follows:
    a. The introductory text is republished;
    b. In paragraph (b)(3), the phrase ``Schedule I'' is revised to 
read ``an annual updating amendment'';
    c. The introductory text to paragraph (d) is republished;
    d. Paragraphs (d)(2) and (d)(3) are revised;
    e. The introductory text to paragraph (e) is republished; and
    f. Paragraphs (e)(2), (e)(3) and (e)(4) are revised to read as 
follows:


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

    The prohibition of section 203A(a) of the Act (15 U.S.C. 80b-3a(a)) 
does not apply to:
* * * * *
    (d) Investment advisers expecting to be eligible for SEC 
registration within 120 Days. An investment adviser that:
* * * * *
    (2) Indicates on Schedule D of its Form ADV (17 CFR 279.1) that it 
will withdraw from registration with the Commission if, on the 120th 
day after the date the investment adviser's registration with the 
Commission becomes effective, the investment adviser would be 
prohibited by section 203A(a) of the Act (15 U.S.C. 80b-3a(a)) from 
registering with the Commission; and
    (3) Notwithstanding Sec. 275.203A-1(b)(2) of this chapter, files a 
completed Form ADV-W (17 CFR 279.2) withdrawing from registration with 
the Commission within 120 days after the date the investment adviser's 
registration with the Commission becomes effective.
    (e) Multi-state investment advisers. An investment adviser that:
* * * * *
    (2) Indicates on Schedule D of its Form ADV 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 State securities authorities in the 
respective States or, in the case of an amendment to Form ADV, it would 
be required by the laws of at least 25 States to register as an 
investment adviser with the State securities authorities in the 
respective States, within 90 days prior to the date of filing Form ADV;
    (3) Undertakes on Schedule D of its Form ADV to withdraw from 
registration with the Commission if the adviser indicates on an annual 
updating amendment to Form ADV 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 
that the investment adviser would be prohibited by section 203A(a) of 
the Act (15 U.S.C. 80b-3a(a)) from registering with the Commission, by 
filing a completed Form ADV-W within 180 days of the adviser's fiscal 
year end (unless the adviser then has at least $25 million of assets 
under management or are otherwise eligible for SEC registration); and
    (4) Maintains in an easily accessible place a record of the States 
in which 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 Form ADV that includes a representation that 
is based on such record.
    12. Section 275.204-1 is revised to read as follows:


Sec. 275.204-1  Amendments to application for registration.

    (a) When amendment is required. You must amend your Form ADV (17 
CFR 279.1):
    (1) At least annually, within 90 days of the end of your fiscal 
year; and
    (2) More frequently, if required by the instructions to Form ADV.
    (b) Electronic filing.
    (1) If you are an investment adviser registered with the Commission 
on______ __, 2000, you must amend your Form ADV by electronically 
filing a completed Part 1A of Form ADV (as amended on ____ __, 2000) 
with the Investment Adviser Registration Depository (IARD) as follows:
    (i) ________ must file no later than ________;
    (ii) ________ must file no later than ________;
    (iii) ________ must file no later than ________; and
    (iv) ________ must file no later than ________.

    Note to Paragraphs (a) and (b): Information on how to file with 
the IARD is available on our website at http://www.sec.gov/____>.

    (2) If you are an investment adviser with a pending registration 
application on______ __, 2000, you must amend your Form ADV by 
electronically filing a completed Part 1A of Form ADV (as amended on 
______ __, 2000) with the IARD by (date used in paragraph (b)(1)(iv)).
    (3) If you have received a hardship exemption under Sec. 275.203-3, 
you must file a completed Part 1A of Form ADV on paper with NASD 
Regulation, Inc. (NASDR) when you are required to

[[Page 20555]]

amend your Form ADV by the schedule in paragraph (b)(1) of this 
section.
    (4) If you have filed Part 1A of Form ADV with the IARD under 
paragraphs (b)(1) or (b)(2) of this section, you must file all 
subsequent amendments to your Form ADV with the IARD.
    (c) Special rule for part 2. When resubmitting Form ADV in 
accordance with paragraph (b) of this section, you are not required to 
submit Part 2A of Form ADV (the firm brochure). Until the IARD begins 
to accept Part 2A of Form ADV, you must maintain a copy of each amended 
form of your firm brochure you use and provide it to SEC staff upon 
request. The firm brochure you maintain is considered filed with the 
Commission. We will notify you when the IARD begins to accept Part 2A, 
and you will have a grace period before you are required to file Part 
2A with the IARD. You are not required to file Part 2B of Form ADV (the 
brochure supplements) with the Commission.

    Note to Paragraph (c): You are required by Sec. 204-3(i) to 
begin using your new firm brochure and all required brochure 
supplements by (date used in paragraph (b)(1)(iv)), and to deliver 
your new firm brochure and all required brochure supplements to each 
of your current advisory clients by (30 days after the date in 
paragraph (b)(1)(iv)).

    (d) Filing fees. You must pay NASDR (the operator of the IARD) an 
annual filing fee at the time you file your annual updating amendment, 
no portion of which is refundable. The filing fees are provided in the 
instructions to Form ADV. Your amended Form ADV will not be accepted by 
NASDR, and thus will not be considered filed with the Commission, until 
you have paid the filing fee.
    (e) Amendments to Form ADV are reports. Each amendment required to 
be filed under this section is a ``report'' within the meaning of 
sections 204 and 207 of the Act (15 U.S.C. 80b-4 and 80b-7).
    13. Section 275.204-2 is amended by revising paragraph (a)(14) to 
read as follows:


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

    (a) * * *
    (14)(i) A copy of each written statement, and each amendment or 
revision to the written statement, given or sent to any advisory client 
or prospective client as required by Rule 204-3 under the Act; any 
summary of material changes that is required by Part 2 of Form ADV but 
is not contained in the written statement; and a record of the dates 
that each written statement, each amendment or revision thereto, and 
each summary of material changes was given or offered to any client or 
to any prospective client who subsequently becomes a client.
    (ii) A memorandum describing any legal or disciplinary event listed 
in Item 8 of Part 2A or Item 3 of Part 2B of Form ADV and presumed to 
be material, if the event involved the investment adviser or any of its 
supervised persons and is not disclosed in the written statements 
described in paragraph (a)(14)(i) of this section. The memorandum must 
explain the investment adviser's determination that the presumption of 
materiality is overcome, and must discuss the factors described in 
those items.
* * * * *
    14. Section 275.204-3 is revised to read as follows:


Sec. 275.204-3  Delivery of firm brochures and brochure supplements.

    (a) General requirements. If you are registered under the Act as an 
investment adviser, you must offer and deliver a firm brochure and one 
or more supplements to each client or prospective client as required by 
this section. The brochure and supplement(s) must contain all 
information required by Part 2 of Form ADV (17 CFR 279.1).
    (b) Offer and delivery requirements. (1) You (or a supervised 
person acting on your behalf) must deliver to a client or prospective 
client:
    (i) Your current brochure before or at the time you enter into a 
written or oral investment advisory contract with the client, and
    (ii) A current brochure supplement for a supervised person before 
or at the time that supervised person begins to provide advisory 
services to the client. For purposes of this section, a supervised 
person will provide advisory services to a client if the supervised 
person will:
    (A) Regularly communicate investment advice to that client, or
    (B) Formulate investment advice for assets of that client, or make 
discretionary investment decisions for assets of that client.
    (2) At least once a year, you must deliver or offer each advisory 
client a copy of your current brochure and any brochure supplements 
that you are required to deliver under paragraph (b)(1)(ii) of this 
section. Your offer must be in writing. If a client accepts your offer, 
you must send the current brochure and supplements to that client, 
without charge, within seven days after you are notified of the 
acceptance.
    (c) Exceptions to delivery requirement. (1) You are not required to 
deliver a brochure or brochure supplement when you enter into an 
investment company contract.
    (2) You are not required to deliver a brochure supplement when you 
enter into a contract for impersonal investment advice. Further, if you 
charge less than $500 per year under that contract, you are not 
required to deliver a brochure when you enter into the contract.
    (d) Delivery to limited partners. If, as an adviser, you are the 
general partner of a limited partnership, the manager of a limited 
liability company, or the trustee of a trust, then for purposes of this 
section you must treat each of the partnership's limited partners, the 
company's members, or the trust's beneficial owners as a client. For 
purposes of this section, a limited liability partnership or limited 
liability limited partnership is a ``limited partnership.''
    (e) Wrap fee program brochures.
    (1) If you are a sponsor of a wrap fee program, then the brochure 
that paragraph (b)(1)(i) of this section requires you to deliver to a 
client or prospective client of the wrap fee program must be a wrap fee 
brochure containing all information required by Part 2A Appendix 1 of 
Form ADV. Any additional information in a wrap fee brochure must be 
limited to information applicable to wrap fee programs that you 
sponsor.
    (2) You do not have to offer or deliver a wrap fee brochure if 
another sponsor of the wrap fee program offers or delivers, to the 
client or prospective client of the wrap fee program, a wrap fee 
program brochure containing all the information your wrap fee program 
brochure must contain.

    Note to paragraph (e): A wrap fee brochure does not take the 
place of any brochure supplements that you are required to deliver 
under paragraph (b)(1)(ii) of this section.

    (f) Updates and amendments. You must amend your brochure and any 
brochure supplement and deliver the amendments to clients promptly when 
information contained in the brochure or brochure supplement becomes 
materially inaccurate. The instructions to Part 2 of Form ADV contain 
updating instructions that you must follow.
    (g) Multiple brochures. If you provide substantially different 
advisory services to different clients, you may provide them with 
different brochures, so long as each client receives all applicable 
information about services and fees. The brochure you deliver to an 
advisory client may omit any information required by Part 2A of Form 
ADV if the information does not apply to the advisory services or fees 
that you will

[[Page 20556]]

provide or charge, or that you propose to provide or charge, to that 
client.
    (h) Other disclosure obligations. Delivering a brochure or 
supplement in compliance with this section does not relieve you of any 
other disclosure obligations you have to your advisory clients or 
prospective clients under any federal or State laws or regulations.
    (i) Transition rule. (1) By (date used in rule 204-1(b)(1)(iv)), 
you must begin using your current brochure and all required brochure 
supplements to comply with this section.
    (2) By (30 days after the date used in rule 204-1(b)(1)(iv)), you 
must deliver to each of your advisory clients your current brochure and 
all required brochure supplements.
    (j) Definitions. For purposes of this section:
    (1) Contract for impersonal investment advice means a contract for 
investment advisory services that does not purport to meet the 
objectives or needs of specific individuals or accounts.
    (2) Current brochure and current brochure supplement mean the most 
recent revision of the brochure or brochure supplement, including all 
subsequent amendments (i.e., stickers).
    (3) Investment company contract means a contract with an investment 
company registered under the Investment Company Act of 1940 (15 U.S.C. 
80a-1 to 80a-64) that meets the requirements of section 15(c) of that 
Act (15 U.S.C. 80a-15(c)).
    (4) Sponsor of a wrap fee program means an investment adviser that 
is compensated under a wrap fee program for sponsoring, organizing, or 
administering the program, or for selecting, or providing advice to 
clients regarding the selection of, other investment advisers in the 
program.
    (5) Supervised person means any of your officers, partners or 
directors (or other persons occupying a similar status or performing 
similar functions) or employees, or any other person who provides 
investment advice on your behalf.
    (6) Wrap fee program means an advisory program under which a 
specified fee or fees not based directly upon transactions in a 
client's account is charged for investment advisory services (which may 
include portfolio management or advice concerning the selection of 
other investment advisers) and the execution of client transactions.


Sec. 275.204-5  [Removed and Reserved]

    15. Section 275.204-5 is removed and reserved.


Sec. 275.206(4)-4  [Removed and Reserved]

    16. Section 275.206(4)-4 is removed and reserved.

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

    17. The authority citation for Part 279 is revised to read as 
follows:

    Authority: 15 U.S.C. 80b-1 to 80b-22.
    18. Form ADV (referenced in Sec. 279.1) is revised.

    Note: The text of Form ADV does not and the amendments will not 
appear in the Code of Federal Regulations. Form ADV is attached as 
Appendix A.

    19. Form ADV-W (referenced in Sec. 279.2) is revised.

    Note: The text of Form ADV-W does not and the amendments will 
not appear in the Code of Federal Regulations. Form ADV-W is 
attached as Appendix B.

    20. Section 279.3 and Form ADV-H are added as follows.

    Note: The text of Form ADV-H will not appear in the Code of 
Federal Regulations. Form ADV-H is attached as Appendix C.

Sec. 279.3  Form ADV-H, application for a temporary or continuing 
hardship exemption.

    An investment adviser must file this form under Sec. 275.203-3 of 
this chapter to request a temporary hardship exemption or apply for a 
continuing hardship exemption.
    21. Form 4-R (referenced in Sec. 279.4) is removed.
    22. Section 279.4 is revised and Form ADV-NR is added as follows:

    Note: Form ADV-NR will not appear in the Code of Federal 
Regulations. Form ADV-NR is attached as Appendix D.

Sec. 279.4  Form ADV-NR, appointment of agent for service of process by 
non-resident general partner and non-resident managing agent of an 
investment adviser.

    Each non-resident general partner or managing agent of an 
investment adviser must file this form under Sec. 275.0-2 of this 
chapter.


Sec. 279.5  [Removed and Reserved]

    23. Section 279.5 and Form 5-R are removed and reserved.

    Note: Form 5-R does not appear in the Code of Federal 
Regulations.

Sec. 279.6  [Removed and Reserved]

    24. Section 279.6 and Form 6-R are removed and reserved.

    Note: Form 6-R does not appear in the Code of Federal 
Regulations.

Sec. 279.7  [Removed and Reserved]

    25. Section 279.7 and Form 7-R are removed and reserved.

    Note: Form 7-R does not appear in the Code of Federal 
Regulations.

Sec. 279.9  [Removed and Reserved]

    26. Section 279.9 and Form ADV-Y2K are removed and reserved.

    Note: Form ADV-Y2K does not appear in the Code of Federal 
Regulations.


    By the Commission.

    Dated: April 5, 2000.
Margaret H. McFarland,
Deputy Secretary.
(Note: Appendixes A, B, C, and D will not appear in the Code of 
Federal Registration)

Appendix A--Form ADV (Paper Version): Uniform Application for 
Investment Adviser Registration

Form ADV: General Instructions

    Read these instructions carefully before filing Form ADV. 
Failure to follow these instructions, properly complete the form, 
and pay all required fees may result in your filing being returned 
to you. Electronic filers should follow the instructions available 
on-line, which are different.
    In these instructions and in the form, ``you'' means the 
investment adviser (i.e., the advisory firm) applying for 
registration or amending its registration. If you are a ``separately 
identifiable department or division'' (SID) of a bank, ``you'' means 
the SID, rather than your bank, unless the instructions or the form 
provide otherwise. Terms that appear in italics are defined in the 
Glossary of Terms to Form ADV.

1. What is Form ADV used for?

    Investment advisers use Form ADV to:
     Register with the Securities and Exchange Commission.
     Register with one or more state securities authorities.
     Amend those registrations.
    Form ADV also contains the requirements for the brochure you 
must deliver to clients under SEC rule 204-3 and similar state 
rules.

2. How is Form ADV organized?

    Form ADV contains four parts:
     Part 1A asks a number of questions about you, your 
business practices, the persons who own and control you, and the 
persons who provide investment advice on your behalf. All advisers 
registering with the SEC or any of the state securities authorities 
must complete Part 1A.
    Part 1A also contains several schedules that supplement Part 1A. 
The items of Part 1A let you know which schedules you must complete.
     Schedule A asks for information about your direct 
owners and executive officers.
     Schedule B asks for information about your indirect 
owners.
     Schedule C is used by paper filers to update the 
information required by Schedules A and B (see Instruction 13).

[[Page 20557]]

     Schedule D asks for additional information for certain 
items in Part 1A.
     Disclosure Reporting Pages (or ``DRPs'') ask for 
details about disciplinary events involving you or persons 
affiliated with you. (These are considered schedules too.)
     Part 1B asks additional questions required by state 
securities authorities. Part 1B contains three DRPs. If you are 
applying for registration or are registered only with the SEC, you 
do not have to complete Part 1B. (If you are filing electronically 
and you do not have to complete Part 1B, you will not see Part 1B.)
     Part 2A contains the requirements for preparing the 
brochure that SEC rule 204-3 and similar state rules require you to 
deliver to your clients. The brochure provides information about 
your business practices, fees and any conflicts of interest you may 
have with your clients. If you sponsor wrap fee programs, you must 
create a separate brochure that discloses information about these 
programs. Appendix 1 to Part 2 contains the requirements for 
preparing a wrap fee program brochure. Instructions to Part 2A 
explain when a brochure must be delivered.
     Part 2B contains the requirements for preparing 
brochure supplements about your supervised persons. Instructions to 
Part 2B explain for which supervised persons you must prepare a 
supplement and to which clients you must deliver the supplement.

3. When am I required to update my Form ADV?

    You must amend your Form ADV annually by filing an annual 
updating amendment within 90 days after the end of your fiscal year. 
When you submit your annual updating amendment, you must update your 
responses to all items.
    In addition to your annual updating amendment, you must amend 
your Form ADV by filing additional amendments (other-than-annual 
amendments) promptly if:
     information you provided in response to Items 1, 3, 9, 
or 11 of Part 1A or Items 1, 2.A.-2.F., or 2.I. of Part 1B become 
inaccurate in any way;
     information you provided in response to Items 4, 7, 8, 
or 10 of Part 1A or Item 2.G. of Part 1B become materially 
inaccurate; or
     any information in Part 2 (your brochure or a brochure 
supplement) becomes materially inaccurate.
    If you are submitting an other-than-annual amendment, you are 
not required to update your responses to Items 2, 5, 6, or 12 of 
Part 1A or Items 2.H. or 2.J. of Part 1B even if your responses to 
those items have become inaccurate. You must update your responses 
to all other items in Part 1 whenever you amend your Form ADV.
    Failure to update your Form ADV, as required by this 
instruction, is a violation of SEC rule 204-1 and similar state 
rules and could lead to your registration being revoked.

4. Where do I sign my Form ADV application or amendment?

    You must sign the appropriate Execution Page. There are three 
Execution Pages at the end of the form. Your initial application and 
all amendments to Form ADV must include at least one Execution Page.
     If you are applying for or amending your SEC 
registration, you must sign and submit either a:
     Domestic Investment Adviser Execution Page, if you (the 
advisory firm) are a resident of the United States; or
     Non-Resident Investment Adviser Execution Page, if you 
(the advisory firm) are not a resident of the United States.
     If you are applying for or amending your registration 
with a state securities authority, you must sign and submit the 
State-Registered Investment Adviser Execution Page.

5. Who must sign my Form ADV or amendment?

    The individual who signs the form depends upon your form of 
organization:
     For a sole proprietorship, the sole proprietor.
     For a partnership, a general partner.
     For a corporation, an authorized principal officer.
     For a ``separately identifiable department or 
division'' (SID) of a bank, a principal officer of your bank who is 
directly engaged in the management, direction or supervision of your 
investment advisory activities.
     For all others, an authorized individual who 
participates in managing or directing your affairs.
    The signature does not have to be notarized.

6. How do I file my Form ADV?

    Until [completion date of transition to electronic filing in 
rule 204-1(b)(i)(D)], you must follow the instructions in 
[transition instructions that will be included with the adopting 
release for Form ADV] to determine how you should file. After [date 
in rule 204-1(b)(i)(D)], follow this Instruction 6.
    Complete Form ADV electronically using the Investment Adviser 
Registration Depository (IARD) if:
     You are filing with the SEC (and submitting notice 
filings to any of the state securities authorities), or
     You are filing with a state securities authority that 
requires or permits advisers to submit Form ADV through the IARD.
    Complete Form ADV (Paper Version) on paper if:
     You are filing with the SEC or a state securities 
authority that requires electronic filing, but you have been granted 
a continuing hardship exemption. Hardship exemptions are described 
in Instruction 12.
     You are filing with a state securities authority that 
permits (but does not require) electronic filing and you do not file 
electronically.

7. How do I get started filing electronically?

    There are two things you must do to get started filing 
electronically:
     You must request a user I.D. code and password by 
completing and submitting Form ADV-ID to NASDR. You can get a copy 
of Form ADV-ID from any of the following web sites: www.sec.gov>, 
www.nasaa.org>, and www.nasdr.com>. Form ADV-ID must be submitted on 
paper. Mail the form to [address] or fax it to [fax number].
     You must establish an IARD account with NASDR, from 
which the IARD will deduct filing fees and any state fees you are 
required to pay. If you have a CRD account with NASDR, you do not 
need to establish a separate IARD account. To establish an IARD 
account, [to be determined].
    Once you receive your user I.D. and password and you have an 
account, you are ready to file electronically.

8. If I am applying for registration with the SEC, or amending my SEC 
registration, how do I make notice filings with the state securities 
authorities?

    If you are applying for registration with the SEC or amending 
your SEC registration, the state securities authorities of states in 
which you are ``doing business'' may require you to provide them 
with copies of your SEC filings. We call these filings ``notice 
filings.'' Your notice filings will be sent electronically to the 
states that you check on Item 2.B. of Part 1A. The state securities 
authorities to which you send notice filings may charge fees, which 
will be deducted from the account you establish with NASDR. To 
determine which state securities authorities require SEC-registered 
advisers to submit notice filings and to pay fees, consult the 
investment adviser law or the state securities authority for the 
particular state in which you are ``doing business.'' See General 
Instruction 15.
    If you are granted a continuing hardship exemption to file Form 
ADV on paper, NASDR will enter your filing into the IARD and your 
notice filings will be sent electronically to the state securities 
authorities that you check on Item 2.B. of Part 1A.

9. I am registered with a state. When must I switch to SEC 
registration?

    If you report on your annual updating amendment that your assets 
under management have increased to $30 million or more, you must 
register with the SEC within 90 days after you file that annual 
updating amendment. If your assets under management increase to $25 
million or more but not $30 million, you may, but are not required 
to, register with the SEC (assuming you are not otherwise required 
to register with the SEC). Once you register with the SEC, you are 
subject to SEC regulation, regardless of whether you remain 
registered with one or more states. Each of your investment adviser 
representatives, however, may be subject to registration in those 
states in which the representative has a place of business. See SEC 
rule 203A-1(b). For additional information, consult the investment 
adviser laws or the state securities authority for the particular 
state in which you are ``doing business.'' See General Instruction 
15.

10. I am registered with the SEC. When must I switch to registration 
with a state securities authority?

    If you report on your annual updating amendment that you have 
assets under management of less than $25 million and you are not 
otherwise eligible to register with the SEC, you must withdraw from 
SEC

[[Page 20558]]

registration within 180 days after the end of your fiscal year by 
filing Form ADV-W. You should consult state law in the states that 
you are doing business to determine if you are required to register 
in these states. See General Instruction 15. Until you file your 
Form ADV-W with the SEC, you will remain subject to SEC regulation, 
and you also will be subject to regulation in any states where you 
register. See SEC rule 203A-1(b).

11. Are there filing fees?

    Yes. These fees go to support and maintain the IARD. The IARD 
filing fees are in addition to any registration or other fee that 
may be required by state law. You must pay an IARD filing fee for 
your initial application and each annual updating amendment. There 
is no filing fee for an other-than-annual amendment or Form ADV-W. 
The IARD filing fee schedule is as follows:

[to be determined]

    If you are submitting a paper filing under a continuing hardship 
exemption (see Instruction 12), you are required to pay an 
additional fee. The amount of the additional fee depends on the type 
of filing you are submitting. The hardship filing fee schedule is as 
follows:

[to be determined]

12. What if I am not able to file electronically?

    If you cannot file electronically, you may be eligible for one 
of two types of hardship exemptions from the electronic filing 
requirements.
     A temporary hardship exemption is available if you file 
electronically, but you encounter unexpected difficulties that 
prevent you from making a timely filing with the IARD, such as a 
computer malfunction or electrical outage. This exemption does not 
permit you to file on paper; instead, it extends the deadline for an 
electronic filing for seven business days. See SEC rule 203-3(a).
     A continuing hardship exemption may be granted if you 
are a small business and you can demonstrate that filing 
electronically would impose an undue hardship. You are a small 
business, and may be eligible for a continuing hardship exemption, 
if you are required to answer Item 12 of Part 1A (because you have 
assets under management of less than $25 million) and you are able 
to respond ``no'' to each question in Item 12. See SEC rule 0-7.
    If you have been granted a continuing hardship exemption, you 
must complete and file the paper version of Form ADV with NASDR. 
NASDR will enter your responses into the IARD. As discussed in 
General Instruction 11, NASDR will charge you a fee to reimburse it 
for the expense of data entry.
    Before applying for a continuing hardship exemption, consider 
engaging a firm that assists investment advisers in making filings 
with the IARD. Check the SEC's web site to obtain a list of firms 
that provide these services.

13. I am eligible to file on paper. How do I make a paper filing?

    When filing on paper, you must:
     Type all of your responses.
     Include your name (the same name you provide in 
response to Item 1.A. of Part 1A) and the date on every page.
     If you are amending your Form ADV:
     complete page 1 and circle the number of any item for 
which you are changing your response.
     include your SEC 801-number (if you have one) and your 
CRD number (if you have one) on every page.
     complete the amended item in full and circle the number 
of the item for which you are changing your response.
     to amend Schedule A or Schedule B, complete and submit 
Schedule C.
    Where you submit your paper filing depends on why you are 
eligible to file on paper:
     If you are filing on paper because you have been 
granted a continuing hardship exemption, submit one manually signed 
Form ADV and one copy to: NASD Regulation, Inc., [address to be 
determined].
    If you complete Form ADV on paper and submit it to NASDR but you 
do not have a continuing hardship exemption, the submission will be 
returned to you.
     If you are filing on paper because a state in which you 
are registered or applying for registration allows you to submit 
paper instead of electronic filings, submit one manually signed Form 
ADV and one copy to the appropriate state securities authorities.

14. Who is required to file Form ADV-NR?

    Every non-resident general partner and managing agent of all 
SEC-registered advisers, whether or not the adviser is resident in 
the United States, must file Form ADV-NR in connection with the 
adviser's initial application. A general partner or managing agent 
of an SEC-registered adviser who becomes a non-resident after the 
adviser's initial application has been submitted must file Form ADV-
NR within 30 days. Form ADV-NR must be filed on paper (it cannot be 
filed electronically).
    Submit Form ADV-NR to the SEC at the following address: 
Securities and Exchange Commission, [address to be determined].
    Failure to file Form ADV-NR promptly may delay SEC consideration 
of your initial application.

15. Where can I get additional information?

    The SEC provides additional information about its rules and the 
Advisers Act on its website: www.sec.gov>.
    NASAA provides additional information about state investment 
adviser laws and state rules, and how to contact a state securities 
authority, on its website: www.nassa.org>.

Federal Information Law and Requirements

    Advisers Act Sections 203(c), 204, 206 and 211(a) authorize the 
SEC to collect the information required by Form ADV. The SEC uses 
the information for regulatory purposes, including deciding whether 
to grant registration. The SEC keeps files of the information 
submitted on this form and makes the information publicly available. 
The SEC may reject forms that do not include required information. 
By accepting a form, however, the SEC does not make a finding that 
it has been completed or submitted correctly. Intentional 
misstatements or omissions constitute federal criminal violations 
under 18 U.S.C. Sec. 1001 and 15 U.S.C. Sec. 80b-17.

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. The Advisers Act 
authorizes the SEC to collect the information on Form ADV from 
applicants. See 15 U.S.C. Secs. 80b-3(c)(1) and 80b-4. Filing the 
form is mandatory.
    The main purpose of this form is to enable the SEC to register 
investment advisers. Every applicant for registration with the SEC 
as an adviser must file the form. See 17 C.F.R. Sec. 275.203-1. The 
form is filed annually by every adviser, no later than 90 days after 
the end of its fiscal year, to amend its registration. It also is 
filed promptly during the year to reflect material changes. See 17 
C.F.R. Sec. 275.204-1. The SEC maintains the information on the form 
and makes it publicly available through the IARD.
    Anyone may send the SEC comments on the accuracy of the burden 
estimate on page 1 of the form, as well as suggestions for reducing 
the burden. The Office of Management and Budget has reviewed this 
collection of information under 44 U.S.C. Sec. 3507.
    The information contained in the form is part of a system of 
records subject to the Privacy Act of 1974, as amended. The SEC has 
published in the Federal Register the Privacy Act System of Records 
Notice for these records.

Form ADV (Paper Version); Unifrom Application for Investment Adviser 
Registration

Form ADV: Instructions for Part 1A

    These instructions explain how to complete certain items in Part 
1A of Form ADV.

1. Item 1: Identifying Information

    If you are a ``separately identifiable department or division'' 
(SID) of a bank, answer Item 1.A. with the full legal name of your 
bank, and answer Item 1.B. with your own name (the name of the 
department or division) and all names under which you conduct your 
advisory business. In addition, your principal office and place of 
business in Item 1.F. should be the principal office at which you 
conduct your advisory business. In response to Item 1.I., the World 
Wide Web site addresses you list on Schedule D should be sites that 
provide information about your advisory business, rather than 
general information about your bank.

2. Item 2: SEC Registration

    If you are registered or applying for registration with the SEC, 
you must indicate in Item 2.A. why you are eligible to register with 
the SEC by checking one or more boxes.
    a. Item 2.A(1): Adviser with Assets Under Management of $25 
Million or More. You may check box 1 only if your response to Item 
5.F(2)(c) is $25 million or more. While you may register with the 
SEC if your assets under management are at least $25 million but 
less than $30 million, you must register

[[Page 20559]]

with the SEC if your assets under management are $30 million or 
more. Part 1A Instruction 5.b. explains how to calculate your assets 
under management.
    If you are a state-registered adviser and you report on your 
annual updating amendment that your assets under management 
increased to $25 million or more, you may register with the SEC. If 
your assets under management increased to $30 million or more, you 
must register with the SEC within 90 days after you file that annual 
updating amendment. See SEC rule 203A-1(b) and Form ADV General 
Instruction 9.
    b. Item 2.A(4): Adviser to an Investment Company. You may check 
box 4 only if you currently provide advisory services under an 
investment advisory contract to an investment company registered 
under the Investment Company Act of 1940 and the investment company 
is operational (i.e., has assets and shareholders, other than just 
the organizing shareholders). See section 203A(a)(1)(B) of the 
Advisers Act. Advising investors about the merits of investing in 
mutual funds or recommending particular mutual funds does not make 
you eligible to check this box.
    c. Item 2.A(5): Nationally Recognized Statistical Rating 
Organization. You may check box 5 only if you are designated as a 
nationally recognized statistical rating organization pursuant to an 
application filed under paragraph (c)(13)(i) of SEC rule 15c3-1 
under the Securities Exchange Act of 1934. See SEC rule 203A-2(a). 
This designation generally is limited to rating agencies, such as 
Moody's and Standard & Poor's.
    d. Item 2.A(6): Pension Consultant. You may check box 6 only if 
you are eligible for the pension consultant exemption from the 
prohibition on SEC registration.
     You are eligible for this exemption if you provided 
investment advice to employee benefit plans, governmental plans, or 
church plans with respect to assets having an aggregate value of $50 
million or more during the 12-month period that ended within 90 days 
of filing this Form ADV. You are not eligible for this exemption if 
you only advise clients on allocating their investments within their 
pension plans. See SEC rule 203A-2(b).
     To calculate the value of assets for purposes of this 
exemption, aggregate the assets of the plans for which you provided 
advisory services at the end of the 12-month period. If you provided 
advisory services to other plans during the 12-month period, but 
your employment or contract terminated before the end of the 12-
month period, you also may include the value of those assets.
    e. Item 2.A(7): Affiliated Adviser. You may check box 7 only if 
you are eligible for the affiliated adviser exemption from the 
prohibition on SEC registration. See SEC rule 203A-2(c). You are 
eligible for this exemption if you control, are controlled by, or 
are under common control with an investment adviser that is 
registered with the SEC, and you have the same principal office and 
place of business as that other investment adviser. If you check box 
7, you also must complete Section 2.A(7) of Schedule D.
    f. Item 2.A(8): Newly-Formed Adviser. You may check box 8 only 
if you are eligible for the newly-formed-adviser exemption from the 
prohibition on SEC registration. See SEC rule 203A-2(d). You are 
eligible for this exemption if:
     Immediately before you file your application for 
registration with the SEC, you were not registered or required to be 
registered with the SEC or a state securities authority; and
     At the time of your formation, you have a reasonable 
expectation that within 120 days of registration you will be 
eligible for SEC registration.
    If you check box 8, you also must complete Section 2.A(8) of 
Schedule D.
    You must file an amendment to Part 1A of your Form ADV that 
updates your response to Item 2.A. within 120 days after the SEC 
declares your registration effective. You may not check box 8 on 
your amendment; since this exemption is available only if you are 
not registered, you may not ``re-rely'' on this exemption. If you 
indicate on that amendment (by checking box 11) that you are not 
eligible to register with the SEC, you also must at that same time 
file a Form ADV-W to withdraw your SEC registration.
    g. Item 2.A(9): Multi-State Adviser. You may check box 9 only if 
you are eligible for the multi-state adviser exemption from the 
prohibition on SEC registration. See SEC rule 203A-2(e). You are 
eligible for this exemption if you are required to register as an 
investment adviser with the securities authorities of 30 or more 
states. If you check box 9, you must complete Section 2.A(9) of 
Schedule D. You must complete Section 2.A(9) of Schedule D in each 
annual updating amendment you submit.
    If you check box 9, you also must:
     Create and maintain a list of the states in which, but 
for this exemption, you would be required to register;
     Update this list each time you submit an annual 
updating amendment in which you continue to represent that you are 
eligible for this exemption; and
     Maintain the list in an easily accessible place for a 
period of not less than five years from each date on which you 
indicate that you are eligible for the exemption.
    If, at the time you file your annual updating amendment, you are 
required to register in less than 25 states and you are not 
otherwise eligible to register with the SEC, you must check box 11 
in Item 2.A. You also must file a Form ADV-W to withdraw your SEC 
registration. See Part 1A Instruction 2.h.
    h. Item 2.A(11): Adviser No Longer Eligible to Remain Registered 
with the SEC. You must check box 11 if:
     You are registered with the SEC;
     You are filing an annual updating amendment to Form ADV 
in which you indicate in response to Item 5.F(2)(c) that you have 
assets under management of less than $25 million; and
     You are not eligible to check any other box (other than 
box 11) in Item 2.A. (and are therefore no longer eligible to remain 
registered with the SEC).
    You must withdraw from SEC registration within 180 days after 
the end of your fiscal year by filing Form ADV-W. Until you file 
your Form ADV-W, you will remain subject to SEC regulation, and you 
also will be subject to regulation in the states in which you 
register. See SEC rule 203A-1(b).

3. Item 3: Form of Organization

    If you are a ``separately identifiable department or division'' 
(SID) of a bank, answer Item 3.A. by checking ``other.'' In the 
space provided, specify that you are a ``SID of'' and indicate the 
form of organization of your bank. Answer Items 3.B. and 3.C. with 
information about your bank.

4. Item 4: Successions

    a. Succession of an SEC-Registered Adviser. If you (1) have 
taken over the business of an investment adviser or (2) have changed 
your structure or legal status (e.g., form of organization or state 
of incorporation), a new organization has been created, which has 
registration obligations under the Advisers Act. There are different 
ways to fulfill these obligations. You may rely on the registration 
provisions discussed in the General Instructions, or you may be able 
to rely on special registration provisions for ``successors'' to 
SEC-registered advisers, which may ease the transition to the 
successor adviser's registration.
    To determine if you may rely on these provisions, review 
``Registration of Successors to Broker-Dealers and Investment 
Advisers,'' Investment Advisers Act Release No. 1357 (Dec. 28, 
1992). If you have taken over an adviser, follow Part 1A Instruction 
4.a(1), Succession by Application. If you have changed your 
structure or legal status, follow Part 1A Instruction 4.a(2), 
Succession by Amendment. If either (1) you are a ``separately 
identifiable department or division'' (SID) of a bank that is 
currently registered as an investment adviser, and you are taking 
over your bank's advisory business; or (2) you are a SID currently 
registered as an investment adviser, and your bank is taking over 
your advisory business, then follow Part 1A Instruction 4.a(1), 
Succession by Application.
    (1) Succession by Application. If you are not registered with 
the SEC as an adviser, and you are acquiring or assuming 
substantially all of the assets and liabilities of the advisory 
business of an SEC-registered adviser, file a new application for 
registration on Form ADV. You will receive new registration numbers. 
You must file the new application within 30 days after the 
succession. On the application, make sure you check ``yes'' to Item 
4 and complete Section 4 of Schedule D.
    Until the SEC declares your new registration effective, you may 
rely on the registration of the adviser you are acquiring, but only 
if the adviser you are acquiring is no longer conducting advisory 
activities. Once your new registration is effective, a Form ADV-W 
must be filed with the SEC to withdraw the registration of the 
acquired adviser.
    (2) Succession by Amendment. If you are a new investment adviser 
formed solely as a result of a change in form of organization, a 
reorganization, or a change in the composition of a partnership, and 
there has been no practical change in control or management, you may 
amend the registration of the registered investment adviser to 
reflect

[[Page 20560]]

these changes rather than file a new application. You will keep the 
same registration numbers, and you should not file a Form ADV-W. On 
your amendment, make sure you check ``yes'' to Item 4 and complete 
Section 4 of Schedule D. You must submit the amendment within 30 
days after the change or reorganization.
    b. Succession of a State-Registered Adviser. If you (1) have 
taken over the business of an investment adviser or (2) have changed 
your structure or legal status (e.g., form of organization or state 
of incorporation), a new organization has been created, which has 
registration obligations under state investment adviser laws. There 
may be different ways to fulfill these obligations. You should 
contact each state in which you are registered to determine that 
state's requirements for successor registration. See Form ADV 
General Instruction 15.

5. Item 5: Information About Your Advisory Business

    a. Newly-Formed Advisers: Several questions in Item 5 that ask 
about your advisory business assume that you have been operating 
your advisory business for some time. Your response to these 
questions should reflect your current advisory business (i.e., at 
the time you file your Form ADV), with the following exceptions:
     Base your response to Item 5.E. on the types of 
compensation you expect to accept;
     Base your response to Item 5.G. on the types of 
advisory services you expect to provide during the next year; and
     Skip Item 5.H.
    b. Item 5.F: Calculating Your Assets Under Management. In 
determining the amount of your assets under management, include the 
securities portfolios for which you provide continuous and regular 
supervisory or management services as of the date of filing this 
Form ADV.
    (1) Securities Portfolios. An account is a securities portfolio 
if at least 50% of the total value of the account consists of 
securities. For purposes of this 50% test, you may treat cash and 
cash equivalents (i.e., bank deposits, certificates of deposit, 
bankers acceptances, and similar bank instruments) as securities. 
You may include securities portfolios that are:
    (a) Your family or proprietary accounts (unless you are a sole 
proprietor, in which case your personal assets must be excluded);
    (b) Accounts for which you receive no compensation for your 
services; and
    (c) Accounts of clients who are not U.S. residents.
    (2) Value of Portfolio. Include the entire value of each 
securities portfolio for which you provide continuous and regular 
supervisory or management services. If you provide continuous and 
regular supervisory or management services for only a portion of a 
securities portfolio, include as assets under management only that 
portion of the securities portfolio for which you provide such 
services. Exclude, for example, the portion of an account:
    (a) Under management by another person; or
    (b) that consists of real estate or businesses whose operations 
you ``manage'' on behalf of a client but not as an investment.
    Do not deduct securities purchased on margin.
    (3) Continuous and Regular Supervisory or Management Services.
    General Criteria. You provide continuous and regular supervisory 
or management services with respect to an account if:
    (a) You have discretionary authority over and provide ongoing 
supervisory or management services with respect to the account; or
    (b) You do not have discretionary authority over the account, 
but you have 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, you are 
responsible for arranging or effecting the purchase or sale.
    Factors. You should consider the following factors in evaluating 
whether you provide continuous and regular supervisory or management 
services to an account.
    (a) Terms of the advisory contract. If you agree in an advisory 
contract to provide ongoing management services, this suggests that 
you provide these services for the account. Other provisions in the 
contract, or your actual management practices, however, may suggest 
otherwise.
    (b) Form of compensation. If you are compensated based on the 
average value of the client's assets you manage over a specified 
period of time, that suggests that you provide continuous and 
regular supervisory or management services for the account. If you 
receive compensation in a manner similar to either of the following, 
that suggests you do not provide continuous and regular supervisory 
or management services for the account --
    (i) You are compensated based upon the time spent with a client 
during a client visit; or
    (ii) You are paid a retainer based on a percentage of assets 
covered by a financial plan.
    (c) Management practices. The extent to which you actively 
manage assets or provide advice bears on whether the services you 
provide are continuous and regular supervisory or management 
services. The fact that you make infrequent trades (e.g., based on a 
``buy and hold'' strategy) does not mean your services are not 
``continuous and regular.''
    Examples. You may provide continuous and regular supervisory or 
management services for an account if you:
    (a) Have discretionary authority to allocate client assets among 
various mutual funds;
    (b) Do not have discretionary authority, but provide the same 
allocation services, and satisfy the criteria set forth in 
Instruction 5.b(3);
    (c) Allocate assets among other managers (a ``manager of 
managers''), and you have discretionary authority to hire and fire 
managers and reallocate assets among them; or
    (d) You are a broker-dealer, and treat the account as a 
brokerage account, but only if you have discretionary authority over 
the account.
    You do not provide continuous and regular supervisory or 
management services for an account if you:
    (a) Provide market timing recommendations (i.e., to buy or 
sell), but have no ongoing management responsibilities;
    (b) Provide only impersonal investment advice (e.g., market 
newsletters);
    (c) Make an initial asset allocation, without continuous and 
regular monitoring and reallocation; or
    (d) Provide advice on an intermittent or periodic basis (such as 
upon client request, in response to a market event, or on a specific 
date (e.g., the account is reviewed and adjusted quarterly)).
    (4) Value of Assets Under Management. Determine your assets 
under management based on the current market value of the assets as 
determined within 90 days prior to the date of filing this Form ADV. 
Determine market value using the same method you used to report 
account values to clients or to calculate fees for investment 
advisory services.
    (5) Example. This is an example of the method of determining 
whether a client account may be included as assets under management.
    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.)
   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 you have 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 5.b(1)).
    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 5.b(3)).
    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 
adviser's total assets under management.

6. Item 10: Control Persons

    If you are a ``separately identifiable department or division'' 
(SID) of a bank, identify on Schedule A your bank's executive 
officers who are directly engaged in managing, directing, or 
supervising your investment advisory activities, and list any other 
persons designated by your bank's board of directors as responsible 
for the day-to-day conduct of your investment advisory activities, 
including supervising employees performing investment advisory 
activities.

[[Page 20561]]

Form ADV (Paper Version): Uniform Application for Investment Adviser 
Registration

Form ADV: Instructions for Part 1B

    These instructions explain how to complete certain items in Part 
1B of Form ADV.

1. Item 2.B: Bond Information

    Your home state may require you to maintain a bond. For example, 
a bond may be required if you have custody of or discretionary 
authority over your client's funds or securities. A bond also may be 
required if your home state requires you to maintain a minimum net 
worth and you do not have that net worth. For additional information 
concerning bond requirements, you should consult your home state's 
investment adviser laws or contact your home state's securities 
authority. See Form ADV General Instruction 15.

2. Item 2.H: Financial Planning Services

    Item 2.H. asks about financial planning services you have 
provided to your clients. This question assumes that you have been 
providing financial planning services for some time. Your response 
to this question should reflect your current advisory business 
(i.e., at the time you file your Form ADV). If you are a newly-
formed adviser, skip Item 2.H.

3. Item 2.I: Custody

    Item 2.I. asks about practices that you engage in that may 
indicate whether you have custody of client's funds or securities. 
This question assumes that you have been operating your advisory 
business for some time. Your response to this question should 
reflect you current advisory business (i.e., at the time you file 
your Form ADV). If you are a newly-formed adviser, base your 
response to Item 2.I. on the way you expect to conduct your business 
during the next year.

Glossary of Terms

    1. Advisory Affiliate: Your advisory affiliates are (1) all of 
your officers, partners, or directors (or any person performing 
similar functions); (2) all persons directly or indirectly 
controlling or controlled by you; (3) all of your current employees 
(other than clerical or administrative employees); and (4) any 
person who solicits on your behalf.
    If you are a ``separately identifiable department or division'' 
(SID) of a bank, your advisory affiliates are: (1) all of your 
bank's employees who perform your investment advisory activities 
(other than clerical or administrative employees); (2) all persons 
designated by your bank's board of directors as responsible for the 
day-to-day conduct of your investment advisory activities (including 
supervising the employees who perform investment advisory 
activities); (3) all persons who directly or indirectly control your 
bank, and all persons whom you control in connection with your 
investment advisory activities; and (4) all other persons who 
directly manage any of your investment advisory activities 
(including directing, supervising or performing your advisory 
activities), all persons who directly or indirectly control those 
management functions, and all persons whom you control in connection 
with those management functions. [Used in: Part 1A, Item 11] 
[Substantively the same as Part I, Item 11 of current Form ADV]
    2. Annual Updating Amendment: Within 90 days after your firm's 
fiscal year end, your firm must file an ``annual updating 
amendment,'' which is an amendment to your firm's Form ADV that 
reaffirms the eligibility information contained in Item 2 of Part 1A 
and updates the responses to any other item for which the 
information is no longer accurate. [Used in: General Instructions, 
Part 1A Instructions, Part 2A Instructions, Part 2B Instructions, 
Part 1A (introductory text)] [Derived from current rule 204-1, 
Schedule I to Form ADV]
    3. Brochure: A written disclosure statement that your firm is 
required to provide to clients and prospective clients. See Advisers 
Act rule 204-3; Form ADV, Part 2A. [Used in: General Instructions, 
Part 1A Instructions, Part 2A Instructions, Part 2B Instructions; 
Used throughout Parts 2A, 2A Appendix 1, Part 2B] [Derived from rule 
204-3(a)]
    4. Charged: Being accused of a crime in a formal complaint, 
information, or indictment (or equivalent formal charge). [Used in: 
Part 1A, Item 11; DRPs] [Same as the Instructions for Form BD, Item 
4(3)]
    5. Client: Any of your firm's investment advisory clients. This 
term includes clients from which your firm receives no compensation, 
such as members of your family. If your firm also provides other 
services (e.g., accounting services), this term does not include 
clients that are not investment advisory clients. [Used throughout 
Form ADV and Form ADV-W] [Derived from Item 5 of the Instructions to 
current Form ADV]
    6. Control: Control means the power, directly or indirectly, to 
direct the management or policies of a person, whether through 
ownership of securities, by contract, or otherwise.
     Each of your firm's officers, partners, or directors 
exercising executive responsibility (or persons having similar 
status or functions) are presumed to control your firm.
     A person is presumed to control a corporation if the 
person: (i) directly or indirectly has the right to vote 25 percent 
or more of a class of the corporation's voting securities; or (ii) 
has the power to sell or direct the sale of 25 percent or more of a 
class of the corporation's voting securities.
     A person is presumed to control a partnership if the 
person has the right to receive upon dissolution, or has 
contributed, 25 percent or more of the capital of the partnership.
     A person is presumed to control a limited liability 
company (``LLC'') if the person: (i) directly or indirectly has the 
right to vote 25 percent or more of a class of the interests of the 
LLC; (ii) has the right to receive upon dissolution, or has 
contributed, 25 percent or more of the capital of the LLC; or (iii) 
is an elected manager of the LLC.
     A person is presumed to control a trust if the person 
is a trustee or managing agent of the trust.
    [Used in: General Instructions, Part 1A Instructions; Part 1A, 
Items 2A, 7, 10, 11, 12; Schedules A, B, C, D; Regulatory DRP] 
[Substantively the same as Advisers Act rule 0-7(b)(1), Item 5 of 
the Instructions to current Form ADV]
    7. Custody: Your firm has custody if it directly or indirectly 
holds client funds or securities, has any authority to obtain 
possession of them, or has the ability to appropriate them. Your 
firm has custody, for example, if it has a general power of attorney 
over a client's account or signatory power over a client's checking 
account. See Advisers Act rule 206(4)-2. [Used in: Part 1A, Item 9; 
Part 1B Instructions; Part 2A, Items 14, 18] [Substantively the same 
as Item 5 of the Instructions to current Form ADV]
    8. Discretionary Authority: Your firm has discretionary 
authority if it has the authority to decide which securities to 
purchase and sell for the client. Your firm also has discretionary 
authority if it has the authority to decide which investment 
advisers to retain on behalf of the client. [Used in: Part 1A, Item 
8; Part 2A, Items 15, 18; Part 2B Instructions] [Derived from 
section 3(a)(35) of the Securities Exchange Act of 1934 (``Exchange 
Act'') (definition of ``investment discretion'')]
    9. Enjoined: This term includes being subject to a mandatory 
injunction, prohibitory injunction, preliminary injunction, or a 
temporary restraining order. [Used in: Part 1A, Item 11; DRPs] [Same 
as Item 4(3) of the Instructions to Form BD]
    10. Felony: For jurisdictions that do not differentiate between 
a felony and a misdemeanor, a felony is an offense punishable by a 
sentence of at least one year imprisonment and/or a fine of at least 
$1,000. The term also includes a general court martial. [Used in: 
Part 1A, Item 11; Part 2A, Item 8; Part 2B, Item 3; DRPs] [Same as 
Item 4(3) of the Instructions to Form BD]
    11. Foreign Financial Regulatory Authority: This term includes 
(1) a foreign securities authority; (2) another governmental body or 
foreign equivalent of a self-regulatory organization empowered by a 
foreign government to administer or enforce its laws relating to the 
regulation of investment-related activities; and (3) a foreign 
membership organization, a function of which is to regulate the 
participation of its members in the activities listed above. [Used 
in: Part 1A, Items 1, 11; Part 2A, Item 8; Part 2B, Items 3 and 8; 
DRPs] [Substantively the same as Advisers Act section 202(a)(24)]
    12. Found: This term includes adverse final actions, including 
consent decrees in which the respondent has neither admitted nor 
denied the findings, but does not include agreements, deficiency 
letters, examination reports, memoranda of understanding, letters of 
caution, admonishments, and similar informal resolutions of matters. 
[Used in: Part 1A, Item 11; Part 1B, Item 2; Part 2A, Items 8 and 
20; Part 2B, Item 3] [Same as Item 4(3) of the Instructions to Form 
BD; Substantively the same as Advisers Act rule 206(4)-4(d)(2)]
    13. Government Entity: Any state or political subdivision of a 
state, including (i) any agency, authority, or instrumentality of 
the state or political subdivision; (ii) a plan or pool of assets 
controlled by the state or political subdivision or any agency, 
authority or instrumentality thereof; and (iii) any

[[Page 20562]]

officer, agent, or employee of the state or political subdivision or 
any agency, authority or instrumentality thereof, acting in their 
official capacity. [Used in: Part 1A, Item 5D] [Same as proposed 
Advisers Act rule 206(4)-5(e)(3)]
    14. High Net Worth Individual: An individual with at least 
$750,000 managed by you, or whose net worth your firm reasonably 
believes exceeds $1,500,000, or who is a ``qualified purchaser'' as 
defined in section 2(a)(51)(A) of the Investment Company Act of 
1940. The net worth of an individual may include assets held jointly 
with his or her spouse. [Used in: Part 1A, Item 5D] [Substantively 
the same as Advisers Act rule 205-3(d)(1) (definition of ``qualified 
client'')]
    15. Home State: If your firm is registered with a state 
securities authority, your firm's ``home state'' is the state where 
it maintains its principal office and place of business. [Used in: 
Part 1B] [Substantively the same as Advisers Act rule 203A-3(c) 
(definition of ``principal office and place of business'')]
    16. Impersonal Investment Advice: Investment advisory services 
that do not purport to meet the objectives or needs of specific 
individuals or accounts. [Used in: Part 2A, Instructions; Part 2B, 
Instructions] [Substantively the same as Advisers Act rule 203A-
3(a)(3)(ii)]
    17. Investment Adviser Representative: Investment adviser 
representatives of SEC-registered advisers are subject to state 
registration in each state in which they have a place of business. 
Any of your firm's supervised persons (except those that provide 
only impersonal investment advice) is an investment adviser 
representative, if--
     the supervised person regularly solicits, meets with, 
or otherwise communicates with your firm's clients,
     the supervised person has more than five clients who 
are natural persons and not high net worth individuals, and
     more than ten percent of the supervised person's 
clients are natural persons and not high net worth individuals.

    Note: If your firm is registered with the state securities 
authorities and not the SEC, your firm may be subject to a different 
state definition of ``investment adviser representative.''

    [Used in: Part 2, General Instructions; Part 2A, Item 13] 
[Substantively the same as Advisers Act rule 203A-3(a); the IARD 
``help'' function will include examples from Advisers Act Release 
No. 1733] \1\
---------------------------------------------------------------------------

    \1\ Exemption for Investment Advisers Operating in Multiple 
States; Revisions to Rules Implementing Amendments to the Investment 
Advisers Act of 1940; Investment Advisers with Principal Officers 
and Places of Business in Colorado or Iowa, Investment Advisers Act 
Release No. 1733 (July 17, 1998) [63 FR 39708 (July 24, 1998)].
---------------------------------------------------------------------------

    18. Investment-Related: Activities that pertain to securities, 
commodities, banking, insurance, or real estate (including, but not 
limited to, acting as or being associated with an investment 
adviser, broker-dealer, municipal securities dealer, government 
securities broker or dealer, issuer, investment company, futures 
sponsor, bank, or savings association). [Used in: Part 1A, Item 11; 
Part 2A, Items 8 and 20; Part 2B, Items 3 and 8; DRPs] [Same as Item 
4(3) of the Instructions to Form BD; Substantively the same as 
Advisers Act rule 206(4)-4(d)(3) and Part I, Item 11 of current Form 
ADV]
    19. Involved: Engaging in any act or omission, aiding, abetting, 
counseling, commanding, inducing, conspiring with or failing 
reasonably to supervise another in doing an act. [Used in: Part 1A, 
Item 11; Part 2A, Items 8 and 20; Part 2B, Items 3 and 8] [Same as 
Item 4(3) of the Instructions to Form BD; Substantively the same as 
Advisers Act rule 206(4)-4(d)(4) and Part I, Item 11 of current Form 
ADV]
    20. Management Persons: Anyone with the power to exercise, 
directly or indirectly, a controlling influence over your firm's 
management or policies, or to determine the general investment 
advice given to the clients of your firm.
    Generally, all of the following are management persons:
     Your firm's principal executive officers, such as your 
chief executive officer, chief financial officer, chief operations 
officer, chief legal officer, and chief compliance officer; your 
directors, general partners, or trustees; and other individuals with 
similar status or performing similar functions;
     The members of your firm's investment committee or 
group that determines general investment advice to be given to 
clients; and
     If your firm does not have an investment committee or 
group, the individuals who determine general investment advice 
provided to clients (if there are more than five people, you may 
limit your firm's response to their supervisors).
    [Used in: Part 1B, Item 2; Part 2A, Items 8, 9, 20] [Derived 
from Advisers Act rule 206(4)-4(d)(1)]
    21. Managing Agent: A managing agent of an investment adviser is 
any person, including a trustee, who directs or manages (or who 
participates in directing or managing) the affairs of any 
unincorporated organization or association that is not a 
partnership. [Used in: Form ADV-NR] [Substantively the same as 
Advisers Act rule 0-2(d)(2)]
    22. Minor Rule Violation: A violation of a self-regulatory 
organization rule that has been designated as ``minor'' pursuant to 
a plan approved by the SEC. A rule violation may be designated as 
``minor'' under a plan if the sanction imposed consists of a fine of 
$2,500 or less, and if the sanctioned person does not contest the 
fine. (Check with the appropriate self-regulatory organization to 
determine if a particular rule violation has been designated as 
``minor'' for these purposes.) [Used in: Part 1A, Item 11] [Same as 
Item 4(3) of the Instructions to Form BD]
    23. Misdemeanor: For jurisdictions that do not differentiate 
between a felony and a misdemeanor, a misdemeanor is an offense 
punishable by a sentence of less than one year imprisonment and/or a 
fine of less than $1,000. The term also includes a special court 
martial. [Used in: Part 1A, Item 11; DRPs; Part 2A, Item 8; Part 2B, 
Item 3] [Same as Item 4(3) of the Instructions to Form BD]
    24. NASDR CRD or CRD: The Web Central Registration Depository 
(``CRD'') system operated by the National Association of Securities 
Dealers Regulation, Inc. (``NASDR'') for the registration of broker-
dealers and broker-dealer representatives. [Used in: Part 1A, Item 
1; Part 2A, Item 1; Part 2A Appendix 1, Item 1; Part 2B, Item 1; 
Form ADV-W, Item 1] [Derived from Exchange Act rule 15b1-1 (broker-
dealer registration requirements) and rule 1140 of the Membership 
and Registration Rules of the NASD (electronic filing rules)]
    25. Non-Resident: (a) an individual who resides in any place not 
subject to the jurisdiction of the United States; (b) a corporation 
incorporated in and having its principal office and place of 
business in any place not subject to the jurisdiction of the United 
States; and (c) a partnership or other unincorporated organization 
or association that has its principal office and place of business 
in any place not subject to the jurisdiction of the United States. 
[Used in: Execution Page(s); Form ADV-NR] [Substantively the same as 
Advisers Act rule 0-2(d)(3)]
    26. Notice Filing: SEC-registered advisers may have to provide 
state securities authorities with copies of documents that are filed 
with the SEC. These filings are referred to as ``notice filings.'' 
[Used in: Part 1A, Item 2; Part 2, General Instructions; Part 2A 
Appendix 1, Instructions; Execution Page(s); Form ADV-W] [Derived 
from Coordination Act section 307(a)]
    27. Order: A written directive issued pursuant to statutory 
authority and procedures, including an order of denial, exemption, 
suspension, or revocation. Unless included in an order, this term 
does not include special stipulations, undertakings, or agreements 
relating to payments, limitations on activity or other restrictions. 
[Used in: Part 1A, Items 2 and 11; Part 2A, Item 8; Part 2B, Item 3; 
Schedule D; DRPs] [Same as Item 4(3) of the Instructions to Form BD]
    28. Performance-Based Fee: An investment advisory fee based on a 
share of capital gains on, or capital appreciation of, client 
assets. A fee that is based upon a percentage of assets that you 
manage is not a performance-based fee. [Used in: Part 1A, Item 5; 
Part 2A, Item 20] [Derived from Advisers Act rule 205-3(a)]
    29. Person: A natural person (an individual) or a company. A 
company includes any partnership, corporation, trust, limited 
liability company (``LLC''), limited liability partnership 
(``LLP''), or other organization. [Used throughout Form ADV and Form 
ADV-W] [Substantively the same as Advisers Act section 202(a)(16) 
(definition of ``person''), section 202(a)(5) (definition of 
``company'') and Item 5 of the Instructions to current Form ADV]
    30. Principal Place of Business or Principal Office and Place of 
Business: Your firm's executive office from which your firm's 
officers, partners, or managers direct, control, and coordinate the 
activities of your firm. [Used in: Part 1A, Items 1 and 2; Schedule 
D; Form ADV-W, Item 1] [Substantively the same as Advisers Act rules 
203A-3(c) and 222-1(b)]
    31. Proceeding: This term includes a formal administrative or 
civil action initiated by a governmental agency, self-regulatory 
organization or foreign financial regulatory authority; a felony 
criminal indictment or information (or equivalent formal charge); or 
a misdemeanor criminal information (or

[[Page 20563]]

equivalent formal charge). This term does not include other civil 
litigation, investigations, or arrests or similar charges effected 
in the absence of a formal criminal indictment or information (or 
equivalent formal charge). [Used in: Part 1A, Item 11; DRPs; Part 
2A, Items 8 and 20; Part 2B, Items 3 and 8] [Same as Item 4(3) of 
the Instructions to Form BD]
    32. Related Person: Any advisory affiliate and any person that 
is under common control with your firm. [Used in: Part 1A, Items 7, 
8, 9; Schedule D; Part 2A, Items 9, 10, 11, 13, 14; Form ADV-W, Item 
3] [Substantively the same as Item 5 of the Instructions to current 
Form ADV]
    33. Self-Regulatory Organization or SRO: Any national securities 
or commodities exchange, registered securities association, or 
registered clearing agency. For example, the Chicago Board of Trade 
(``CBOT''), National Association of Securities Dealers, Inc. 
(``NASD'') and New York Stock Exchange (``NYSE'') are self-
regulatory organizations. [Used in: Part 1A, Item 11; DRPs; Part 1B, 
Item 2; Part 2A, Items 8 and 20; Part 2B, Items 3 and 8] 
[Substantively the same as Advisers Act rule 206(4)-4(d)(5) and Item 
4(1) of the Instructions to Form BD]
    34. Sponsor: A sponsor of a wrap fee program sponsors, 
organizes, or administers the program or selects, or provides advice 
to clients regarding the selection of, other investment advisers in 
the program. [Used in: Part 1A, Item 5; Schedule D; Part 2, General 
Instructions; Part 2A, Item 4; Part 2A Appendix 1, Instructions] 
[Derived from Advisers Act rule 204-3(f)(1)]
    35. State Securities Authority: The securities commission (or 
any agency or office performing like functions) of any state of the 
United States, the District of Columbia, Puerto Rico, the Virgin 
Islands, or any other possession of the United States. [Used 
throughout Form ADV]; [Derived from Advisers Act section 202(a)(19) 
(definition of ``State'') and NSMIA section 307(a)]
    36. Supervised Person: Any of your officers, partners, directors 
(or other persons occupying a similar status or performing similar 
functions), or employees, or any other person who provides 
investment advice on your behalf and is subject to your supervision 
and control. [Used in: Part 2A, Item 5; Part 2B] [Substantively the 
same as Advisers Act section 202(a)(25)]
    37. Wrap Brochure: The written disclosure statement that 
sponsors of wrap fee programs are required to provide to each of 
their wrap fee program clients. [Used in: Part 2, Instructions; Part 
2A, Appendix 1] [Derived from Advisers Act rule 204-3(f)]
    38. Wrap Fee Program: Any advisory program under which a 
specified fee or fees not based directly upon transactions in a 
client's account is charged for investment advisory services (which 
may include portfolio management or advice concerning the selection 
of other investment advisers) and the execution of client 
transactions. [Used in: Part 1, Item 5; Schedule D; Part 2, 
Instructions; Part 2A, Item 4; Part 2A Appendix 1; Part 2B, 
Instructions] [Substantively the same as Advisers Act rule 204-
3(g)(4)]

BILLING CODE 8010-01-P

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BILLING CODE 8010-01-C

[[Page 20607]]

Form ADV (Paper Version): Uniform Application for Investment Adviser 
Registration

Part 2: Uniform Requirements for Investment Adviser Brochure and 
Supplements

General Instructions for Part 2 of Form ADV

    Under SEC and similar state rules, you are required to deliver 
to clients and prospective clients a brochure disclosing material 
information about your firm and its business practices. You also may 
be required to deliver a brochure supplement disclosing material 
information about one or more of your supervised persons. Part 2 of 
Form ADV sets out the minimum required disclosures that your 
brochure (Part 2A for a firm brochure, or Appendix 1 for a wrap fee 
program brochure) and brochure supplements (Part 2B) must contain.
    1. Narrative Format. Part 2 of Form ADV consists of a series of 
items that contain disclosure requirements for preparing your firm's 
brochure and any required supplements. The items require narrative 
responses. You do not have to provide the responses in the same 
order that the items appear, and you should not repeat the items 
themselves in the brochure or the supplements.
    2. Plain English. The items in Part 2 of Form ADV are designed 
to promote effective communication between you and your clients. 
Write your brochure and supplements in plain English, taking into 
consideration your clients' level of financial sophistication. Your 
brochure should be concise and direct. In drafting your brochure and 
brochure supplements, you should: (a) use short sentences; (b) use 
definite, concrete, everyday words; (c) use active voice; (d) use 
tables or bullet lists for complex material, whenever possible; (e) 
avoid legal jargon or highly technical business terms unless you 
explain them or you believe your clients will understand them; and 
(f) avoid multiple negatives. Consider providing examples to 
illustrate a description of your practices or policies.

    Note: The SEC's Office of Investor Education and Assistance has 
published A Plain English Handbook. You may find this handbook 
helpful in writing your brochure and supplements. You can get a copy 
of this handbook from the SEC's web site at www.sec.gov/news/handbook.htm, or by calling 1-800-SEC-0330.

    3. Full Disclosure of All Conflicts of Interest. Under federal 
and state law, you are a fiduciary required to make full disclosure 
to your clients of all material facts regarding conflicts of 
interest between you and your client. You therefore may have to 
disclose to clients information not specifically required by Part 2 
of Form ADV.
    4. Full and Truthful Disclosure. All information in your 
brochure and brochure supplements must be true and complete. It is 
unlawful under federal and state law to make false statements or 
omit any material facts.
    5. Filing. You must file your brochure with your regulators as 
part of your Form ADV. You will file your brochure with your Form 
ADV on the IARD system, starting when the IARD system is capable of 
accepting these filings. Until then:
     If you are registered or registering with the SEC, you 
will preserve a copy of your brochure and make it available, upon 
request, to SEC staff--your brochure will be deemed filed with the 
SEC. See SEC rules 203-1, 204-1, and 204-2(a)(14). If you submit 
notice filings to states, the state securities authorities require 
you to send them paper copies of your brochure until the IARD system 
is capable of accepting these filings. You are not required to file 
your brochure supplements, but record-keeping rules require you to 
preserve a copy of the supplements and make them available to SEC 
staff. See SEC rule 204-2(a)(14).
     If you are registered or registering with one or more 
of the state securities authorities, you will file with the 
securities authority for each state in which you are registered or 
registering a paper copy of your brochure and a paper copy of the 
brochure supplement for each supervised person and each investment 
adviser representative doing business in that state.

Instructions for Part 2A of Form ADV: Preparing Your Firm Brochure

    1. To whom must we offer or deliver a firm brochure, and when? 
You must give a firm brochure to each client before or at the time 
you enter into an advisory agreement with that client. You must 
deliver the brochure even if your advisory agreement with the client 
is oral. See SEC rule 204-3(b)(1) and similar state rules.
    You must deliver or offer each client a free update of the 
brochure each year. If a client accepts your offer, you must send 
the brochure to the client within seven days after you are notified. 
See SEC rule 204-3(b)(2) and similar state rules.
    For SEC-registered advisers: You are not required to deliver, or 
offer, your brochure to either (1) clients who receive only 
impersonal investment advice from you and will pay you less than 
$500 per year or (2) clients that are SEC-registered investment 
companies (the client must be registered under the Investment 
Company Act of 1940, and the advisory contract must meet 
requirements of section 15(c) of that Act). See SEC rule 204-3(c).

    Note: Even if you are not required to give a brochure to a 
client, you still have an affirmative obligation under the anti-
fraud provisions of federal and state law to disclose to your 
clients all material facts regarding conflicts of interest between 
you and your clients, including all material disciplinary 
information.

    2. How should we offer and deliver our brochure and updates? Can 
we offer them orally? Electronically? Your annual offer to your 
clients of an updated brochure must be in writing. You may offer and 
deliver your brochure using electronic media. The SEC has published 
interpretive guidelines on delivering documents electronically--you 
can find these at www.sec.gov/rules/concept/33-7288.txt.
    3. We advise limited partnerships, limited liability companies, 
and trusts. To whom must we offer or deliver our brochure? It 
depends. If you are an SEC-registered adviser, you should determine 
whether the ``registered investment company exception'' in 
instruction 1 applies. If it does not apply, and you are the general 
partner of a limited partnership, the manager of a limited liability 
company, or the trustee of a trust, then you must treat each limited 
partner, member, or beneficial owner as a client for purposes of 
delivering your brochure and brochure supplements. You should treat 
a limited liability partnership or limited liability limited 
partnership as a limited partnership. See SEC rule 204-3(d).
    4. We are an SEC-registered adviser and we have determined that 
we have no clients to whom we must offer or deliver a brochure. Must 
we prepare one? No.
    5. We offer several advisory services. May we prepare multiple 
firm brochures? Yes. If you offer substantially different types of 
advisory services, you may opt to prepare separate brochures so long 
as each client receives all applicable information about services 
and fees. Each brochure may omit information that does not apply to 
the advisory services and fees it describes. For example, your firm 
brochure that describes one advisory service can omit the fee 
schedule for a different advisory service that is not discussed in 
the brochure.
    6. We sponsor a wrap fee program. Is there a different brochure 
we need to offer and deliver to our wrap fee clients? Yes. If you 
sponsor a wrap fee program, you must offer and deliver a wrap fee 
program brochure to your wrap fee clients. The disclosure 
requirements for preparing a wrap fee program brochure (also called 
a wrap brochure) appear in Part 2A Appendix 1 of Form ADV. If your 
entire advisory business is sponsoring wrap fee programs, you do not 
need to prepare a firm brochure separate from your wrap brochure(s). 
See SEC rule 204-3(e).
    7. May we include information not required by an item in our 
brochure? Yes. If you include information not required by an item, 
however, you may not include so much additional information that the 
required information is obscured.
    8. What if information in our brochure changes? If any 
information in your brochure becomes materially inaccurate, you must 
promptly amend your brochure by either revising and re-distributing 
your brochure or preparing a sticker to accompany the old brochure, 
as described below.
    (a) Filing the brochure amendment with regulators.
     If you are registered with the SEC, you must preserve a 
copy of the revised brochure or the sticker, and make the revised 
brochure (and all stickers) available to SEC staff--your brochure 
and stickers will be deemed filed with the SEC. State laws require 
you to file paper copies of all brochure amendments with the state 
securities authorities to which you make notice filings.
     If you are registered with the state securities 
authorities, you must file all brochure amendments with the state 
securities authorities with which you are registered.
    (b) Delivering the amendment to clients. You must deliver the 
new information to your clients promptly after the date of the

[[Page 20608]]

amendment. To deliver the new information, you can either revise and 
reprint your brochure or prepare a sticker. Each sticker must 
explain which information became inaccurate and provide the updated 
information and the date of the sticker.
    Use only your revised brochure (or accompany your brochure with 
the stickers) to satisfy your brochure delivery requirements (rule 
204-3). In addition, you must promptly deliver the sticker (or 
revised brochure) to all existing clients. You may use a sticker for 
any brochure amendment (except an annual updating amendment), so 
long as the brochure remains readable and clear.

    Note: We will notify you when the IARD begins to accept Part 2A, 
and you will have a grace period before you are required to file 
your firmbrochure with the IARD.

    9. Must we revise our brochure every year? Yes. When you file 
the annual updating amendment to your Form ADV, you must include a 
revised brochure. You must also reprint this revised brochure, 
incorporating all current stickers into the brochure text.
    10. We are a new firm. Do we need a brochure? Yes. Respond to 
items in Part 2A of Form ADV based on the advisory services you 
propose to provide and the policies and practices you propose to 
adopt.
    11. We are a ``separately identifiable department or division'' 
(SID) of a bank. Must our brochure discuss our bank's general 
business practices? No. Information you include in your firm 
brochure (or in brochure supplements) should be information about 
you, the SID, and your business practices, rather than general 
information about your bank.

Part 2A of Form ADV: Firm Brochure

Item 1  Cover Page

    A. The cover page of your brochure must state your name, 
business address, telephone number, and the date of the brochure.

    Note: If you primarily conduct advisory business under a name 
different from your full legal name, and you have disclosed your 
business name in Item 1.B. of Part 1A of Form ADV, then you may use 
your business name throughout your brochure.

    B. Display the following statements prominently on your cover 
page:
    This brochure provides information about the qualifications and 
business practices of [your name]. Please contact [name and/or title 
of contact person] if you have any questions about the contents of 
this brochure. The information in this brochure has not been 
approved or verified by the United States Securities and Exchange 
Commission or by any State securities authority.
    Additional information about [your name] is available on the 
Internet at [site name to be determined]. You can search this site 
by a unique identifying number, known as a CRD number. The CRD 
number for [your name] is [your CRD number].
    C. If you refer to yourself as a ``registered investment 
adviser'' or describe yourself as being ``registered,'' include a 
statement that registration does not imply a certain level of skill 
or training.

Item 2  Material Changes

    If your brochure contains material changes from its last annual 
update, summarize those changes. Include the summary on, or 
immediately following, the cover page of the brochure or in a 
separate letter accompanying the brochure. The summary must state 
clearly that it discusses only material changes since the last 
annual update of your brochure, and it must provide the date of the 
last annual update of your brochure.

    Note: You do not have to provide the summary to a client or 
prospective client who has not received a previous version of your 
brochure.

Item 3  Table of Contents

    Provide a table of contents to your brochure.

    Note: Your table of contents must be detailed enough so that 
your clients can locate topics easily.

Item 4  Advisory Business

    A. Describe your advisory firm, including how long you have been 
in business. Identify your principal owner(s).

    Note: (1) For purposes of this item, your principal owners 
include the persons you list as owning 25% or more of your firm on 
Schedule A of Form ADV (Ownership Codes C, D or E). (2) If you are a 
publicly held company without a 25% shareholder, simply disclose 
that you are publicly held. (3) If an individual or company owns 25% 
or more of your firm through subsidiaries, you must identify the 
individual or parent company and intermediate subsidiaries. If you 
are a state-registered adviser, you must identify all intermediate 
subsidiaries. If you are an SEC-registered adviser, you must 
identify intermediate subsidiaries that are publicly held, but not 
other intermediate subsidiaries.

    B. Describe the types of advisory services you offer. If you 
hold yourself out as specializing in a particular type of advisory 
service, such as financial planning or market timing, explain in 
detail the nature of that service. Similarly, if you provide 
investment advice only with respect to limited types of securities, 
explain the type of investment advice you offer, and disclose that 
your advice is limited to those types of investments.
    C. Explain whether and how you tailor your advisory services to 
the individual needs of clients. Explain whether clients may impose 
restrictions on investing in certain securities or types of 
securities.
    D. If you manage client assets, disclose the amount of assets 
you manage on a discretionary basis and the amount of assets you 
manage on a non-discretionary basis. Disclose the date ``as of'' 
which you calculated the amounts.

    Note: In calculating the amount of client assets you manage in 
response to this Item, you do not have to use the method for 
computing assets under management that you used to respond to Item 
5.F. in Part 1A. The amount you disclose may be rounded to the 
nearest $100,000. Your ``as of'' date must not be more than three 
months before the date of your brochure. You do not need to amend 
your brochure between annual updates solely to update the amounts of 
client assets you manage.

    E. If you issue periodicals or periodic reports about 
securities, list the names of the periodicals and briefly describe 
their subject matter.

    Note: You do not need to list or describe a report on an 
individually named security.

    F. If you participate in wrap fee programs by providing 
portfolio management services, (1) disclose the programs offered and 
the names of the sponsors, (2) describe any differences between how 
you manage wrap fee accounts and how you manage other accounts, and 
(3) explain that you receive a portion of the wrap fee.

Item 5  Fees and Compensation

    A. Describe how you are compensated for your advisory services. 
Provide your fee schedule. Disclose whether the fees are negotiable.
    B. Describe whether you deduct fees from clients' assets or bill 
clients for fees incurred. If clients may select either method, 
disclose this fact. Explain how often you bill clients or deduct 
your fees.
    C. Describe any other types of fees or expenses clients may pay 
in connection with your advisory services, such as custodian fees or 
mutual fund expenses. Disclose the amount or range of these fees. 
Disclose that clients will incur brokerage and other transaction 
costs, and direct the reader to the section of your brochure 
discussing brokerage.
    D. If your clients either may or must pay your fees in advance, 
disclose this fact. Explain how a client may obtain a refund of any 
pre-paid fee if the advisory contract is terminated before the end 
of the billing period. Explain how you will determine the amount of 
the refund.
    E. If you or a supervised person accepts compensation for the 
sale of securities or other investment products, including 
distribution or service (``trail'') fees from the sale of mutual 
funds, disclose this fact and respond to Items 5.E.1, 5.E.2., 5.E.3. 
and 5.E.4.
    1. Explain that this practice presents a conflict of interest 
and gives you or the supervised person an incentive to recommend 
investment products based on the compensation received, rather than 
on the client's needs. Describe your internal procedures or controls 
for addressing conflicts that arise, including your procedures for 
disclosing conflicts to clients. If you recommend primarily mutual 
funds, disclose whether you will recommend ``no-load'' funds.
    2. Explain that clients have the option to purchase investment 
products that you recommend through other brokers or agents that are 
not affiliated with you.
    3. If more than 50% of your revenue from advisory clients 
results from commissions and other compensation for the sale of 
investment products you recommend to your clients, including trail 
fees from the sale of mutual funds, disclose that commissions 
provide your primary or, if applicable, your exclusive compensation.
    4. If you charge advisory fees in addition to commissions, 
disclose whether you reduce

[[Page 20609]]

your advisory fees to offset the commissions you accept.

    Note: If you receive commissions in connection with the purchase 
or sale of securities, you should carefully consider the 
applicability of the broker-dealer registration requirements of the 
Securities Exchange Act of 1934.

Item 6  Types of Clients

    Describe the types of clients to whom you generally provide 
investment advice, such as individuals, trusts, investment 
companies, or pension plans. If you have any requirements to open or 
maintain an account, such as a minimum account size, disclose the 
requirements.

Item 7  Methods of Analysis, Investment Strategies and Risk of Loss

    A. Describe the methods of analysis and investment strategies 
you use in formulating investment advice or managing assets. Explain 
that investing in securities involves risk of loss that clients 
should be prepared to bear.
    B. If you primarily use a particular method of analysis or 
strategy, explain the specific risks involved. If the method of 
analysis or strategy involves significant or unusual risks, discuss 
these risks in detail. If your primary strategy involves frequent 
trading of securities, explain how frequent trading can affect 
investment performance, particularly through increased brokerage and 
other transaction costs and taxes.
    C. If you recommend primarily a particular type of security, 
explain the specific risks involved. If the type of security 
involves significant or unusual risks, discuss these risks in 
detail.
    D. Discuss your practices regarding cash balances in client 
accounts, including whether you invest cash balances for temporary 
purposes and, if so, how.

Item 8  Disciplinary Information

    If there are legal or disciplinary events that are material to a 
client's or prospective client's evaluation of your advisory 
business and the integrity of your management, disclose all material 
facts regarding those events. This disclosure is required under 
anti-fraud provisions such as section 206 of the Investment Advisers 
Act of 1940.
    If your advisory firm or a management person has been involved 
in an administrative proceeding before the SEC described in Item 
8.B.2. below, then you must also deliver a copy of the SEC's order 
to your clients if the date of the order is on or after [effective 
date of new Form ADV]. You must deliver copies of the order as if it 
were a sticker to your brochure (that is, the order must accompany 
your brochure to prospective clients, and you must also deliver the 
order to existing clients), for one year following the date of the 
order.
    Items 8.A., 8.B., and 8.C. list specific legal and disciplinary 
events that you must presume are material for this Item. If your 
advisory firm or a management person has been involved in one of 
these events, you must disclose it under this Item for ten years 
following the date of the event, unless (1) the event was resolved 
in your or the management person's favor, or was reversed, suspended 
or vacated, or (2) the event is not material (see Note below). For 
purposes of calculating this ten-year period, the ``date'' of an 
event is the date the final order, judgment, or decree was entered, 
or the date any rights of appeal from preliminary orders, judgments 
or decrees lapsed.
    Items 8.A., 8.B., and 8.C. are not an exclusive list. If your 
advisory firm or a management person has been involved in a legal or 
disciplinary event that is not listed in Items 8.A., 8.B., or 8.C. 
but is material to a client's or prospective client's evaluation of 
your advisory business or the integrity of its management, you must 
disclose the event. Similarly, even if more than ten years have 
passed since the date of the event, you must disclose the event if 
it is so serious that it remains currently material to the client's 
or prospective client's evaluation.
    A. A criminal or civil action in a domestic, foreign or military 
court of competent jurisdiction in which your firm or a management 
person.
    1. was convicted of, or pled guilty or nolo contendere (``no 
contest'') to (a) any felony; (b) a misdemeanor that involved 
investments or an investment-related business, fraud, false 
statements or omissions, wrongful taking of property, bribery, 
perjury, forgery, counterfeiting, or extortion; or (c) a conspiracy 
to commit any of these offenses;
    2. is the named subject of a pending criminal proceeding that 
involves an investment-related business, fraud, false statements or 
omissions, wrongful taking of property, bribery, forgery, 
counterfeiting, extortion, or a conspiracy to commit any of these 
offenses;
    3. was found to have been involved in a violation of an 
investment-related statute or regulation; or
    4. was the subject of any order, judgment, or decree permanently 
or temporarily enjoining, or otherwise limiting, your firm or a 
management person from engaging in any investment-related activity, 
or from violating any investment-related statute, rule, or order.
    B. An administrative proceeding before the SEC, any other 
federal regulatory agency, any state regulatory agency, or any 
foreign financial regulatory authority in which your firm or a 
management person.
    1. was found to have caused an investment-related business to 
lose its authorization to do business; or
    2. was found to have been involved in a violation of an 
investment-related statute or regulation and was the subject of an 
order by the agency or authority
    (a) denying, suspending, or revoking the authorization of your 
firm or a management person to act in an investment-related 
business;
    (b) barring or suspending your firm's or a management person's 
association with an investment-related business;
    (c) otherwise significantly limiting your firm's or a management 
person's investment-related activities; or
    (d) imposing a civil money penalty of more than $2,500 on your 
firm or a management person.
    C. A self-regulatory organization (SRO) proceeding in which your 
firm or a management person.
    1. was found to have caused an investment-related business to 
lose its authorization to do business; or
    2. was found to have been involved in a violation of the SRO's 
rules and was the subject of an order by the SRO barring or 
suspending your firm or a management person from membership or from 
association with other members, or expelling your firm or a 
management person from membership; otherwise significantly limiting 
your firm's or a management person's investment-related activities; 
or fining your firm or a management person more than $2,500.

    Note: Special circumstances may make an event immaterial 
(overcoming the materiality presumption). If an event is immaterial, 
you are not required to disclose it. Your determination, however, is 
not binding on any other person, including any regulator or court. 
When you review a legal or disciplinary event involving your firm or 
a management person for materiality, you should consider all of the 
following factors: (1) the proximity of the person involved in the 
disciplinary event to the advisory function; (2) the nature of the 
infraction that led to the disciplinary event; (3) the severity of 
the disciplinary sanction; and (4) the time elapsed since the date 
of the disciplinary event. If you determine that the materiality 
presumption is overcome, you may be required to keep a file 
memorandum of your determination. See SEC rule 204-2(a)(14)(ii).

Item 9  Other Financial Industry Activities and Affiliations

    A. If you or any of your management persons are registered, or 
have an application pending to register, as a broker-dealer or a 
registered representative of a broker-dealer, disclose this fact.
    B. If you or any of your management persons are registered, or 
have an application pending to register, as a futures commission 
merchant, commodity pool operator, or a commodity trading advisor, 
disclose this fact.
    C. Describe any material relationship or arrangement that you or 
any of your management persons have with any related person listed 
below. Identify the related person and, if the relationship or 
arrangement creates a material conflict of interest with clients, 
describe the nature of the conflict and the restrictions or internal 
procedures you use when there is a conflict of interest, including 
any procedures for disclosing these conflicts to clients.
    1. broker-dealer, municipal securities dealer, or government 
securities dealer or broker.
    2. investment company (including a mutual fund, closed-end 
investment company, unit investment trust, private investment 
company or ``hedge fund,'' and offshore fund).
    3. other investment adviser or financial planner.
    4. futures commission merchant, commodity pool operator, or 
commodity trading advisor.
    5. banking or thrift institution.
    6. accountant or accounting firm.
    7. lawyer or law firm.
    8. insurance company or agency.
    9. pension consultant.

[[Page 20610]]

    10. real estate broker or dealer.
    11. sponsor or syndicator of limited partnerships.
    12. securities exchange, securities association, or alternative 
trading system.
    D. If you recommend or select other investment advisers for your 
clients and you receive compensation directly or indirectly from 
those advisers, or you have other business relationships with those 
advisers, describe these practices and discuss the conflicts of 
interest these practices create.

Item 10  Participation or Interest in Client Transactions and Personal 
Trading

    A. If you or a related person recommends to clients, or buys or 
sells for client accounts, securities in which you or a related 
person has a material financial interest (excluding an interest as a 
shareholder of an SEC-registered, open-end investment company), 
describe your practice and discuss the conflicts of interest it 
presents. Describe your internal procedures or controls for 
addressing conflicts that arise, including your procedures for 
disclosing conflicts to clients. You do not need to repeat any 
information you provided in response to Item 5 of Part 2A.
    Examples: (1) You or a related person, as principal, buys 
securities from (or sells securities to) your clients; (2) you or a 
related person acts as general partner in a partnership in which you 
solicit client investments; or (3) you or a related person acts as 
investment adviser to an investment company that you recommend to 
clients.
    B. If you or a related person invests in the same securities (or 
related securities, e.g., warrants, options or futures) that you or 
a related person recommends to clients, discuss the conflicts of 
interest this presents and the restrictions or internal procedures 
you use when there is a conflict of interest in connection with 
personal trading, including your procedures for disclosing conflicts 
to clients.
    C. If you or a related person recommends securities to clients, 
or buys or sells securities for client accounts, at or about the 
same time that you or a related person buys or sells the same 
securities for your own (or the related person's own) account, 
describe your practice and discuss the conflicts of interest it 
presents. Describe your internal procedures or controls for 
addressing conflicts that arise, including your procedures for 
disclosing conflicts to clients.

    Note: If your firm has a code of ethics, some of the procedures 
you should discuss in response to Item 10 may be part of your code 
of ethics.

Item 11  Brokerage Practices

    A. Describe your policies and practices in selecting or 
recommending broker-dealers for client transactions and determining 
the reasonableness of their compensation (e.g., commissions or 
spreads).
    1. Research and Other Soft Dollar Benefits. If you receive 
research or other products or services other than execution (known 
as soft dollar benefits) from a broker-dealer or a third party in 
connection with client securities transactions, disclose your 
practices and discuss the conflicts of interest they create.

    Note: Your disclosure and discussion must include all soft 
dollar benefits you receive, both proprietary (created or developed 
by the broker-dealer) and created or developed by a third party.

    a. Explain that when you use client brokerage commissions to 
obtain research, products or services, you receive a benefit because 
you do not have to produce or pay for the research, products or 
services.
    b. Disclose that you may have an incentive to select or 
recommend a broker-dealer based on your interest in receiving the 
research, products or services, rather than on your clients' 
interest in paying the lowest commission rate available.
    c. If you may cause clients to pay commissions higher than those 
charged by other broker-dealers in return for soft dollar benefits 
(known as paying-up), disclose this fact.
    d. Disclose whether you use soft dollar benefits to service all 
of your clients' accounts or only those that paid for the benefits. 
Disclose whether you seek to allocate soft dollar benefits to client 
accounts proportionately to the soft dollar credits the accounts 
generate.
    e. Explain the procedures you used during your last fiscal year 
to direct client transactions to a particular broker-dealer in 
return for soft dollar benefits.
    f. Describe the types of products and services you or any of 
your related persons acquired with client brokerage commissions 
within your last fiscal year.

    Note: This description must be specific enough for your clients 
to understand the types of products or services you are acquiring 
and permit them to evaluate possible conflicts of interest. Your 
description must be more detailed for products or services that are 
not used in your investment decision-making process. Merely 
disclosing that you obtain various research reports and products is 
not specific enough.

    2. Brokerage for Client Referrals. If you consider, in selecting 
or recommending broker-dealers, whether you or a related person 
receives client referrals from a broker-dealer or third party, 
disclose this practice and discuss the conflicts of interest it 
creates.
    a. Disclose that you may have an incentive to select or 
recommend a broker-dealer based on your interest in receiving client 
referrals, rather than on your clients' interest in receiving the 
best execution services at the lowest rates available.
    b. Explain any procedures you used during your last fiscal year 
to direct client transactions to a particular broker-dealer in 
return for client referrals.
    3. Directed Brokerage.
    a. If you routinely request or require that a client direct you 
to execute transactions through a specified broker-dealer, describe 
your practice or policy. Explain that not all advisers require their 
clients to direct brokerage. If you and the broker-dealer are 
affiliates or have another economic relationship that creates a 
material conflict of interest, describe the relationship and discuss 
the conflicts of interest it presents. If you must respond to this 
Item, you must also respond to Item 11.A.3.b. of Part 2A.
    b. If you permit a client to direct brokerage, describe your 
practices. Explain that you may be unable to achieve best execution 
of client transactions. Explain that directing brokerage may cost 
clients more money. For example, in a directed brokerage account, 
the client may pay higher brokerage commissions because you may not 
be able to negotiate lower commissions or aggregate orders to reduce 
transaction costs.
    4. Commission Recapture. If you direct any client transactions 
to a broker-dealer that provides commission recapture benefits to 
your client based on the trades you place, explain how commission 
recapture works, describe the benefits of commission recapture and 
explain how a client can elect to participate in commission 
recapture.

    Note: ``Commission recapture'' means a program that permits a 
client, rather than the adviser, to receive benefits (including cash 
rebates, products, services, and expense payments or reimbursements) 
from broker-dealers in connection with that client's securities 
transactions.

    B. Discuss whether and under what conditions you negotiate 
brokerage commissions on behalf of clients. If you do not negotiate 
commissions, or if you limit the extent to which you negotiate 
commissions, explain that this may result in clients paying higher 
brokerage costs than they might otherwise pay.
    C. Discuss whether and under what conditions you aggregate the 
purchase or sale of securities for various client accounts in 
quantities sufficient to obtain reduced transaction costs (known as 
bunching). If you do not bunch orders when you have the opportunity 
to do so, explain your practice and describe the costs to clients of 
not bunching.

Item 12  Review of Accounts

    A. Indicate whether you periodically review client accounts or 
financial plans. If you do, describe the frequency and nature of the 
review, and the titles of the employees who conduct the review.
    B. If you review client accounts on other than a periodic basis, 
describe the factors that trigger a review.
    C. Describe the content and indicate the frequency of regular 
reports you provide to clients regarding their accounts. State 
whether these reports are written.

Item 13  Payment for Client Referrals

    A. If someone who is not a client provides an economic benefit 
to you for providing investment advice or other advisory services to 
your clients, describe the arrangement. For purposes of this Item, 
economic benefits include any sales awards or other prizes. You do 
not need to repeat any information you provided in response to Item 
5 of Part 2A.
    B. If you or a related person directly or indirectly compensates 
any person who is not your employee for client referrals, describe 
the arrangement and the compensation.

    Note: If you compensate any person for client referrals, you 
should consider whether rules regarding solicitation arrangements 
and/or state rules requiring registration of investment adviser 
representatives apply.


[[Page 20611]]



Item 14  Custody

    A. If you have custody of client funds or securities, disclose 
this fact. If you are not a bank, an insurance company, or a broker-
dealer excepted from the requirements of rule 206(4)-2, disclose the 
additional risks that clients will face by having their assets in 
your custody instead of held by an independent custodian.

    Note: You may be deemed to have custody of client funds or 
securities if a related person has custody. If so, your response to 
Item 14.A. should also identify the related person who has custody.

    B. If you require clients to give you custody of their funds or 
securities, disclose that most advisers do not require this.

    Note: You are not required to respond to Item 14.B. if you have 
custody solely because you (1) act as general partner for limited 
partnerships that you advise, (2) serve as trustee for your client 
accounts, or (3) deduct your advisory fees directly from your 
clients' accounts.

    C. If you have custody over any clients' funds or securities, 
disclose what special reports, if any, you provide to those clients.

Item 15  Investment Discretion

    If you accept discretionary authority to manage securities 
accounts on behalf of clients, disclose this fact and describe any 
limitations clients may (or customarily do) place on this authority. 
Describe the procedures you follow before you assume this authority 
(e.g., execution of a power of attorney).

Item 16  Proxy Voting Policies

    A. If you have, or will accept, authority to exercise voting 
power with respect to client securities, disclose the policies, 
practices, and procedures you use to determine how to vote proxies. 
Describe whether (and if so, how) your clients can direct your vote 
in a particular proxy solicitation, and what procedures you use when 
there is a conflict between your interest and those of your clients. 
Explain whether (and, if so, how) clients can find out how you voted 
with respect to their securities in a particular proxy solicitation.
    B. If you do not vote proxies with respect to client securities, 
disclose this fact. Explain whether clients will receive their 
proxies directly from their custodian or a transfer agent or from 
you, and discuss whether (and if so, how) clients can contact you 
with questions about a particular proxy solicitation.

Item 17  Investment Performance

    If you advertise or report the investment performance (such as 
the rate of return) of your managed accounts, securities 
recommendations, or model portfolios, describe any standards you use 
to calculate (or present) this performance, such as industry 
standards or standards used solely by you. Disclose whether any 
third party reviews this performance information to determine or 
verify its accuracy or its compliance with presentation standards; 
if so, name the person conducting the review and briefly describe 
the nature of the review.

Item 18  Financial Information

    A. If you have custody of client funds or securities, or you 
require or solicit prepayment of more than $1,200 in fees per 
client, six months or more in advance, include a balance sheet for 
your most recent fiscal year.
    1. The balance sheet must be prepared in accordance with 
generally accepted accounting principles, audited by an independent 
public accountant, and accompanied by a note stating the principles 
used to prepare it, the basis of securities included, and any other 
explanations required for clarity.
    2. Show parenthetically the market or fair value of securities 
included at cost.
    3. Qualifications and any accompanying independent accountant's 
report must conform to Article 2 of SEC Regulation S-X.

    Note: If you are a sole proprietor, show investment advisory 
business assets and liabilities separate from other business and 
personal assets and liabilities. You may aggregate other business 
and personal assets unless advisory business liabilities exceed 
advisory business assets.


    Note: If you are an SEC-registered adviser and you are a bank, 
an insurance company or a broker-dealer excepted from the 
requirements of SEC rule 206(4)-2, you do not need to provide a 
balance sheet.


    Note: If you have not completed your first fiscal year, include 
a balance sheet dated not more than 90 days prior to the date of 
your brochure.

    B. If you are an SEC-registered adviser and you have 
discretionary authority or custody of client funds or securities, or 
you require or solicit prepayment of more than $1,200 in fees per 
client, six months or more in advance, disclose all of your 
financial conditions that are reasonably likely to impair your 
ability to meet contractual commitments to clients. This disclosure 
is required under anti-fraud provisions such as section 206 of the 
Investment Advisers Act of 1940.
    C. If you have been the subject of a bankruptcy petition at any 
time during the past ten years, disclose that fact.

Item 19  Index

    The brochure you file with the SEC or state securities 
authorities must contain (or be accompanied by) an index of the 
items required by this Part 2A, indicating where in the brochure you 
address each item (e.g., Item 18, page 3). The brochure you provide 
to your clients does not need to include this index.
    If you are registering or registered with one or more state 
securities authorities, you must respond to the following additional 
Item.

Item 20  Requirements for State-Registered Advisers

    A. Identify each of your principal executive officers and 
management persons, and describe their formal education and business 
background. If you have supplied this information elsewhere in your 
Form ADV, you do not need to repeat it in response to this Item.
    B. Describe any business in which you are actively engaged 
(other than giving investment advice) and the approximate amount of 
time spent on that business. If you have supplied this information 
elsewhere in your Form ADV, you do not need to repeat it in response 
to this Item.
    C. In addition to the description of your fees in response to 
Item 5 of Part 2A, if you or a supervised person are compensated for 
advisory services with performance-based fees, disclose this fact, 
and explain how this fee will be calculated. Disclose specifically 
that performance-based compensation may create an incentive for the 
adviser to recommend an investment that may carry a higher degree of 
risk to the client.
    D. In addition to the events listed in Item 8 of Part 2A, if 
your advisory firm or a management person has been involved in one 
of the events listed below, disclose all material facts regarding 
the event.
    1. an award or otherwise being found liable in an arbitration 
claim alleging damages in excess of $2,500, involving any of the 
following:
    (a) an investment or an investment-related business or activity;
    (b) fraud, false statement(s), or omissions;
    (c) theft, embezzlement, or other wrongful taking of property;
    (d) bribery, forgery, counterfeiting, or extortion; or
    (e) dishonest, unfair, or unethical practices.
    2. an award or otherwise being found liable in a civil, self-
regulatory organization, or administrative proceeding involving any 
of the following:
    (a) an investment or an investment-related business or activity;
    (b) fraud, false statement(s), or omissions;
    (c) theft, embezzlement, or other wrongful taking of property;
    (d) bribery, forgery, counterfeiting, or extortion; or
    (e) dishonest, unfair, or unethical practices.
    E. In addition to any relationship or arrangement described in 
response to Item 9.C. of Part 2A, describe any relationship or 
arrangement that you or any of your management persons have with any 
issuer of securities that is not listed in Item 9.C. of Part 2A.
    F. Include a sample copy of each of your advisory contracts that 
you are currently using or that you have used during your most 
recently completed fiscal year.
    G. If you have discretionary authority or custody of client 
funds or securities, or you require or solicit prepayment of more 
than $500 in fees per client, six months or more in advance, 
disclose all of your financial conditions that are reasonably likely 
to impair your ability to meet contractual commitments to clients.

Instructions for Part 2A Appendix 1 of Form ADV: Preparing Your Wrap 
Fee Program Brochure

    1. Who must deliver a wrap fee program brochure, and when? If 
you sponsor a wrap fee program, you must give a wrap brochure to 
each client of the wrap fee program before or at the time the client 
enters into a wrap fee program contract. A wrap brochure takes

[[Page 20612]]

the place of your advisory firm brochure required by Part 2A of Form 
ADV, but only for clients of wrap fee programs that you sponsor. You 
must deliver or offer each wrap fee program client a free update of 
the wrap brochure each year. If a client accepts this offer, you 
must send the wrap brochure to the client within seven days after 
you are notified. See SEC rule 204-3(b) and (e).
    2. How should we offer and deliver our wrap fee program brochure 
and annual updates? Can we offer them orally? Electronically? Your 
annual offer to your clients of an updated wrap fee program brochure 
must be in writing. You may deliver and offer your wrap fee program 
brochure using electronic media. The SEC has published interpretive 
guidelines on delivering documents electronically--you can find 
these at www.sec.gov/rules/concept/33-7288.txt.
    3. Must we also deliver brochure supplements to wrap fee program 
clients? Yes. A wrap brochure does not take the place of any 
supplements required by Part 2B of Form ADV.
    4. What if we sponsor more than one wrap fee program? You may 
prepare a single wrap brochure describing all the wrap fee programs 
you sponsor, or you may prepare separate wrap brochures that 
describe one or more of your wrap fee programs. If you prepare 
separate brochures, each brochure must state that you sponsor other 
wrap fee programs and must explain how the client can obtain 
brochures for the other programs.
    5. Our wrap fee program has multiple sponsors. Must each sponsor 
create and deliver or offer a separate wrap brochure? No. If another 
sponsor creates, and delivers to your wrap fee program clients, a 
wrap brochure that includes all information required in your wrap 
brochure, you do not have to create and deliver or offer a separate 
wrap brochure. See SEC rule 204-3(e)(2).
    6. We provide portfolio management services under a wrap fee 
program that we sponsor. Must we deliver both our wrap brochure and 
our firm brochure to our wrap fee program clients? No, just the wrap 
brochure. If you or your employees provide portfolio management 
services under a wrap fee program that you also sponsor, your wrap 
brochure must describe the investments and investment strategies you 
(or your employees) will use as portfolio managers. This requirement 
appears in Item 6.B. of this Appendix.
    7. We provide other advisory services outside of our wrap fee 
programs. May we combine our wrap brochure into our firm brochure 
for clients receiving these other services? No. Your wrap brochure 
must address only the wrap fee programs you sponsor. See SEC rule 
204-3(e)(1).
    8. What if information in a wrap brochure changes? If any 
information in your brochure becomes materially inaccurate, you must 
promptly amend the wrap brochure by either revising and re-
distributing the wrap brochure or preparing a sticker to accompany 
the old wrap brochure, as described below.
    (a) Filing the wrap brochure amendment with regulators.
     If you are registered with the SEC, you must preserve a 
copy of the revised wrap brochure or the sticker, and make the 
revised wrap brochure (and all stickers) available to SEC staff--
your wrap brochure and stickers will be deemed filed with the SEC. 
State laws require you to file paper copies of all wrap brochure 
amendments with the state securities authorities to which you make 
notice filings.
     If you are registered with the state securities 
authorities, you must file all wrap brochure amendments with the 
state securities authorities with which you are registered.
    (b) Delivering the amendment to clients. You must deliver the 
new information to your clients, promptly after the date of the 
amendment. To deliver the new information, you can either revise and 
reprint your wrap brochure or prepare a sticker. Each sticker must 
explain which information became inaccurate and provide the updated 
information and the date of the sticker.
    Use only your revised wrap brochure (or accompany your wrap 
brochure with the stickers) to satisfy your wrap brochure delivery 
requirements (rule 204-3). In addition, you must promptly deliver 
the sticker (or revised wrap brochure) to all existing clients. You 
may use a sticker for any wrap brochure amendment (except an annual 
updating amendment), so long as the wrap brochure remains readable 
and clear.

    Note:
    We will notify you when the IARD begins to accept Part 2A 
(including Appendix 1), and you will have a grace period before you 
are required to file wrap fee program brochures with the IARD.

    9. Must we revise our wrap brochure every year? Yes. When you 
file the annual updating amendment to your Form ADV, you must 
include a revised wrap brochure. You must also reprint this revised 
wrap brochure, incorporating all current stickers into the wrap 
brochure text.

Part 2A  Appendix 1 of Form ADV: Wrap Fee Program Brochure

Item 1  Cover Page

    A. The cover page of your wrap fee program brochure must state 
your name, business address, telephone number, and the date of the 
wrap brochure.

    Note:
    If you primarily conduct advisory business under a name 
different from your full legal name, and you have disclosed your 
business name in Item 1.B. of Part 1A of Form ADV, then you may use 
your business name throughout your wrap brochure.

    B. Display the following statements prominently on your cover 
page:
    This brochure provides information that you should consider 
before becoming a client of the [name of program or programs]. 
Please contact [name and/or title of contact person] if you have any 
questions about the contents of this brochure. The information in 
this brochure has not been approved or verified by the United States 
Securities and Exchange Commission or by any State securities 
authority.
    Additional information about [your name] is available on the 
Internet at [site name to be determined]. You can search this site 
by a unique identifying number, known as a CRD number. The CRD for 
[your name] is [your CRD number].

Item 2  Material Changes

    If your wrap brochure contains material changes from its last 
annual update, summarize those changes. Include the summary on, or 
immediately following, the cover page of the brochure or in a 
separate letter accompanying the brochure. The summary must clearly 
state that it discusses only material changes since the last annual 
update of the wrap brochure, and must provide the date of the last 
annual update to the wrap brochure.

    Note: You are not required to give the summary to a client or 
prospective client who has not received a previous version of your 
wrap brochure.

Item 3  Table of Contents

    Provide a table of contents to your wrap brochure.

    Note:
    Your table of contents must be detailed enough so that your 
clients can locate topics easily.

Item 4  Services, Fees and Compensation

    A. Describe the services, including the types of portfolio 
management services, provided under each program. Indicate the wrap 
fee charged for each program or, if fees vary according to a 
schedule, provide your fee schedule. Indicate whether fees are 
negotiable and identify the portion of the total fee, or the range 
of fees, paid to portfolio managers.
    B. Explain that the program may cost the client more or less 
than purchasing such services separately and describe the factors 
that bear upon the relative cost of the program, such as the cost of 
the services if provided separately and the trading activity in the 
client's account.
    C. Describe any fees that the client may pay in addition to the 
wrap fee, and describe the circumstances under which clients may pay 
these fees, including, if applicable, mutual fund expenses and mark-
ups, mark-downs, or spreads paid to market makers.
    D. If the person recommending the wrap fee program to the client 
receives compensation as a result of the client's participation in 
the program, disclose this fact. Explain that the amount of this 
compensation may be more than what the person would receive if the 
client participated in your other programs or paid separately for 
investment advice, brokerage, and other services. Explain that the 
person, therefore, may have a financial incentive to recommend the 
wrap fee program over other programs or services.

Item 5  Account Requirements and Types of Clients

    If a wrap fee program imposes any requirements to open or 
maintain an account, such as a minimum account size, disclose these 
requirements. If there is a minimum amount for assets placed with 
each portfolio manager as well as a minimum account size for 
participation in the wrap fee program, disclose and explain these 
requirements. To the extent applicable to your wrap fee program 
clients, describe the types of clients to whom you generally provide 
investment advice, such as individuals, trusts, investment 
companies, or pension plans.

[[Page 20613]]

Item 6  Portfolio Manager Selection and Evaluation

    A. Describe how you select and review portfolio managers, your 
basis for recommending or selecting portfolio managers for 
particular clients, and your criteria for replacing or recommending 
the replacement of portfolio managers for the program and for 
particular clients.
    1. Describe any standards you use to calculate portfolio manager 
performance, such as industry standards or standards used solely by 
you.
    2. Indicate whether you review, or whether any third party 
reviews, performance information to determine or verify its accuracy 
or its compliance with presentation standards. If so, briefly 
describe the nature of the review and the name of any third party 
conducting the review.
    3. If applicable, explain that neither you nor a third party 
reviews portfolio manager performance information, and/or that 
performance information may not be calculated on a uniform and 
consistent basis.
    B. If you, or any of your employees covered under your 
investment adviser registration, acts as portfolio manager for a 
wrap fee program described in the wrap brochure, respond to Items 
7.A. (Methods of Analysis, Investment Strategies and Risk of Loss) 
and 16 (Proxy Voting Policies) of Part 2A of Form ADV.

Item 7  Client Information Provided to Portfolio Managers

    Describe the information about clients that you communicate to 
the clients' portfolio managers, and how often or under what 
circumstances you provide updated information.

Item 8  Client Contact with Portfolio Managers

    Explain any restrictions placed on clients' ability to contact 
and consult with their portfolio managers.

Item 9  Additional Information

    A. Respond to Item 8 (Disciplinary Information) and Item 9 
(Other Financial Industry Activities and Affiliations) of Part 2A of 
Form ADV.
    B. Respond to Items 10 (Participation or Interest in Client 
Transactions and Personal Trading), 12 (Review of Accounts), 13 
(Payment for Client Referrals), and 18 (Financial Information) of 
Part 2A of Form ADV, as applicable to your wrap fee clients.

Item 10  Index

    The wrap brochure you file with the SEC or state securities 
authorities must contain (or be accompanied by) an index of the 
items required by this Appendix, indicating where in the wrap 
brochure you address each item. The wrap brochure you provide to 
your clients does not need to include this index.
    If you are registering or registered with one or more state 
securities authorities, you must respond to the following additional 
Item.

Item 11  Requirements for State-Registered Advisers

    Respond to Items 20.D. and 20.F. of Part 2A of Form ADV.

Part 2B of Form ADV: Instructions for Preparing a Brochure Supplement

    1. For which supervised persons must we prepare a brochure 
supplement? Generally, you must prepare a brochure supplement for 
each supervised person who will provide advisory services to 
clients. You should begin, however, by determining whether you are 
required to deliver or offer the brochure supplement for a 
particular supervised person to any client. If you have no client to 
whom you must deliver or offer the brochure supplement for a 
particular supervised person, then that supervised person does not 
need a supplement.
    As a general rule:
     You must prepare a supplement for each supervised 
person who on a regular basis communicates investment advice to a 
client.
     You must also prepare a supplement for each supervised 
person who formulates advice for a client even if the supervised 
person has no client contact. However, you do not have to prepare a 
supplement for a supervised person who has no client contact and 
determines investment advice only as part of a committee.
     If your firm has discretionary authority over client 
assets, you must also prepare a supplement for each supervised 
person who makes discretionary investment decisions for client 
assets even if the supervised person has no client contact.
    2. To whom must we offer or deliver supplements, and when? 
First, determine whether you are required to deliver a firm brochure 
(or wrap fee program brochure) to your client; if not, then you are 
not required to deliver any brochure supplements to that client, 
either. See SEC rule 204-3(c).
    If you are required to deliver a firm brochure (or wrap 
brochure) to a client, however, then you must also give that client 
the brochure supplement for a supervised person before or at the 
time the supervised person begins to provide advisory services to 
that client. You must deliver or offer a free update of the 
supplement each year. If a client accepts this offer, you must send 
the supplement to the client within seven days after you are 
notified. See SEC rule 204-3(b).
    A supervised person will provide advisory services to a client 
if he or she (a) will regularly communicate investment advice to 
that client, (b) will formulate investment advice for assets of that 
client, or (c) will make discretionary investment decisions for 
assets of that client. See SEC rule 204-3(b)(1)(B). You may have a 
supervised person deliver his or her own supplement on your behalf, 
but your firm remains responsible for seeing that the delivery is 
made.
    3. How should we offer and deliver supplements and updates? Can 
we offer them orally? Electronically? Your annual offer to your 
clients of updated supplements must be in writing. You may deliver 
and offer supplements using electronic media. The SEC has published 
interpretive guidelines on delivering documents electronically--you 
can find these at www.sec.gov/rules/concept/33-7288.txt.
    4. Some of our clients receive only impersonal investment advice 
from us. Must we deliver or offer supplements to them? No. You are 
not required to deliver a brochure supplement to clients who receive 
only impersonal investment advice from you. See SEC rule 204-
3(c)(2).
    5. Must brochure supplements be separate documents? No. If your 
firm brochure includes all the information required in a brochure 
supplement, you do not need a separate supplement. Smaller firms 
with just a few supervised persons may find it easier to include all 
supplement information in their firm brochure, while larger firms 
may prefer to use a firm brochure and separate supplements.
    If your firm brochure includes some (but not all) supplement 
information about a supervised person, the supplement can refer the 
reader to the appropriate section(s) of your firm brochure instead 
of repeating the information.
    You may prepare supplements for groups of supervised persons. A 
group supplement, or a firm brochure presenting supplement 
information about supervised persons, must present information in a 
separate section for each supervised person.
    6. May we include information not required by an item in our 
brochure? Yes. If you include information not required by an item, 
however, you may not include so much additional information that the 
required information is obscured.
    7. What if information in a brochure supplement changes? If any 
information in a brochure supplement becomes materially inaccurate, 
you must promptly amend the supplement by either revising and re-
distributing the supplement or preparing a sticker to accompany the 
old supplement, as described below.
    (a) Filing the supplement amendment with regulators.
     If you are registered with the SEC, you are not 
required to file the revised supplement or sticker. However, record-
keeping rules require you to preserve a copy of the revised 
supplement or the sticker, and make the revised supplement (and all 
stickers) available to SEC staff.
     If you are registered with the state securities 
authorities, you must file all supplement amendments with the state 
securities authorities with which you are registered.
    (b) Delivering the amendment to clients. You must deliver the 
new information to all clients for whom the supervised person 
provides advisory services, promptly after the date of the 
amendment. To deliver the new information, you can either revise and 
reprint the supplement or prepare a sticker. Each sticker must 
explain which information became inaccurate and provide the updated 
information and the date of the sticker.
    Use only the revised supplement (or accompany the old supplement 
with the stickers) to satisfy your brochure and supplement delivery 
requirements (rule 204-3). In addition, you must promptly deliver 
the sticker (or revised supplement) to all existing clients for whom 
the supervised person provides advisory services. You may use a 
sticker for any brochure amendment (except an annual updating 
amendment), so long as the brochure remains readable and clear.
    8. Must we revise a supplement every year? Yes. When you make 
your annual updating

[[Page 20614]]

amendment to your Form ADV, you must revise your brochure 
supplements and reprint them, incorporating all current stickers 
into the text.

Part 2B of Form ADV: Brochure Supplement

Item 1  Cover Page

    A. Include the following on the cover page of the supplement.
    1. The supervised person's name, business address and telephone 
number (if different from yours).
    2. Your firm's name, business address and telephone number. If 
your firm brochure uses a business name for your firm, use the same 
business name for the firm in the supplement.
    3. The date of the supplement.
    B. Display the following statements prominently on the cover 
page of the supplement:
    This supplement provides information about [name of supervised 
person] that supplements the [name of advisory firm] brochure. You 
should have received a copy of that brochure. Please contact [name 
and/or title of your contact person] if you did not receive [name of 
advisory firm]'s brochure or if you have any questions about the 
contents of this supplement.
    Additional information about [name of supervised person] is 
available on the Internet at [site name to be determined]. You can 
search this site by a unique identifying number, known as a CRD 
number. The CRD number for [name of supervised person] is 
[supervised person's CRD number].

Item 2  Educational Background and Business Experience

    Disclose the supervised person's name, age (or year of birth), 
formal education after high school, professional designations or 
attainments, and business background for the preceding five years. 
If the supervised person either has no formal education after high 
school or has no business background, disclose this fact.

Item 3  Disciplinary Information

    If there are legal or disciplinary events material to a client's 
or prospective client's evaluation of the supervised person's 
integrity, disclose all material facts regarding those events. This 
disclosure is required under anti-fraud provisions such as section 
206 of the Investment Advisers Act of 1940.
    Items 3.A., 3.B., 3.C., and 3.D. below list specific legal and 
disciplinary events that you must presume are material for this 
Item. If the supervised person has been involved in one of these 
events, you must disclose it under this Item for ten years following 
the date of the event, unless (1) the event was resolved in the 
supervised person's favor, or was reversed, suspended or vacated, or 
(2) the event is not material (see Note below). For purposes of 
calculating this ten-year period, the ``date'' of an event is the 
date the final order, judgment, or decree was entered, or the date 
any rights of appeal from preliminary orders, judgments or decrees 
lapsed.
    Items 3.A., 3.B., 3.C., and 3.D. are not an exclusive list. If 
the supervised person has been involved in a legal or disciplinary 
event that is not listed in Items 3.A., 3.B., 3.C., or 3.D. but is 
material to a client's or prospective client's evaluation of the 
supervised person's integrity, you must disclose the event.
    A. A criminal or civil action in a domestic, foreign or military 
court of competent jurisdiction in which the supervised person.
    1. was convicted of, or pled guilty or nolo contendere (``no 
contest'') to (a) any felony; (b) a misdemeanor that involved 
investments or an investment-related business, fraud, false 
statements or omissions, wrongful taking of property, bribery, 
perjury, forgery, counterfeiting, or extortion; or (c) a conspiracy 
to commit any of these offenses;
    2. is the named subject of a pending criminal proceeding that 
involves an investment-related business, fraud, false statements or 
omissions, wrongful taking of property, bribery, forgery, 
counterfeiting, extortion, or a conspiracy to commit any of these 
offenses;
    3. was found to have been involved in a violation of an 
investment-related statute or regulation; or
    4. was the subject of any order, judgment, or decree permanently 
or temporarily enjoining, or otherwise limiting, the supervised 
person from engaging in any investment-related activity, or from 
violating any investment-related statute, rule, or order.
    B. An administrative proceeding before the SEC, any other 
federal regulatory agency, any state regulatory agency, or any 
foreign financial regulatory authority in which the supervised 
person.
    1. was found to have caused an investment-related business to 
lose its authorization to do business; or
    2. was found to have been involved in a violation of an 
investment-related statute or regulation and was the subject of an 
order by the agency or authority
    (a) denying, suspending, or revoking the authorization of the 
supervised person to act in an investment-related business;
    (b) barring or suspending the supervised person's association 
with an investment-related business;
    (c) otherwise significantly limiting the supervised person's 
investment-related activities; or
    (d) imposing a civil money penalty of more than $2,500 on the 
supervised person.
    C. A self-regulatory organization (SRO) proceeding in which the 
supervised person
    1. was found to have caused an investment-related business to 
lose its authorization to do business; or
    2. was found to have been involved in a violation of the SRO's 
rules and was the subject of an order by the SRO barring or 
suspending the supervised person from membership or from association 
with other members, or expelling the supervised person from 
membership; otherwise significantly limiting the supervised person's 
investment-related activities; or fining the supervised person more 
than $2,500.
    D. Any other proceeding revoking or suspending a professional 
attainment, designation, or license of the supervised person.

    Note: Special circumstances may make an event immaterial 
(overcoming the materiality presumption). If an event is immaterial, 
you are not required to disclose it. Your determination, however, is 
not binding on any other person, including any regulator or court. 
When you review a legal or disciplinary event involving the 
supervised person for materiality, you should consider all of the 
following factors: (1) the proximity of the supervised person to the 
advisory function; (2) the nature of the infraction that led to the 
disciplinary event; (3) the severity of the disciplinary sanction; 
and (4) the time elapsed since the date of the disciplinary event. 
If you determine that the materiality presumption is overcome, you 
may be required to keep a file memorandum of your determination. See 
SEC rule 204-2(a)(14)(ii).

Item 4  Other Business Activities

    A. If the supervised person is registered, or has an application 
pending to register, as a broker-dealer, registered representative 
of a broker-dealer, futures commission merchant, commodity pool 
operator, or commodity trading advisor, disclose this fact and 
describe the business relationship, if any, between the advisory 
business and the other business.
    1. If a relationship between the advisory business and the 
supervised person's other financial industry activities creates a 
material conflict of interest with clients, describe the nature of 
the conflict and any restrictions or internal procedures that you 
use when there is a conflict of interest, including your procedures 
for disclosing conflicts to clients.
    2. If the supervised person receives commissions, bonuses or 
other compensation based on the sale of securities or other 
investment products, including as a broker-dealer or registered 
representative, and including distribution or service (``trail'') 
fees from the sale of mutual funds, disclose this fact. If this 
compensation is not cash, explain what type of compensation the 
supervised person receives. Explain that this practice gives the 
supervised person an incentive to recommend investment products 
based on the compensation received, rather than on the client's 
needs.
    B. If the supervised person is actively engaged in any business 
or occupation for compensation not discussed in response to Item 
4.A, above, disclose this fact and describe the nature of that 
business. If the other business activity or activities provide the 
primary source of the supervised person's income, also disclose this 
fact.

Item 5  Additional Compensation

    If someone who is not a client provides an economic benefit to 
the supervised person for providing advisory services, describe the 
arrangement. For purposes of this Item, economic benefits include 
sales awards and other prizes, but do not include the supervised 
person's regular salary. Any bonus that is based, at least in part, 
on the number or amount of sales, client referrals, or new accounts 
should be considered an economic benefit, but other regular bonuses 
should not.

Item 6  Investment Advice and Supervision

    Disclose the extent to which the supervised person or other 
persons or groups in your firm formulate the investment advice the 
supervised person gives to clients. If the

[[Page 20615]]

supervised person formulates this investment advice, explain how you 
supervise the supervised person, including how you monitor the 
advice the supervised person provides.
    Provide the name, title and telephone number of the person 
responsible for supervising the supervised person's advisory 
activities on behalf of your firm.

Item 7  Financial Information

    If the supervised person has been the subject of a bankruptcy 
petition at any time during the past ten years, disclose that fact.
    If you are registering or registered with one or more state 
securities authorities, you must respond to the following additional 
Item.

Item 8  Requirements for State-Registered Advisers

    A. In addition to the events listed in Item 3 of Part 2B, if the 
supervised person has been involved in one of the events listed 
below, disclose all material facts regarding the event.
    1. An award or otherwise being found liable in an arbitration 
claim alleging damages in excess of $2,500, involving any of the 
following:
    (a) an investment or an investment-related business or activity;
    (b) fraud, false statement(s), or omissions;
    (c) theft, embezzlement, or other wrongful taking of property;
    (d) bribery, forgery, counterfeiting, or extortion; or
    (e) dishonest, unfair, or unethical practices.
    2. An award or otherwise being found liable in a civil, self-
regulatory organization, or administrative proceeding involving any 
of the following:
    (a) an investment or an investment-related business or activity;
    (b) fraud, false statement(s), or omissions;
    (c) theft, embezzlement, or other wrongful taking of property;
    (d) bribery, forgery, counterfeiting, or extortion; or
    (e) dishonest, unfair, or unethical practices.

Form ADV (Paper Version): Uniform Application for Investment Adviser 
Registration

Domestic Investment Adviser Execution Page

    You must complete the following Execution Page to Form ADV. This 
execution page must be signed and attached to your initial 
application for SEC registration and all amendments to registration.

Appointment of Agent for Service of Process

    By signing this Form ADV Execution Page, you, the undersigned 
adviser, irrevocably appoint the Secretary of State or other legally 
designated officer, of the state in which you maintain your 
principal office and place of business and any other state in which 
you are submitting a notice filing, as your agents to receive 
service, and agree that such persons may accept service on your 
behalf, of any notice, subpoena, summons, order instituting 
proceedings, demand for arbitration, or other process or papers, and 
you further agree that such service may be made by registered or 
certified mail, in any federal or state action, administrative 
proceeding or arbitration brought against you in any place subject 
to the jurisdiction of the United States, if the action, proceeding 
or arbitration (a) arises out of any activity in connection with 
your investment advisory business that is subject to the 
jurisdiction of the United States, and (b) is founded, directly or 
indirectly, upon the provisions of: (i) the Securities Act of 1933, 
the Securities Exchange Act of 1934, the Trust Indenture Act of 
1939, the Investment Company Act of 1940, or the Investment Advisers 
Act of 1940, or any rule or regulation under any of these acts, or 
(ii) the laws of the state in which you maintain your principal 
office and place of business or of any state in which you are 
submitting a notice filing.

Signature

    I, the undersigned, sign this Form ADV on behalf of, and with 
the authority of, the investment adviser. The investment adviser and 
I both certify, under penalty of perjury under the laws of the 
United States of America, that the information and statements made 
in this ADV, including exhibits and any other information submitted, 
are true and correct, and that I am signing this Form ADV Execution 
Page as a free and voluntary act.
    I certify that the adviser's books and records will be preserved 
and available for inspection as required by law. Finally, I 
authorize any person having custody or possession of these books and 
records to make them available to federal and state regulatory 
representatives.

Signature:-------------------------------------------------------------
Printed Name:----------------------------------------------------------
Adviser CRD Number:----------------------------------------------------
Date:------------------------------------------------------------------
Title:-----------------------------------------------------------------

Form ADV (Paper Version): Uniform Application for Investment Adviser 
Registration

State-Registered Investment Adviser Execution Page

    You must complete the following Execution Page to Form ADV. This 
execution page must be signed and attached to your initial 
application for state registration and all amendments to 
registration.

1. Appointment of Agent for Service of Process

    By signing this Form ADV Execution Page, you, the undersigned 
adviser, irrevocably appoint the legally designated officers and 
their successors, of the state in which you maintain your principal 
office and place of business and any other state in which you are 
applying for registration or amending your registration, as your 
agents to receive service, and agree that such persons may accept 
service on your behalf, of any notice, subpoena, summons, order 
instituting proceedings, demand for arbitration, or other process or 
papers, and you further agree that such service may be made by 
registered or certified mail, in any federal or state action, 
administrative proceeding or arbitration brought against you in any 
place subject to the jurisdiction of the United States, if the 
action, proceeding or arbitration (a) arises out of any activity in 
connection with your investment advisory business that is subject to 
the jurisdiction of the United States, and (b) is founded, directly 
or indirectly, upon the provisions of: (i) the Securities Act of 
1933, the Securities Exchange Act of 1934, the Trust Indenture Act 
of 1939, the Investment Company Act of 1940, or the Investment 
Advisers Act of 1940, or any rule or regulation under any of these 
acts, or (ii) the laws of the state in which you maintain your 
principal office and place of business or of any state in which you 
are applying for registration, or amending your registration.

2. State-Registered Investment Adviser Affidavit

    If you are subject to state regulation, by signing this Form 
ADV, you represent that, you are in compliance with the registration 
requirements of the state in which you maintain your principal place 
of business and are in compliance with the bonding, capital, and 
recordkeeping requirements of that state.

Signature

    I, the undersigned, sign this Form ADV on behalf of, and with 
the authority of, the non-resident investment adviser. The 
investment adviser and I both certify, under penalty of perjury 
under the laws of the United States of America, that the information 
and statements made in this ADV, including exhibits and any other 
information submitted, are true and correct, and that I am signing 
this Form ADV Execution Page as a free and voluntary act.
    I certify that the adviser's books and records will be preserved 
and available for inspection as required by law. Finally, I 
authorize any person having custody or possession of these books and 
records to make them available to federal and state regulatory 
representatives.

Signature:-------------------------------------------------------------
Printed Name: Title:---------------------------------------------------
Adviser CRD Number:----------------------------------------------------
Date:------------------------------------------------------------------
Title:-----------------------------------------------------------------

Form ADV (Paper Version): Uniform Application for Investment Adviser 
Registration

Non-Resident Investment Adviser Execution

    You must complete the following Execution Page to Form ADV. This 
execution page must be signed and attached to your initial 
application for SEC registration and all amendments to registration.

1. Appointment of Agent for Service of Process

    By signing this Form ADV Execution Page, you, the undersigned 
adviser, irrevocably appoint each of the Secretary of the SEC, and 
the Secretary of State or other legally designated officer, of any 
other state in which you are submitting a notice filing, as your 
agents to receive service, and agree that such persons may accept 
service on your behalf, of any notice, subpoena, summons, order 
instituting proceedings, demand for arbitration, or other process or 
papers, and you further agree that such service may be made by 
registered or certified mail, in any federal or state action, 
administrative

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proceeding or arbitration brought against you in any place subject 
to the jurisdiction of the United States, if the action, proceeding 
or arbitration (a) arises out of any activity in connection with 
your investment advisory business that is subject to the 
jurisdiction of the United States, and (b) is founded, directly or 
indirectly, upon the provisions of: (i) the Securities Act of 1933, 
the Securities Exchange Act of 1934, the Trust Indenture Act of 
1939, the Investment Company Act of 1940, or the Investment Advisers 
Act of 1940, or any rule or regulation under any of these acts, or 
(ii) the laws of any state in which you are submitting a notice 
filing.

2. Appointment and Consent: Effect on Partnerships

    If you are organized as a partnership, this irrevocable power of 
attorney and consent to service of process will continue in effect 
if any partner withdraws from or is admitted to the partnership, 
provided that the admission or withdrawal does not create a new 
partnership. If the partnership dissolves, this irrevocable power of 
attorney and consent shall be in effect for any action brought 
against you or any of your former partners.

3. Non-Resident Investment Adviser Undertaking Regarding Books and 
Records

    By signing this Form ADV, you also agree to provide, at your own 
expense, to the U.S. Securities and Exchange Commission at its 
principal office in Washington D.C., at any Regional or District 
Office of the Commission, or at any one of its offices in the United 
States, as specified by the Commission, correct, current, and 
complete copies of any or all records that you are required to 
maintain under Rule 204-2 under the Investment Advisers Act of 1940. 
This undertaking shall be binding upon you, your heirs, successors 
and assigns, and any person subject to your written irrevocable 
consents or powers of attorney or any of your general partners and 
managing agents.

Signature

    I, the undersigned, sign this Form ADV on behalf of, and with 
the authority of, the non-resident investment adviser. The 
investment adviser and I both certify, under penalty of perjury 
under the laws of the United States of America, that the information 
and statements made in this ADV, including exhibits and any other 
information submitted, are true and correct, and that I am signing 
this Form ADV Execution Page as a free and voluntary act.
    I certify that the adviser's books and records will be preserved 
and available for inspection as required by law. Finally, I 
authorize any person having custody or possession of these books and 
records to make them available to federal and state regulatory 
representatives.

Signature:-------------------------------------------------------------
Printed Name:----------------------------------------------------------
Adviser CRD Number:----------------------------------------------------
Date:------------------------------------------------------------------
Title:-----------------------------------------------------------------

Appendix B--Form ADV-W (Paper Version): Notice of Withdrawal From 
Registration as an Investment Adviser

Instructions for Form ADV-W

    Note:
    Unless the context clearly indicates otherwise, all terms used 
in the Form have the same meaning as in the Investment Advisers Act 
of 1940 and in the General Rules and Regulations of the Commission 
thereunder (17 Code of Federal Regulations 275).

    1. We would like to withdraw from registration as an investment 
adviser. What do we need to do?
    You must determine whether you are filing for partial withdrawal 
or full withdrawal.
    A partial withdrawal is when you are withdrawing from investment 
adviser registration with some, but not all, of the jurisdictions 
where you are registered (or have an application for registration 
pending). For example, you would file for partial withdrawal if you 
are switching from state registration to SEC registration (or vice 
versa). Similarly, you would file for partial withdrawal if you are 
a state-registered adviser and are withdrawing from some, but not 
all, of the states with which you are registered (or have an 
application for registration pending).
    A full withdrawal is when you are withdrawing from all of the 
regulators with which you are registered (or have an application 
pending).
    If you are filing for partial withdrawal and switching from SEC 
to state registration, you must complete the Status Section, Items 
1A through 1D, and the Execution Section. You do not need to 
complete Items 1E through 8 of Form ADV-W.
    If you are filing for partial withdrawal and switching from 
state to SEC registration, you must complete the entire Form ADV-W.
    If you are registered only with the state securities authorities 
and withdrawing from some, but not all, of the states where you are 
registered, you must complete the entire Form ADV-W.
    If you are filing for full withdrawal, you must complete the 
entire Form ADV-W.
    2. We are going out of business. Does this change how we would 
answer particular questions on the Form ADV-W?
    Yes. The purpose of Item 1D is so that we can contact you if the 
Form ADV-W is deficient or if we have questions. If you are going 
out of business, make sure you list in Item 1D an address and phone 
number at which we can reach the contact employee.
    3. I am filing for partial withdrawal. How do I complete Item 2?
    If you are ceasing advisory business in any of the jurisdictions 
from which you are withdrawing, check ``yes.'' On the next line, 
provide the date on which you are ceasing advisory business in these 
jurisdictions (however, if you cease conducting advisory business on 
different dates in different jurisdictions, you must complete a 
separate Form ADV-W for each different date). The date you provide 
in this blank must be on or before the date you file Form ADV-W. 
Then, provide the reasons you are filing for withdrawal (regardless 
of whether you are filing for partial or complete withdrawal).
    You are permitted to ``post-date'' the Form ADV-W to December 31 
anytime between November 1 and December 31. You are permitted to 
enter a cease date of December 31 to avoid being charged state 
renewal fees in jurisdictions from which you are withdrawing (the 
IARD does not operate during the last week of each year and you are 
unable to make any filings during that time). However, you cannot 
enter any date other than December 31, and you can only enter a 
December 31 cease date after November 1.
    4. I have completed Form ADV-W and filed it with the SEC. When 
will it become effective?
    Your Form ADV-W will become effective when it is filed with the 
SEC. However, your Form ADV-W will not be deemed ``filed'' until the 
SEC receives it and determines that it is not deficient. The 
effective date of a Form ADV-W filed with the state securities 
authorities may be different.
    5. How should I file my Form ADV-W?
    You are required to file Form ADV-W electronically on the IARD.
    In the event you are unable to submit an electronic filing, you 
must apply for a temporary or continuing hardship exemption pursuant 
to rule 203-3. If you can rely on a temporary or continuing hardship 
exemption, you must mail or fax two executed copies of the Form ADV-
W to NASDR, at ____________.
    Whether you file on the IARD or are permitted to submit paper 
filings, you must preserve in your records a copy of the Form ADV-W 
that you file with the SEC.
    6. What are the Schedules to Form ADV-W?
    Form ADV-W contains two Schedules, Schedule W1 and W2. Your 
answers to Form ADV-W will determine whether you are required to 
complete either or both Schedules.
    Schedule W1 is a ``continuation page.'' If you have to list 
additional persons whom you have assigned advisory contracts (Item 
5), or multiple persons or locations with respect to your books and 
records (Item 8), you must complete Schedule W1.
    The names of individuals listed on Schedule W1 must be given in 
full.
    Schedule W2 requires basic financial information relating to 
your investment advisory business. If you check ``yes'' to Items 3, 
4, or 6, you are required to complete Schedule W2.
    7. Questions about Item 8. The following examples are intended 
to assist you in completing Item 8 to Form ADV-W and Sections 8B and 
8C of Schedule W1 in the event that multiple persons have or will 
have custody of your books and records, or in the event that your 
books and records are or will be kept at multiple locations.
    a. After I withdraw from registration, two persons (Persons A 
and B) will have custody of my books and records, but my books and 
records will be kept at a single location. How should I complete the 
Form ADV-W and Schedule W1?
    On Form ADV-W, you should check ``yes'' to Item 8.A.1., and 
``no'' to Item 8.A.2. Leave Items 8B and 8C on Form ADV-W blank. You 
would complete two Schedules W1. The first would list Person A, and 
the location at

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which your books and records will be kept. You would complete a 
second Schedule W1 that would list Person B, and would list (again) 
the location at which your books and records will be kept.
    b. After I withdraw from registration, only one person will have 
custody of my books and records, but they will be kept at three 
locations (Locations X, Y and Z). How should I complete Form ADV-W 
and Schedule W1?
    On Form ADV-W, you should check ``no'' to Item 8.A.1., and 
``yes'' to Item 8.A.2. Leave Items 8B and 8C on Form ADV-W blank. 
You would complete three Schedules W1. The first would list the 
person that will have custody of your books and records, and 
Location X. The second Schedule W1 would list (again) the person 
that has or will have custody of your books and records, and 
Location Y. The third Schedule W1 would list (again) the person that 
has or will have custody of your books and records, and Location Z.
    c. After I withdraw from registration, two people (Persons A and 
B) will have custody of my books and records, and my books and 
records will be kept at two locations (Locations Y and Z). Each 
person would have custody of the books and records that are kept at 
both locations. How should I complete Form ADV-W and Schedule W1?
    On Form ADV-W, you should check ``yes'' to Item 8.A.1., and 
``yes'' to Item 8.A.2. Leave Items 8B and 8C on Form ADV-W blank. 
You would complete four Schedules W1. The first would list Person A 
and Location Y. The second Schedule W1 would list (again) Person A, 
and would list Location Z. The third Schedule W1 would list Person B 
and Location Y, and the fourth Schedule W1 would list Person B and 
Location Z. On each Schedule W1, you should briefly describe the 
records that are kept at each location (e.g. business and trading 
records from 1996 through 1999).
    8. Who should sign the Form ADV-W?
    Copies of the Form ADV-W you file with the SEC must be executed 
by a person you have authorized to file the Form. If you are a sole 
proprietor, you must sign the Form; if you are a partnership, a 
general partner must sign the Form in the name of the partnership; 
if you are an unincorporated organization or association that is not 
a partnership, the managing agent (an authorized person who directs 
or manages or who participates in the directing or managing of its 
affairs) must sign the Form in the name of the organization or 
association; if you are a corporation, a principal officer duly 
authorized must sign the Form in the name of the corporation. If an 
officer of any entity is signing the Form, the officer's title must 
be given.
    9. What if I need more space to provide additional information?
    If you are filing electronically, add any additional information 
in the text box asking you to ``describe the books and records kept 
at this location.'' If you are filing on paper, use the reverse side 
of Schedule W1 to provide any additional information.
    10. What if I do not follow these instructions when completing 
the Form ADV-W?
    If you do not prepare and execute the Form ADV-W as required by 
these instructions, SEC staff may return the form to you for 
correction. The SEC's acceptance of the Form, however, is not a 
finding that you have filed the Form ADV-W as required or that the 
information submitted is true, correct or complete.
    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. 
Section 203(h) of the Advisers Act authorizes the Commission to 
collect the information on this Form from applicants. See 15 U.S.C. 
Secs. 80b-3(h). Filing of this Form is mandatory for an investment 
adviser to withdraw from registration. The principal purpose of this 
collection of information is to enable the Commission to verify that 
the activities of an investment adviser seeking to withdraw from 
registration do not require the investment adviser to be registered 
and to determine whether terms and conditions should be imposed upon 
a registrant's withdrawal. The Commission will maintain files of the 
information on Form ADV-W 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 Form ADV-W, 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 uses of the records are set forth at 40 
Federal Register 39255 (Aug. 27, 1975) and 41 FR 5318 (Feb. 5, 
1976).

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Appendix D--Form ADV-NR--(Paper Version); Appointment of Agent For 
Service of Process by Non-Resident General Partner and Non-Resident 
Managing Agent of an Investment Adviser

    You must submit this Form ADV-NR if you are a non-resident 
general partner or a non-resident managing agent of any investment 
adviser (domestic or non-resident). Form ADV-NR must be signed and 
submitted in connection with the adviser's initial application. If 
the mailing address you list below changes, you must file an amended 
Form ADV-NR to provide the current address. If you become a non-
resident general partner or a non-resident managing agent after the 
date the adviser files its initial application, you must file Form 
ADV-NR with the Commission within 30 days. If you serve as a general 
partner or managing agent for multiple advisers, you must submit a 
separate Form ADV-NR for each adviser.

1. Appointment of Agent for Service of Process

    By signing this Form ADV-NR, you, the undersigned non-resident 
general partner or non-resident managing agent, irrevocably appoint 
each of the Secretary of the SEC, and the Secretary of State, or 
equivalent officer, of the state in which the adviser referred to in 
this form maintains its principal office and place of business, if 
applicable, and any other state in which the adviser is applying for 
registration, amending its registration, or submitting a notice 
filing, as your agents to receive service, and agree that such 
persons may accept service on your behalf, of any notice, subpoena, 
summons, order instituting proceedings, demand for arbitration, or 
other process or papers, and you further agree that such service may 
be made by registered or certified mail, in any federal or state 
action, administrative proceeding or arbitration brought against you 
in any place subject to the jurisdiction of the United States, if 
the action, proceeding or arbitration: (a) arises out of any 
activity in connection with the investment adviser's business that 
is subject to the jurisdiction of the United States, and (b) is 
founded, directly or indirectly, upon the provisions of: (i) the 
Securities Act of 1933, the Securities Exchange Act of 1934, the 
Trust Indenture Act of 1939, the Investment Company Act of 1940, or 
the Investment Advisers Act of 1940, or any rule or regulation under 
any of these acts, or (ii) the laws of the state in which the 
adviser referred to in this Form maintains its principal office and 
place of business, if applicable, or of any state in which the 
adviser is applying for registration, amending its registration, or 
submitting a notice filing.

2. Appointment and Consent: Effect on Partnerships

    If you are organized as a partnership, this irrevocable power of 
attorney and consent to service of process will continue in effect 
if any partner withdraws from or is admitted to the partnership, 
provided that the admission or withdrawal does not create a new 
partnership. If the partnership dissolves, this irrevocable power of 
attorney and consent shall be in effect for any action brought 
against you or any of your former partners.

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[FR Doc. 00-9036 Filed 4-14-00; 8:45 am]
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