[Federal Register Volume 67, Number 76 (Friday, April 19, 2002)]
[Proposed Rules]
[Pages 19500-19506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9585]



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Part III





Securities and Exchange Commission





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17 CFR Parts 275 and 279



Exemption for Certain Investment Advisers Operating Through the 
Internet; Proposed Rule

  Federal Register / Vol. 67, No. 76 / Friday, April 19, 2002 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-2028; File No. S7-10-02]
RIN 3235-AI15


Exemption for Certain Investment Advisers Operating Through the 
Internet

AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Proposed rules.

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SUMMARY: The Commission is publishing for comment rule amendments under 
the Investment Advisers Act of 1940 that would exempt certain 
investment advisers that provide advisory services through the Internet 
from the prohibition on Commission registration set out in section 203A 
of the Act. The effect of the amendments would be to permit these 
advisers to register with the Commission instead of with state 
securities authorities. The amendments are designed to alleviate the 
burden of multiple state regulation on advisers whose business is 
unconnected with any particular state and for whom multiple state 
regulation would be a hardship.

DATES: Comments must be received on or before June 6, 2002.

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. S7-10-02; 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 website: http://www.sec.gov.\1\
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    \1\ We do not edit personal or identifying information, such as 
names or e-mail addresses, from electronic submissions. Submit only 
information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Marilyn Barker, Senior Counsel, or 
Jennifer L. Sawin, Assistant Director, at (202) 942-0719 or 
[email protected], Office of Investment Adviser Regulation, Division of 
Investment Management, Securities and Exchange Commission, 450 Fifth 
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Street, NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on proposed amendments to rule 203A-2 (17 CFR 275.203A-2) and to Part 
1A of Form ADV (17 CFR 279.1), both under the Investment Advisers Act 
of 1940 (15 U.S.C. 80b) (``Advisers Act'' or ``Act'').

I. Background

    The National Securities Markets Improvement Act of 1996 (``NSMIA'') 
amended the Advisers Act to divide the responsibility for regulating 
investment advisers between the Commission and the state securities 
authorities.\2\ Congress allocated to state securities authorities the 
primary responsibility for regulating smaller advisory firms that are 
essentially local businesses, and allocated to the Commission the 
primary responsibility for regulating larger advisers.\3\ Section 203A 
of the Advisers Act\4\ effects this division by generally prohibiting 
advisers from registering with us unless they either have assets under 
management of not less than $25 million or advise a registered 
investment company,\5\ and preempts state adviser statutes as to 
advisers registered with the Commission.\6\ Advisers prohibited from 
registering with us remain subject to the regulation of state 
securities authorities.\7\
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    \2\ National Securities Markets Improvement Act of 1996, Pub. L. 
104-290, 110 Stat. 3416 (1996) (codified in scattered sections of 15 
U.S.C.).
    \3\ See s. Rep. No. 293, 104th Cong., 2d Sess. 3-4 (1996) 
(hereafter Senate Report) at 4 (``The states should play an 
important and logical role in regulating small investment advisers 
whose activities are likely to be concentrated in their home 
state.'').
    \4\ 15 U.S.C. 80b-3a.
    \5\ Section 203A(a)(1) of the Advisers Act (15 U.S.C. 80b-
3a(a)(1)). Rule 203A-1(a)(1) increases the assets under management 
threshold from $25 million to $30 million for registration with the 
Commission. (17 CFR 275.203A-1(a)(1). Upon reaching the $30 million 
threshold, advisers must register with us. Advisers having assets 
under management between $25 million and $30 million may opt to 
register with us. [17 CFR 275.203A-1(a)(2)].
    \6\ Section 203A(b) of the Advisers Act [15 U.S.C. 80b-3a(b)].
    \7\ Section 222 of the Advisers Act (15 U.S.C. 80b-18a). The 
prohibition in section 203A against registration with the Commission 
applies to advisers whose principal office and place of business is 
in a United States jurisdiction that has enacted an investment 
adviser statute. 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 text accompanying note 
83. Currently, 49 states have investment adviser statutes, as do the 
District of Columbia, Puerto Rico and Guam. Investment advisers in 
Wyoming and the United States Virgin Islands, which do not have 
adviser statutes, register with us.
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    The ``$25 million assets under management'' test was designed by 
Congress to distinguish investment advisers with a national presence 
from those that are essentially local businesses.\8\ Congress 
recognized, however, that some advisers should be regulated at the 
federal level even though they have assets under management of less 
than $25 million, and gave us authority to permit advisers to register 
with us if the prohibition would be ``unfair, a burden on interstate 
commerce, or otherwise inconsistent with the purposes' of section 
203A.\9\ In exercising this authority, we relieve advisers from the 
burdens of multiple state regulation.\10\
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    \8\ See Senate Report at 4-5.
    \9\ Section 203A(c) of the Advisers Act (15 U.S.C. 80b-3a(c)). 
See Senate Report at 5. Section 203A was designed to allow the 
Commission to better use its limited resources by concentrating its 
regulatory responsibilities on larger advisers with national 
businesses, and to reduce the burden to investment advisers of the 
overlapping and duplicative regulation (that existed prior to 
enactment of NSMIA) by preempting state investment adviser statutes, 
thus subjecting large advisers with national businesses to a single 
regulatory program administered by the Commission. See Senate Report 
at 2-4.
    \10\ The exercise of our exemptive authority permits 
registration with the Commission and preempts state law with respect 
to the exempted advisers that register with us.
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    We recently have been asked, by advisers that provide their 
services through interactive websites and by their counsel, whether we 
might use our exemptive authority to permit these advisers to register 
with us.\11\ These types of advisers, which we will call Internet 
Investment Advisers, provide substantially all of their advisory 
services through interactive websites. Clients visiting these websites 
answer on-line questions about their finances, investment objectives 
and investment time horizon, risk tolerance, and investment 
restrictions. The Internet Investment Adviser's computer-based 
application or platform--an algorithm --processes and analyzes the 
client's responses to generate the personalized investment advice that 
is communicated to the client through the website.\12\ The interactive 
website may be reached at any time by persons residing in any state or 
outside the United States.
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    \11\ We recognize that other advisers use the Internet in other 
ways. For example, other advisers may use websites for marketing 
purposes. See infra Section II of this Release. The proposed rule 
amendment, however, does not address these other Internet uses.
    \12\ See Andrew Willmott, Legg Mason Nurtures Mass Affluent, 
FUNDfire, Dec. 12, 2001; Caren Chesler, Technology A Must In Managed 
Account Mart, FUNDfire, July 27, 2001.
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    Most Internet Investment Advisers are not eligible to register with 
us. They do not have assets under management or advise a registered 
investment company, and thus do not meet the statutory thresholds for 
registration with us.

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Further, most of these advisers either do not qualify to use our 
existing exemptive rules or, as discussed below, cannot use the 
exemptions effectively.
    Our multi-state adviser exemption permits an adviser that does not 
meet the statutory thresholds to register with us if, among other 
things, it would otherwise have to register with the securities 
authorities of at least 30 states.\13\ The exemption was designed to 
permit Commission registration for advisory firms that had offices and 
clients in multiple states.\14\ Internet Investment Advisers, however, 
do not have multiple offices; their multiple state registration 
obligations turn solely on the residences of their clients. Because an 
Internet Investment Adviser's clients can come from anywhere, and in 
any number at any time, as a practical matter, the adviser may need to 
register in all the states and wait until it has a registration 
obligation in 30 states before registering with us and canceling its 
state registrations.\15\
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    \13\ 17 CFR 275.203A-2(e). An investment adviser relying on this 
exemption must represent that it has reviewed its obligations under 
state and federal law and has concluded that is would be required to 
register as an investment adviser with the securities authorities of 
at least 30 states. Following registration with us, the investment 
adviser continues to be eligible for the exemption as long as it can 
annually represent that it would be required to register in at least 
25 states.
    \14\ The multi-state exemption codified exemptive orders that 
permitted large accounting firms that offered financial planning 
services to register as advisers with the Commission even though 
they did not manage assets.
    \15\ In addition to the multi-state exemption, rule 203A-2 (17 
CFR 275.203A-2) provides four other exemptions under which advisers 
register with the Commission, none of which may be available to 
Internet Investment Advisers. One of these exemptions permits a 
newly-formed adviser to register with us if the adviser is not 
already registered or required to be registered with the Commission 
or with a state securities authority, and the adviser has a 
reasonable expectation that, within 120 days, it will be eligible to 
register with us under a different basis. Rule 203A-2(d) (17 CFR 
275.203A-2(d). This rule was designed for use principally by new 
advisory firms that have been ``spun-off'' from existing portfolio 
management firms and therefore can reasonably expect to have at 
least $25 million in assets under management within 120 days, and by 
advisers to new mutual funds that are expected to be operational 
within 120 days. Internet Investment Advisers, however, typically 
must register early in their development and testing phase in order 
to secure venture capital, and typically need more than 120 days to 
complete development and testing. Many may not even be fully 
operational within 120 days after registering.
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    As discussed above, Congress gave us authority to permit investment 
advisers to register with us when the prohibition would be unfair, a 
burden on interstate commerce, or otherwise inconsistent with the 
purposes of section 203A.\16\ Internet Investment Advisers, which were 
not in business when NSMIA was enacted in 1996, appear to be the type 
of advisory firm for which Congress envisioned we would exercise this 
authority. Other small advisers with few or no assets under management 
typically rely on face-to-face contact between clients and advisory 
personnel at the firm's offices. They are local businesses serving the 
geographical area in which the office is located. In contrast, Internet 
Investment Advisers have no physical presence in a community or state. 
Clients of Internet Investment Advisers have little or no in-person 
contact with the firm or its personnel, and obtain the adviser's 
services only through a website. Their activities are, by their nature, 
not confined to one or a few states that have a distinct regulatory 
interest in the advisers' operations. In addition, the cost of 
registering temporarily in all state jurisdictions acts as an 
impediment to launching these businesses. Requiring these advisers to 
register in multiple states would appear to be unfair to them and a 
burden on their interstate commerce. Therefore, we are proposing to 
amend our exemptive rules to permit these advisers to register with the 
Commission.
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    \16\ See supra note 9 and accompanying text.
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II. Discussion

    Proposed rule 203A-2(f) would exempt an adviser from the 
prohibition on Commission registration if the adviser conducts 
substantially all of its advisory business through an interactive 
website on the Internet.\17\ Advisers registering with us under the new 
exemption\18\ would be required to keep records demonstrating that they 
meet the conditions of the rule.\19\
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    \17\ Proposed rule 203A-2(f)(1)(i).
    \18\ A new box would be added to Item 2 of Part 1A of Form ADV 
for these advisers to indicate their eligibility to register with 
the Commission.
    \19\ Proposed rule 203A-2(f)(1)(ii).
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    We have drafted the proposed rule to make it unavailable to 
advisers that merely have websites as marketing tools or that use 
Internet vehicles such as E-mail, chat rooms, bulletin boards and 
webcasts or other electronic media to communicate with clients.\20\ 
Eligibility for the exemption would turn on whether the adviser 
conducts substantially all of its advisory business through an 
interactive website. We define ``interactive website'' in the proposed 
rule as a website in which computer software-based models or 
applications provide investment advice to clients based on information 
that each client supplies through the website.\21\ We define the term 
``substantially all'' in the proposed rule to mean that at least 90 
percent of the investment adviser's clients obtain advice exclusively 
through the interactive website.\22\
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    \20\ Internet use of some kind is very common among advisers. 
Over half of SEC-registered advisory firms, for example, report 
having at least one web address. A rule permitting all advisers 
using the Internet to register with the Commission could effectively 
undo NSMIA's division of regulatory responsibilities between the 
Commission and the states.
    \21\ Proposed rule 203A-2(f)(2)(i).
    \22\ Proposed rule 203A-2(f)(2)(ii).
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    We request comment on the terms of the proposed rule:
     Does the proposed rule differentiate adequately between 
advisers that merely use the Internet to market their business and 
those that conduct substantially all of their advisory business through 
the Internet?
     Will the test for ``substantially all'' appropriately 
limit the use of the rule, or are there alternative tests that we 
should consider?
     The rule would require that 90% of the adviser's clients 
obtain their investment advice exclusively through the interactive 
website. Is 90% of clients the appropriate percentage? If not, what 
higher or lower percentage should we consider?
     Should we require that these clients obtain all of their 
advice from the adviser through the interactive website? Alternatively, 
should we consider permitting an adviser to use the rule even if these 
clients obtain less than all of their advice through the website? If 
so, what proportion should we require? How would the adviser measure 
that proportion? What burden would this measurement place on the 
adviser?
     We estimate that as many as 20 advisers may currently be 
eligible for the exemption provided by the proposed rule amendments. Is 
this estimate reasonable?
     We believe that demand for Internet Investment Advisers' 
services may grow in the next several years, perhaps as part of the 
growing demand for advice to pension plan participants. Is this 
expectation reasonable? How many new Internet Investment Advisers are 
likely to form to meet any increases in demand?
     Are there other types of investment advisers `` without 
assets under management but operating in many states `` that face 
similar burdens? How many of these advisers are there? In how many 
states do they typically register? Should we also consider exempting 
them from section 203A?

III. Request for Comment

    Any interested persons wishing to submit written comments on the 
proposed rule amendments that are the

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subject of this release, or to submit comments on other matters that 
might have an effect on the proposals described above, are requested to 
do so. Commenters suggesting alternative approaches are encouraged to 
submit proposed rule text.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission also is requesting information regarding 
the potential impact of the proposed rule amendments on the economy on 
an annual basis. Commenters should provide empirical data to support 
their views.

IV. Cost-Benefit Analysis

A. Background

    The Commission is sensitive to the costs and benefits imposed by 
its rules. Proposed rule 203A-2(f) under the Advisers Act would permit 
certain investment advisers that provide advisory services through 
interactive Internet websites to register with the Commission rather 
than with the state securities authorities. These investment advisers 
cannot currently register with the Commission because they do not meet 
the Act's statutory thresholds, that is, they do not have $25 million 
or more of assets under management and do not advise registered 
investment companies.\23\ Unlike most state-registered advisers, 
Internet Investment Advisers have no local presence and their 
activities are not confined to one or a few states; the nature of the 
Internet makes these advisers' services available to clients in all 
states, and an adviser's state registration obligations could be 
triggered without warning within a single day or hour when six or more 
clients from a single state obtain personalized investment advice from 
the adviser's interactive website.\24\ As a practical matter, 
therefore, Internet Investment Advisers need to register in all states 
to avoid violating state laws.\25\
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    \23\ These statutory thresholds were imposed in NSMIA, which 
divided responsibility for regulating investment advisers between 
the Commission and the state securities authorities.
    \24\ Exceeding state-established de minimis numbers for advisory 
clients may trigger state registration requirements. The national de 
minimis standard in section 222(d) of the Advisers Act (15 U.S.C. 
80b-18a(d), however, preempts state minimums that are lower than six 
clients resident in that state during a 12-month period.
    \25\ At this time, 49 states have investment adviser statutes, 
as do the District of Columbia, Puerto Rico and Guam. Wyoming and 
the United States Virgin Islands currently do not have investment 
adviser statutes. Advisers that maintain their principal places of 
business in those two jurisdictions must register with the 
Commission.
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    Congress gave us authority to permit advisers to register with us 
even though they do not meet the statutory threshold if the prohibition 
would be unfair, a burden on interstate commerce, or otherwise 
inconsistent with NSMIA's regulatory division between the states and 
the Commission. We have used this authority to adopt exemptive rules to 
permit Commission registration of advisers that did not meet the 
statutory thresholds in section 203A. The rule amendment we are 
proposing today is designed to alleviate the substantial burden of 
multiple state registration and regulation for Internet Investment 
Advisers by permitting these advisers to register with the Commission.
    Since most Internet Investment Advisers do not currently register 
with us, we have limited data on the number of investment advisers that 
would qualify at this time for the proposed exemption. Based on news 
articles, however, and for purposes of the Paperwork Reduction Act, we 
have estimated that perhaps as many as 20 firms would currently be 
eligible for the new exemption.
     Comment is requested on our estimate of the number of 
investment advisers likely to register with the Commission under the 
proposed rule.
     Commenters are requested to provide views and empirical 
data relating to the number of these advisers.

B. Benefits

    The proposal would benefit Internet Investment Advisers by 
relieving them of the costs they would otherwise incur if they were 
required to comply with the registration and other regulatory 
requirements of 49 states. As discussed earlier, Internet Investment 
Advisers, as a practical matter, would have to register in all states 
and then wait until their registration obligations are triggered in at 
least 30 states before becoming eligible for Commission registration 
under our multi-state exemption in rule 203A-2(e).\26\ Adviser 
regulations and requirements are not uniform and may even be 
contradictory from state to state. Based on recent discussions with 
counsel familiar with state adviser registration and regulatory issues, 
we estimate the cost to an Internet Investment Adviser of complying 
with the registration and other regulatory requirements of 49 states to 
be approximately $50,000 annually.\27\ The benefit of the proposed rule 
is therefore estimated to total as much as $1 million annually for the 
20 advisers that may be eligible for the new exemption at this 
time.\28\ Moreover, subjecting these advisers to the cost of 
registering temporarily in all state jurisdictions and to multiple 
state regulation acts as an impediment to launching these businesses. 
The proposed rule would benefit the advisers industry by removing this 
barrier, and may enable more firms to offer these types of Internet-
based services.
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    \26\ 17 CFR 275.203A-2(e). Advisers relying on the multi-state 
exemption must be required to register with the securities 
authorities of at least 30 states. After registering with us, multi-
state advisers continue to be eligible for the exemption as long as 
they can represent annually that they would be required to register 
in at least 25 states.
    \27\ This figure includes the costs of responding to multiple 
states' comments on filings, as well as the cost of complying with 
multiple and often disparate state regulations. It does not, 
however, include the time to complete Form ADV initially and the 
fees to file Form ADV through the IARD, as discussed below. This 
figure also does not include state registration fees.
    \28\ 20  x  50,000 = 1,000,000.
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    The benefits of the proposed rule would also include the savings to 
the affected advisers from the cost of examinations by multiple states' 
regulators, as well as the savings to state securities authorities that 
would no longer examine these firms.

C. Costs

    Proposed rule 203A-2(f) would impose certain costs on advisers 
relying on the exemption. The Commission estimates that the total cost 
to each Internet Investment Adviser to comply with the recordkeeping 
provision of the proposed rule would be approximately $138.80,\29\ such 
that the total cost for the 20 advisers that may be eligible for the 
new exemption at this time would be $2,776.\30\
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    \29\ The Commission estimated this figure by multiplying the 
burden hours to comply with the proposed rule's recordkeeping 
requirements (4 hours) by an average hourly compensation rate of 
$34.70. This compensation rate includes overhead and is the rate for 
an operations supervisor outside of New York City, based on a 2000 
study by the Securities Industry Association. The estimate of burden 
hours is based on the Commission's submission for the proposed rule 
under the Paperwork Reduction Act and reflects recent discussions 
with counsel familiar with advisers' recordkeeping issues. See infra 
Section V. of this Release.
    \30\ 20  x  138.8 = 2,776.
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D. Form ADV

    We have not included the benefits or costs associated with filing 
Form ADV,\31\ nor benefits or costs associated with the Investment 
Adviser Registration Depository (IARD). Form ADV is used by the states 
as well as by the Commission to register investment advisers, such that 
all advisers registering with either the Commission or a state complete 
a single Form ADV; advisers may file the form with the Commission or 
with one or more states. Shifting an Internet Investment

[[Page 19503]]

Adviser's registration from the states to the Commission, therefore, 
does not change their basic filing requirement.\32\ Similarly, state-
registered advisers as well as advisers registered with the Commission 
make their Form ADV filings electronically through the IARD and pay the 
attendant filing fees.\33\ Shifting an Internet Investment Adviser's 
registration from the states to the Commission does not change this 
filing process or the IARD filing fees.
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    \31\ 17 CFR 279.1 (Form ADV).
    \32\ Advisers registered with the Commission, however, complete 
only Part 1A of Form ADV, while advisers registered with the states 
must complete both Parts 1A and 1B.
    \33\ Advisers pay filing fees to NASD Regulation, Inc., which 
operates the IARD system. The filing fees include an initial set-up 
fee and an annual fee, each of which varies based on the adviser's 
assets under management. Because Internet Investment Advisers 
generally do not manage client assets, we expect that they will be 
eligible for the lowest fee levels of $150 for the initial set-up 
fee and $100 for the annual fee. See Investment Advisers Act Release 
No. 1888 (July 28, 2000) (65 FR 47807 (Aug. 3, 2000)) (``Advisers 
Act Release No. 1888'').
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E. Request for Comment

     The Commission requests comment on the potential costs and 
benefits identified in this release, as well as any other costs or 
benefits that may result from the proposal.
     We encourage commenters to identify, discuss, analyze, and 
supply relevant data regarding these or additional costs and benefits.

V. Paperwork Reduction Act

A. Recordkeeping

    Proposed rule 203A-2(f) would exempt, from the prohibition against 
Commission registration, certain investment advisers that provide 
advisory services through the Internet. The proposed rule includes a 
recordkeeping provision, and therefore contains a new ``collection of 
information'' requirement within the meaning of the Paperwork Reduction 
Act of 1995.\34\ The Commission staff needs and will use this 
collection of information in its examination and oversight program. The 
proposed rule requires advisers registering under the rule to maintain 
a record demonstrating that substantially all of their advisory 
business has been conducted through an interactive website. Although we 
anticipate that most advisers registering under the proposed rule would 
generate the necessary records in the ordinary conduct of their 
Internet advisory business, the recordkeeping requirement of proposed 
rule 203A-2(f) may impose a small additional burden on these advisers. 
We estimate that this recordkeeping burden should not exceed an average 
of 4 hours annually per adviser, for a total burden of 80 hours 
annually.\35\
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    \34\ 44 U.S.C. 3501-3520.
    \35\ 4 hours  x  20 advisers = 80 hours. This estimate is based 
on recent discussions with counsel familiar with advisers' 
recordkeeping issues. The recordkeeping requirement does not require 
extensive data on usage of the website, nor does it specify how an 
adviser should maintain its records to meet this condition of the 
proposed rule. The adviser would need only to demonstrate that 90 
percent of its clients obtain their investment advice from the firm 
exclusively through the website. We note that Internet Investment 
Advisers that conduct their business exclusively through interactive 
websites would likely need to spend very little time documenting 
their compliance with the condition. An adviser that also meets in 
person with some clients or communicates with them through other 
means may need to spend more time.
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     We request comment whether the estimate of our 
recordkeeping burden is reasonable.
    The Commission is submitting the collection of information to the 
Office of Management and Budget (``OMB'') in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The title for the collection of information 
is ``Exemption for Certain Investment Advisers Operating Through the 
Internet'' under the Advisers Act. 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 
collection of information is mandatory, and responses are not kept 
confidential. The likely respondents to this information collection 
would be investment advisers that meet the conditions of the proposed 
rule and register with us.

B. Form ADV

    In addition, the proposal would amend Form ADV to add a new 
category of advisers eligible for Commission registration. The proposed 
rule therefore would increase the number of advisers that file Form ADV 
and annual amendments to Form ADV with the Commission. The title for 
this existing collection of information is ``Form ADV'' under the 
Advisers Act. 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 form contains currently approved 
collection of information numbers under OMB control number 3235-0049 
(expires June 30, 2003), and the Commission is submitting the 
amendments to this collection of information to the Office of 
Management and Budget (``OMB'') in accordance with 44 U.S.C. 3507(d) 
and 5 CFR 1320.11. The collection of information is found at 17 CFR 
275.203-1, 275.204-1, and 279.1. This collection of information also is 
mandatory. Responses are not kept confidential. The likely new 
respondents to this information collection would be the investment 
advisers that meet the conditions of the proposed rule and register 
with us.
    As new respondents,\36\ these advisers will increase the total 
burden under Form ADV, but an Internet Investment Adviser's burden for 
completing Form ADV would not differ from that for current 
registrants.\37\ The currently approved burden of the collection of 
information under Form ADV is 46,466 hours, and the current average 
burden for each form is 9.402 hours.\38\ We estimate that approximately 
20 Internet Investment Advisers would register with the Commission 
under the proposed rule,\39\ and that each of these advisers would file 
one complete Form ADV and one amendment annually.\40\ The increase in 
the total annual burden for this collection of information would 
therefore be 455 hours,\41\ for a total revised burden of 46,921 
hours.\42\
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    \36\ We note that, because the states as well as the Commission 
use Form ADV, these advisers will be new respondents for purposes of 
the Commission's collection of information requirements, but not new 
users of Form ADV.
    \37\ The proposed amendments would add a new box to Item 2 of 
Part 1A of Form ADV, so that Internet Investment Advisers could 
indicate their eligibility for Commission registration. All advisers 
registering with the Commission must indicate their eligibility by 
checking at least one box, so the addition of the new box for 
Internet Investment Advisers will not change the burden of 
completing the form.
    \38\ See Electronic Filing by Investment Advisers; Proposed 
Amendments to Form ADV, Investment Advisers Act Release No. 1862 
(April 5, 2000) (65 FR 20524 (April 17, 2000)) (``Advisers Act 
Release No. 1862''). The current average burden per response 
includes 9,100 filings of the complete form at 22 hours each, plus 
13,250 amendments requiring 0.75 hours each. (((9100 x 22) + 
(13250 x .75))/22350=9.402).
    \39\ Our staff has examined approximately six advisers that 
registered with us and whose business is substantially Internet-
based. Because most Internet Investment Advisers are not yet 
eligible to register with us, however, we believe that there may be 
as many as 20 firms that could register under the proposed new 
exemption.
    \40\ The currently approved burden for this collection of 
information estimates that most advisers registering with the 
Commission for the first time will file one amendment per year.
    \41\ 22 hours to complete a new Form ADV  x  20 Internet 
Investment Advisers = 440 hours. 0.75 hours per amendment  x  20 
amendments = 15 hours. 440 + 15 = 455.
    \42\ 46,466 + 455 = 46,921.
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     We request comment whether these estimates are reasonable.

C. Request for Comment

    Any information received by the Commission related to the proposed 
rule amendments would not be kept confidential. Pursuant to 44 U.S.C.

[[Page 19504]]

3506(c)(2)(B), the Commission solicits comments to:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility;
     Evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collections of information;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
     Determine whether there are ways to 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 wishing 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, Room 3208, Washington, DC 
20503, and also should send a copy to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609 with reference to File No. S7-10-02. OMB is required to 
make a decision concerning the collections of information between 30 
and 60 days after publication, so a comment to OMB is best assured of 
having its full effect if OMB receives the comment within 30 days after 
publication of this release. Requests for materials submitted to OMB by 
the Commission with regard to these collections of information should 
be in writing, refer to File No. S7-10-02, and be submitted to the 
Securities and Exchange Commission, Records Management, Office of 
Filings and Information Services, 450 Fifth Street, NW, Washington, DC 
20549.

VI. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') regarding proposed rule 203A-2(f) in 
accordance with section 3(a) of the Regulatory Flexibility Act.\43\
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    \43\ 5 U.S.C. 603(a).
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A. Reasons for Proposed Action

    Section 203A(a) of the Investment Advisers Act of 1940 generally 
prohibits an investment adviser from registering with the Commission 
unless the adviser either has at least $25 million of assets under 
management or is an adviser to a registered investment company. 
Internet Investment Advisers do not meet the statutory thresholds for 
registration with us and do not qualify to use our existing exemptive 
rules. Section 203A(c) of the Advisers Act gives us authority to permit 
investment advisers to register with us when the prohibition of section 
203A(a) would be unfair, a burden on interstate commerce, or otherwise 
inconsistent with the purposes of section 203A.\44\ Without this 
proposed rulemaking relief, Internet Investment Advisers, as a 
practical matter, may be left with the burden of registering in 49 
states, waiting until their registration obligations accrue in at least 
30 states, and then registering with the Commission under the multi-
state exemption of rule 203A-2(e) and withdrawing the state 
registrations. The proposed rule would eliminate the unnecessary burden 
of these temporary state registrations by permitting these advisers to 
register with us.
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    \44\ See supra note and accompanying text.
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B. Objectives and Legal Basis

    The objective of the proposed amendments is to alleviate the burden 
of multiple state regulation on investment advisers that conduct 
substantially all of their advisory business through interactive 
websites. Proposed rule 203A-2(f) would achieve this objective by 
providing these advisers with an exemption from the prohibition on 
Commission registration. We are proposing this rule pursuant to our 
authority under section 203A(c) of the Act.\45\ Section 203A(c) of the 
Act gives us the authority, by rule or regulation upon our own motion, 
or by order upon application, to permit registration with us of any 
person or class of persons to which the application of the prohibition 
on Commission registration would be unfair, a burden on interstate 
commerce, or otherwise inconsistent with the purposes of section 203A.
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    \45\ 15 U.S.C. 80b-3a(c).
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C. Small Entities Subject to Proposed Rule

    Under Commission rules, for the purposes of the Advisers Act and 
the Regulatory Flexibility Act, an investment adviser generally is 
considered a small entity if it: (i) Has assets under management having 
a total value of less than $25 million; (ii) did not have total assets 
of $5 million or more on the last day of its most recent fiscal year; 
and (iii) does not control, is not controlled by, and is not under 
common control with another investment adviser that has assets under 
management of $25 million or more, or any person (other than a natural 
person) that had $5 million or more on the last day of its most recent 
fiscal year.\46\ The Commission estimates that approximately 20 
investment advisers will likely be eligible to register with us under 
the proposed rule, and it is probable that all of these approximately 
20 investment advisers will be small entities.\47\
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    \46\ 17 CFR 275.0-7(a).
    \47\ Internet Investment Advisers generally do not manage assets 
and therefore will not likely have any assets under management. 
These firms are also generally start-up businesses and may have 
limited assets; only one of the Internet-based firms our staff has 
examined reported having total assets of $5 million or more. 
Consequently, we believe that most, if not all, of the advisers 
registering with us under the proposed rule will be small entities.
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     Comment is requested on the number of Internet Investment 
Advisers that are likely to be small entities.
     Commenters are requested to provide views and empirical 
data relating to the number of these advisers that would be considered 
small entities.

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed rule would impose certain new recordkeeping 
requirements on Internet Investment Advisers. The proposed rule would 
not impose any other new or additional reporting or compliance 
requirements on these advisers, and would significantly reduce certain 
compliance burdens for these advisers by eliminating the need for these 
advisers to comply with multiple state regulations. As discussed 
earlier, most or all of these advisers would likely be small advisers. 
Under the proposed rule, Internet Investment Advisers would be required 
to maintain in an easily accessible place a record demonstrating that 
substantially all of their advisory business has been conducted through 
an interactive website. The Commission believes that the recordkeeping 
requirement contained in the proposed rule would not impose a 
significant burden on Internet Investment Advisers, including small 
advisers.\48\
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    \48\ Recordkeeping is already mandated for all Commission-
registered advisers, including small advisers, under rule 204-2. (17 
CFR 275.204-2.) The Commission has estimated, for purposes of the 
Paperwork Reduction Act, that compliance with the recordkeeping 
requirements of the proposed rule would take no more than 4 hours 
annually on average.
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    The Commission believes that the proposed amendment to Item 2 of 
Part 1A of Form ADV would have no measurable effect on Internet 
Investment Advisers, including small advisers. A new box would be added 
to

[[Page 19505]]

Item 2 for Internet Investment Advisers to indicate their eligibility 
to register with the Commission. An adviser registering with the 
Commission under the proposed rule would simply check that new box when 
completing Form ADV.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with the proposed rule.

F. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities, 
including (i) establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small advisers; (ii) clarifying, consolidating, or 
simplifying compliance and reporting requirements under the proposed 
rule for small advisers; (iii) using performance rather than design 
standards; and (iv) exempting small advisers from coverage of all or 
part of the proposed rule.
    Regarding the first alternative, the Commission has considered 
establishing different compliance or reporting requirements for small 
advisers. Establishing different compliance or reporting requirements 
would be inconsistent with our mandate to provide a system of public 
disclosure of investment adviser information. An Internet Investment 
Adviser that is a small entity, however, by the nature of its business, 
would likely spend fewer resources in completing Form ADV and 
amendments, and pay lower filing fees, than a larger adviser.
    Regarding the second alternative, the Commission has attempted to 
clarify and simplify compliance and reporting requirements under the 
proposed rule for all advisers, including small advisers. It does not 
appear that the proposed rule can be formatted differently for small 
advisers and still achieve its stated objective of providing relief 
from multiple state regulation. The proposal has been designed 
particularly to benefit Internet Investment Advisers, which are, we 
believe, generally small entities.
    With respect to the third alternative, the proposed rule would 
permit advisers to use performance rather than design standards to meet 
certain requirements under the Act. The proposal, for example, does not 
specify the means by which an adviser must maintain its records to 
satisfy the recordkeeping requirements of the proposed rule.
    Regarding the fourth alternative, the Commission has considered 
exempting small advisers from the proposed rule. Such an exemption 
would be inconsistent with the intended purpose of the proposal, which 
is to provide regulatory relief from multiple state regulatory 
requirements. Small advisers are the primary intended beneficiaries of 
this rulemaking relief.
    The Commission has considered the above alternatives in the context 
of the proposed rule, and, after taking into account the resources 
available to Internet Investment Advisers that are small entities and 
the potential burden the proposal could place on these advisers, has 
concluded that the alternatives would not accomplish the stated 
objectives of the proposal.

G. Solicitation of Comments

    We encourage written comments on matters discussed in this IRFA.
     In particular, how many small entities would be affected 
by the proposed rule?
     What burdens would the proposed rule impose on small 
advisers?
     Commenters are asked to describe the nature of any impact 
and provide empirical data supporting the extent of the impact.

VII. Statutory Authority

    We are proposing rule 203A-2(f) pursuant to our authority set forth 
in section 203A(c) of the Investment Advisers Act of 1940.\49\ Section 
203A(c) of the Act gives us the authority, by rule or regulation upon 
our own motion, or by order upon application, to permit registration 
with us of any person or class of persons to which the application of 
the prohibition on Commission registration would be unfair, a burden on 
interstate commerce, or otherwise inconsistent with the purposes of 
section 203A.
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    \49\ 15 U.S.C. 80b-3a(c).
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List of Subjects in 17 CFR Parts 275 and 279

    Investment advisers, Reporting and recordkeeping requirements.

Text of Proposed Rule Amendments

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

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

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

    Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3A, 80b-
4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.

* * * * *
    2. Section 275.203A-2 is amended by adding paragraph (f) to read as 
follows:


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

* * * * *
    (f) Internet investment advisers. (1) An investment adviser that:
    (i) Conducts substantially all of its advisory business through an 
interactive website on the Internet; and
    (ii) Maintains in an easily accessible place, for a period of not 
less than five years from the filing of a Form ADV that includes a 
representation that the adviser is eligible to register with the 
Commission under paragraph (f)(1)(i) of this section, a record 
demonstrating that substantially all of its advisory business has been 
conducted through an interactive website.
    (2) For purposes of this section:
    (i) Interactive website means a website in which computer software-
based models or applications provide investment advice to clients based 
on information each client supplies through the website.
    (ii) Substantially all means that at least 90 percent of the 
investment adviser's clients obtain their investment advice from the 
adviser exclusively through the interactive website.

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

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

    Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, 
et seq.
    4. Form ADV (Referenced in Sec. 279.1), Part 1A, Item 2 is amended 
by revising the introductory text of paragraph A, paragraph A.(10) and 
A.(11), and by adding paragraph A.(12) to read as follows:


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


    Form ADV
* * * * *
    Part 1A
* * * * *
    Item 2 SEC Registration
* * * * *

[[Page 19506]]

    A. To register (or remain registered) with the SEC, you must 
check at least one of the Items 2.A(1) through 2.A(11), below. If 
you are submitting an annual updating amendment to your registration 
and you are no longer eligible to register with the SEC, check Item 
2.A(12). You:
* * * * *
    {time}  (10) are an Internet investment adviser relying on rule 
203A-2(f);
    {time}  (11) have received an SEC order exempting you from the 
prohibition against registration with the SEC.
    If you checked this box, complete Section 2A(11) of Schedule D.
    {time}  (12) are no longer eligible to register with the SEC.
* * * * *
    5. Form ADV (Referenced in Sec. 279.1), Schedule D is amended by 
revising the heading ``Section 2.A(10)'' to read ``Section 2.A(11)''.

    By the Commission.

    Dated: April 12, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9585 Filed 4-18-02; 8:45 am]
BILLING CODE 8010-01-P