[Federal Register Volume 69, Number 163 (Tuesday, August 24, 2004)]
[Rules and Regulations]
[Pages 52120-52125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-19089]



[[Page 52119]]

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Part IV





Department of Labor





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Employee Benefits Security Administration



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29 CFR Parts 2509 and 2510



Electronic Registration Requirements for Investment Advisers To Be 
Investment Managers Under Title I of ERISA; Final Rule

  Federal Register / Vol. 69, No. 163 / Tuesday, August 24, 2004 / 
Rules and Regulations  

[[Page 52120]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2509 and 2510

RIN 1210-AA94


Electronic Registration Requirements for Investment Advisers To 
Be Investment Managers Under Title I of ERISA

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Final rule.

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SUMMARY: This document contains a regulation relating to the definition 
of investment manager in section 3(38)(B) of Title I of the Employee 
Retirement Income Security Act of 1974 (ERISA). Under the final 
regulation, in lieu of filing a copy of their state registration forms 
with the Secretary of Labor, state-registered investment advisers 
seeking to obtain or maintain investment manager status under Title I 
of ERISA must electronically register through the Investment Adviser 
Registration Depository (IARD) as an investment adviser with the state 
in which they maintain their principal office and place of business. 
The IARD is a centralized electronic filing system, established by the 
Securities and Exchange Commission (SEC) in conjunction with state 
securities authorities. The IARD enables investment advisers to satisfy 
SEC and state registration obligations through the use of the Internet, 
and current filing information in the IARD database is readily 
available to the Department and the general public via the Internet. 
The final regulation makes electronic registration through the IARD the 
exclusive method for state-registered investment advisers to satisfy 
filing requirements for investment manager status under section 
3(38)(B)(ii) of Title I of ERISA. The regulation affects plan trustees, 
investment managers, other fiduciaries, and plan participants and 
beneficiaries. This document also contains conforming amendments to 29 
CFR 2509.75-5 at FR-6 and FR-7, to conform them to the provisions in 
the final regulation.

DATES: The effective date of the changes to parts 2509 and 2510 is 
October 25, 2004.

FOR FURTHER INFORMATION CONTACT: Florence M. Novellino, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, U.S. Department of Labor, Washington, DC 20210, 
telephone (202) 693-8518 (not a toll free number).

SUPPLEMENTARY INFORMATION:

A. Background

    Under Title I of the Employee Retirement Income Security Act of 
1974 (ERISA), named fiduciaries of plans may appoint investment 
managers to manage plan assets. If the investment manager is a 
registered investment adviser, bank or insurance company, and meets the 
other requirements for being an ``investment manager'' as defined in 
section 3(38) of ERISA, the plan trustees are relieved from certain 
obligations relating to the assets for which the investment manager is 
responsible.\1\ In 1996, the National Securities Markets Improvement 
Act of 1996 (NSMIA), Public Law 104-290, 110 Stat. 3416, amended the 
Investment Advisers Act of 1940 (Advisers Act) to divide certain 
investment adviser regulatory responsibilities, including the 
registration requirements, between the Securities and Exchange 
Commission (SEC) and the states. Prior to 1996, most investment 
advisers were required to register with the SEC and in each state in 
which they were doing business. Paragraph (1) of section 203A(a) of the 
Advisers Act, as amended by NSMIA, and SEC rule at 17 CFR 275.203A-1, 
prohibit certain investment advisers from registering with the SEC and 
instead requires that they register with the states in which they 
maintain their principal offices and places of business.\2\ The 
legislative history of NSMIA indicates that this division of regulatory 
responsibilities was intended, among other things, to encourage the SEC 
and state regulators to create a uniform system for ``one-stop'' filing 
that would benefit investors, reduce regulatory and paperwork burdens 
for registered investment advisers, and facilitate supervision of 
investment advisers.\3\
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    \1\ Section 402(c)(3) of ERISA states that a plan may provide 
that with respect to control or management of plan assets a named 
fiduciary may appoint an investment manager or managers to manage 
(including the power to acquire and dispose of) plan assets. Section 
405(d) of ERISA provides in part that, if an investment manager or 
managers have been appointed under section 402(c)(3), then no 
trustee shall be liable for the acts or omissions of such investment 
manager or managers, or be under an obligation to invest or 
otherwise manage any asset of the plan which is subject to the 
management of such investment manager.
    \2\ Specifically, subject to certain exceptions, investment 
advisers fall into three categories under the NSMIA amendments. 
First, an investment adviser having assets under management of less 
than $25 million generally is prohibited from registering with the 
SEC but must instead register with the state regulatory authority in 
the state where the investment adviser maintains its principal 
office and place of business. Those with at least $25 million but 
less than $30 million may register with the SEC in lieu of filing 
with state authorities. Those with $30 million or more must register 
with the SEC. Section 203A(a) of the Advisers Act is codified at 15 
U.S.C. 80b-3a(a). See also 17 CFR 275.203A-2 for exemptions from the 
prohibition for certain investment advisers registering with the 
SEC.
    \3\ S. Rep. No. 104-293, at 5 (1996).
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    The SEC implemented that legislative intent at the federal level by 
publishing a final rule in September of 2000 at 17 CFR 275.203-1 which 
made electronic filing with the Investment Adviser Registration 
Depository (IARD) mandatory for SEC-registered advisers. Additionally, 
all states accept forms filed via the IARD to satisfy state 
registration requirements, and many mandate state registration via the 
IARD.\4\ Accordingly, the IARD has become a ``one-stop'' Internet-based 
centralized filing system that enables investment advisers to satisfy 
filing obligations with both federal and state securities regulators. 
Pertinent state registration information in the IARD database is 
available on the Internet to the general public through the Investment 
Adviser Public Disclosure (IAPD) Web site that may be directly accessed 
through the SEC's Web site or through links from various state and 
investor Web sites. The IAPD Web site contains investment adviser 
registration data, including information about current registration 
forms, registration status, services provided, fees charged, and 
disclosures about certain conflicts of interest and disciplinary 
events, if any. The IAPD Web site includes information on investment 
advisers that currently are registered with the SEC or a state, and 
also contains information on investment advisers that were registered 
in the previous two years but are no longer registered.
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    \4\ The State of Wyoming has not promulgated a state investment 
adviser registration requirement; therefore all Wyoming-based 
investment advisers are required to register under the Advisers Act 
with the SEC via the IARD. See 65 FR 57438, 57445 (Sept. 22, 2000).
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    Section 3(38)(B) of Title I of ERISA was also amended to reflect 
the above-described changes to the investment adviser registration 
requirements under the Advisers Act.\5\ Specifically, section 3(38)(B) 
of ERISA requires that, to be an investment manager under Title I, an 
investment adviser must: (i) Be registered with the SEC under the 
Advisers Act of 1940, or (ii) if not registered under such Act by 
reason of paragraph (1) of section 203A(a) of such Act, be registered 
as an investment adviser under the laws of the state in which it 
maintains its principal office

[[Page 52121]]

and place of business and, at the time the investment adviser last 
filed the registration form it most recently filed with such state in 
order to maintain its registration under the laws of such state, it 
also filed a copy of such form with the Secretary of Labor.
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    \5\ See sec. 308(b)(1) of Title III of NSMIA and Act of November 
10, 1997, Sec. 1, Pub. L. 105-72, 111 Stat. 1457.
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    To implement the filing requirements in section 3(38)(B)(ii) of 
ERISA, the Department announced on January 14, 1998, that state-
registered investment advisers seeking to qualify, or remain qualified, 
as investment managers must file a copy of their most recent state 
registration form for the state in which they maintain their principal 
office and place of business with the Department prior to November 10, 
1998, and thereafter file with the Department copies of any subsequent 
filings with that state. The ongoing obligation to file copies with the 
Department was, however, to be temporary in nature and remain in effect 
until a centralized database containing the state registration forms, 
or substantially similar information, was available to the 
Department.\6\
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    \6\ Pub. L. 105-72 provided that a fiduciary shall be treated as 
meeting the requirement for filing a copy of the required state 
registration form with the Secretary if a copy of the form (or 
substantially similar information) is available to the Secretary 
from a centralized electronic or other record-keeping database. See 
Act of November 10, 1997, Sec. 1(b), Pub. L. 105-72, 111 Stat. 1457.
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    On December 9, 2003, the Department published a notice in the 
Federal Register (68 FR 68710) seeking public comments on its proposal 
that would add section 2510.3-38 to Title 29 of the Code of Federal 
Regulations and require state-registered investment advisers seeking to 
obtain or maintain investment manager status under Title I of ERISA to 
electronically register through the IARD as an investment adviser with 
the state in which they maintain their principal office and place of 
business.
    The Department received two comments regarding the proposal.\7\ One 
comment was from an organization whose membership is comprised of 
securities regulators from the States (including the District of 
Columbia and Puerto Rico), Canada and Mexico. The second comment was 
submitted by a professional self-regulatory organization for financial 
planners. Both commenters supported the proposal and agreed that 
requiring state-registered investment advisers seeking investment 
manager status under ERISA to register electronically with IARD would 
provide Federal and State securities regulators as well as the public 
with easy access to up-to-date information regarding investment 
advisers. They also concluded that the regulation would not impose 
undue burdens on investment advisers or affect the ability of state 
securities regulators to oversee the registration and licensing of in-
state and out-of-state investment advisers.
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    \7\ The comments received in response to the proposed regulation 
are available for inspection by the public in the Department's 
Public Disclosure Room, 200 Constitution Avenue, NW., N-1513, 
Washington, DC 20210.
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    The Department continues to believe that the requirement to file 
with the Department copies of state registration filings already 
accessible to the Department and the general public via the IAPD Web 
site placed an unnecessary administrative burden on the regulated 
community. The requirement also results in the Department allocating 
resources to receive, sort, and store paper copies of information 
readily available in electronic form. It continues to be the 
Department's view that use of the IARD as a centralized electronic 
database would improve the ability of the Department, plan fiduciaries, 
and plan participants and beneficiaries to readily access registration 
information regarding investment advisers eligible to be investment 
managers of ERISA-covered plans. As noted above, not only does the SEC 
require electronic filing through the IARD for registration under the 
Advisers Act, but most states also require IARD filing for compliance 
with state investment adviser registration requirements. While a few 
states do not make electronic filing through the IARD mandatory, as 
noted above, all states permit investment advisers to use the IARD to 
satisfy registration requirements. As described more fully below, the 
Department believes the majority of investment managers of ERISA-
covered plans already file registration forms electronically through 
the IARD under the Advisers Act or under applicable state securities 
laws. In the Department's view, the benefits to plan trustees, plan 
participants and beneficiaries, and the Department of this regulation 
outweigh the relatively small incremental cost that some investment 
managers may incur if they do not already register with their states 
through the IARD. Accordingly, the Department is adopting the final 
regulation without change from the proposal.

B. Summary of the Final Rule

    Section 2510.3-38(a) of the final regulation describes the general 
filing requirement with the Secretary set forth in section 3(38)(B)(ii) 
applicable to state-registered investment advisers seeking to become or 
remain investment managers under Title I of ERISA and makes it clear 
that the regulation's purpose is to establish the exclusive means to 
satisfy that filing obligation. Section 2510.3-38(b) of the regulation 
provides that, for a state-registered investment adviser to satisfy the 
filing requirement in section 3(38)(B)(ii) of ERISA, it must 
electronically file the required registration information through the 
IARD. Section 2510.3-38(b) also provides that submitting a copy of 
state registration forms to the Secretary does not constitute 
compliance with section 3(38)(B)(ii) of ERISA. Section 2510.3-38(c) of 
the regulation defines the term ``Investment Adviser Registration 
Depository'' and ``IARD'' for purposes of the regulation as the 
centralized electronic depository described in 17 CFR 275.203-1. 
Finally, section 2510.3-38(d) of the regulation provides a cross-
reference to the SEC Internet site at www.sec.gov/iard for information 
on filing investment advisor registration forms with the IARD.\8\
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    \8\ The comment from the organization whose membership is 
comprised of securities regulators from the States (including the 
District of Columbia and Puerto Rico), Canada and Mexico also 
suggested that, in addition to referencing SEC's Web site at http://www.sec.gov/iard, the regulation should include a reference to IARD 
materials on its website and on NASD's information Website dedicated 
to the IARD. The Department modeled its website reference on the 
Website reference in the SEC's regulation at 17 CFR 275.203-1. 
Referencing multiple governmental and non-governmental websites in 
the regulation may lead to confusion and require the Department to 
monitor multiple websites and update the regulation in the event 
website addresses change. The Department also notes that the NASAA 
and NASD Websites are included as links on the SEC site that is 
referenced in the regulation. Accordingly, the Department decided 
not to adopt the suggestion to add additional websites references to 
the regulatory text.
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C. Conforming Changes to 29 CFR 2509.75-5

    The amendment to section 3(38)(B) of ERISA relating to state-
registered investment advisers and the final regulation resulted in a 
need to make certain conforming amendments to 29 CFR 2509.75-5 
(Interpretive Bulletin 75-5). Specifically, Interpretive Bulletin 75-5 
includes various questions and answers relating to fiduciary 
responsibility, including FR-6 and FR-7 relating to persons that may be 
eligible to be appointed as an investment manager under section 
402(c)(3) of ERISA. Neither FR-6 nor FR-7 recognize that an investment 
adviser not registered with the SEC under the Advisers Act may still be 
eligible to be appointed as an investment manager if they are not 
registered under the Advisers Act by reason of paragraph 1 of section 
203A(a) of that Act but are state-registered in accordance with ERISA 
section 3(38)(B). As an interpretive rule, section 2509.75-5 is

[[Page 52122]]

not subject to notice and comment rulemaking requirements under section 
553(b) of the Administrative Procedure Act, 5 U.S.C. 553(b). Therefore, 
the Department is publishing these changes to Interpretive Bulletin 75-
5 in final form without prior publication of a notice of proposed 
rulemaking. Because these changes merely make the interpretive bulletin 
conform with the amendments to ERISA section 3(38) enacted by Public 
Law 105-72 and the provisions in 29 CFR 2510.3-38 being finalized in 
this document, the changes to FR-6 and FR-7 shall be deemed effective 
as of the effective date of this final rule.\9\
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    \9\ For prior periods, the Department effectively supplemented 
the relevant FR-6 and FR-7 provisions by, as noted above, its 
announcement on January 14, 1998, that a state-registered investment 
adviser seeking to meet the filing obligations with the Secretary of 
Labor described in section 3(38)(B)(ii) of ERISA must file a copy of 
its most recent state registration form for the state in which it 
maintains its principal office and place of business with the 
Department prior to November 10, 1998, and thereafter file with the 
Department copies of any subsequent filings with that state. 
Further, the Department provided in the proposed regulation 
published on December 9, 2003 that, until publication of a final 
rule, state-registered investment advisers seeking to obtain or 
maintain investment manager status under Title I of ERISA could rely 
on the proposed regulation to meet the filing obligations with the 
Secretary of Labor described in section 3(38)(B)(ii) of ERISA.
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D. Interim Reliance

    The proposed regulation provided that until the effective date of 
the final regulation, state-registered investment advisers seeking to 
obtain or maintain investment manager status under Title I of ERISA 
will be treated as having met the filing obligations with the Secretary 
of Labor described in section 3(38)(B)(ii) of ERISA for any 
registration filing due on or after December 9, 2003 if they satisfy 
the conditions of the proposed regulation. Accordingly, the Department 
will continue to treat investment advisers seeking to obtain or 
maintain investment manager status under Title I of ERISA as having met 
the filing obligations with the Secretary of Labor described in section 
3(38)(B)(ii) of ERISA for any registration filing due before the 
effective date of the final regulation but on or after December 9, 2003 
if they satisfied the conditions of the proposed regulation.

E. Regulatory Impact Analysis

Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, it has been 
determined that this final action is ``non-significant'' within the 
meaning of section 3(f)(4) of the Executive Order. Accordingly, it does 
not require an assessment of potential costs and benefits under section 
6(a)(3) of that Order. Nonetheless, when the Department issued the 
proposed regulation on December 9, 2003, it sought public comment on an 
initial analysis of costs and benefits. The Department received only 
commentary that supported the proposal. Although no further economic 
analysis is required under the Executive Order, the Department has 
included, for information purposes only a final assessment of costs and 
benefits.

Summary

    The Department undertook this rulemaking for the purpose of 
establishing a single and readily accessible source of consistent 
information about the registration of investment advisers that are 
investment managers by virtue of meeting the requirements of section 
3(38)(B)(ii) of ERISA. The Department believes the regulation will 
benefit plan fiduciaries, investment advisers, and ultimately the 
participants and beneficiaries of employee benefit plans. Although the 
anticipated benefits of the regulation are not quantified here, they 
are expected to more than justify its relatively modest estimated cost.
    The estimated cost of the implementation of electronic registration 
through the IARD for approximately 500 advisers that submitted copies 
of their state registrations to the Secretary of Labor, and that 
currently register in only those states that do not mandate IARD 
filing, is just under $400,000. Ongoing annual costs are estimated at 
$50,000. These costs will be offset by efficiency gains for plan 
fiduciaries and for investment advisers that wish to be appointed by 
plan fiduciaries. As a result of the electronic registration 
requirement, plan fiduciaries will be able to access a single source of 
registration information regardless of the size or location of the 
adviser, and advisers may more readily demonstrate their eligibility to 
be investment managers in order to gain appointments by plan 
fiduciaries. Over time, these investment managers may also reduce the 
handling of paper and the time required to complete the Form ADV, which 
is the joint SEC and state registration form that is also currently 
accepted by all the states for state registration purposes. Electronic 
availability of registration information will also support better and 
more transparent decision making with respect to the appointment of 
investment managers, which ultimately benefits the participants and 
beneficiaries of the plans involved.

Discussion

    The regulation benefits plan fiduciaries that wish to appoint an 
investment manager pursuant to section 402(c)(3) of ERISA. Under 
section 405(d)(1) of ERISA, plan fiduciaries are not liable for the 
acts or omissions of the investment manager, and have no obligation to 
invest assets subject to management by the investment manager. The 
centralized source of readily accessible registration information 
offered by the IARD will help plan fiduciaries more efficiently locate 
information needed to determine whether advisers they may consider 
appointing are eligible to be an investment manager under ERISA. The 
source and format of information will no longer differ based on the 
size or principal business location of the adviser.
    Uniform use of the IARD for all advisers who wish to be or remain 
as investment managers under ERISA will benefit these advisers as well. 
The change to electronic filing will not change the incentives for 
investment advisers to become investment managers under ERISA, but 
should promote increased efficiency for doing so. Advisers are not 
required to be an investment manager to conduct advisory activities for 
any customer. The Department assumes that an adviser's decision whether 
to meet the definition of investment manager under ERISA is based on 
factors unrelated to the form or format of their registration. It is 
therefore expected that those state-

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registered advisers who filed paper copies of their state registration 
forms with the Secretary chose to do so to gain an advantage in 
securing appointments by plan fiduciaries.
    In any case, this regulation will not change the content of the 
filings for these advisers because all states accept the joint SEC and 
state filing form (Form ADV) for state registration, and with certain 
exceptions, all of the copies submitted to the Secretary were made on 
Form ADV.\10\ Mandatory use of the IARD will, however, change the 
format and manner in which the information is transmitted. While the 
Department expects advisers to incur a cost to establish a procedure 
for electronic filing through the IARD plus an annual fee, the change 
to an electronic format and transmission method is expected to be more 
efficient and less costly over time. Use of the IARD will reduce the 
paper handling, filing, and mailing costs associated with providing 
copies to the state or states as well as to the Secretary, and reduce 
handling to obtain and reproduce signatures. The SEC cited similar 
efficiency gains in its regulatory impact analysis of the final rule 
implementing mandatory electronic filing for federally regulated 
advisers. Securities and Exchange Commission, Electronic Filing by 
Investment Advisers; Final Rule, 65 FR 57438, Sept. 22, 2000.
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    \10\ Several exceptions were observed; in those cases, the 
adviser submitted a copy of the state's action on their 
registration, such as a license or approval form, rather than the 
registration form itself. In each case, other advisers' filings for 
the same state were examined to confirm that the state did accept 
Form ADV filings.
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    The regulation will directly affect only those investment advisers 
who wish to become or remain as investment managers under section 3(38) 
of ERISA, who generally have $25 million or less under management and 
consequently do not register with the SEC, and who register only in 
states that do not mandate use of the IARD to satisfy state 
registration requirements. Copies of registration forms submitted to 
the Secretary by state-registered investment advisers indicate that 
about 500 state-registered advisers have registered in only a non-IARD 
state.\11\ Prior to the implementation of the IARD and many states' 
decisions to mandate use of the IARD to meet state investment adviser 
registration requirements, about 1,500 advisers provided paper copies 
of their state registration forms to the Secretary. Based on the data 
contained in those filings, about 1,000 of these already have the 
capability to file electronically because they are required to register 
in states that mandate use of the IARD. The Department therefore 
assumes that this regulation affects only those advisers that register 
solely in non-IARD states.
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    \11\ California, Florida, Kentucky, South Carolina, and West 
Virginia at the time of this writing.
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    Under existing requirements, state-registered advisers incur a 
state registration filing fee with every state in which they are 
required to register, plus postage and handling fees for their 
submissions. Such fees vary by state. Most if not all of the 500 
advisers affected by this regulation now register in only one state. 
When advisers registered only in non-IARD states register through the 
IARD, the appropriate state registration fee will be forwarded to the 
state, such that there will be no net change in state filing fees.
    The Advisers Act and Form ADV allow for the requirement that states 
be provided registration statements. To facilitate state registration, 
the registrant checks the appropriate boxes on the form for each 
applicable state, and the IARD then distributes the required 
information electronically to those states. States will be unaffected 
because they will continue to receive existing fees, although they will 
be transmitted in a different manner.
    These advisers would, however, newly incur the IARD initial filing 
fee of $150 for advisers of the size under consideration here, and an 
annual filing fee of $100. It is also expected that the 500 state-
registered advisers will incur a cost for the set-up of the electronic 
filing capability, and an expenditure of time to adjust internal 
procedures and put existing information into an electronic format. 
Filing fees are expected to total $75,000 in the first year and $50,000 
in each subsequent year for these advisers.
    The cost of the electronic filing set-up is not known. The SEC did 
not quantify the cost of set-up in the final rule cited above that 
pertained to mandatory use of the IARD for registration with the SEC. 
However, for purposes of this discussion, the cost for establishment of 
electronic filing capability by an adviser has been estimated to be 
$500, which amounts to a total of $250,000 for the 500 advisers 
affected. This is a one-time cost based on available information on 
annual fees charged to SEC registrants by commercial providers of 
service in the industry.\12\ An examination of a sample of the 500 
individual filings showed that many of the advisers in question already 
use the software of a single provider for completing their Form ADV. 
Because this provider performs services to IARD filers who are 
currently SEC registrants as well, we have assumed that their range of 
services includes a method of facilitating electronic filing. It is 
also assumed that all advisers make use of electronic technology in the 
normal course of business and will not be required to make substantial 
technological changes as a result of this regulation.
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    \12\ Such fees are used here as a proxy only; the fees do not 
pertain specifically to electronic set-up or transmission.
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    A one-time cost is also estimated for the time required for the 
adviser to adjust its internal procedures to input data electronically, 
if necessary. A comparison of a sample of the paper filings received 
with IARD data indicated that these advisers had not filed 
electronically with IARD. However, it seems likely that many advisers 
already prepare the forms electronically, regardless of whether they 
submit them electronically. Nevertheless, to account for preparation 
for electronic transmission, it has been estimated that the advisers 
will incur the cost of two hours of a financial professional's time at 
$68 per hour, for a cost of $136 per adviser and a total of $68,000.
    The estimated one-time cost of this regulation totals $393,000. The 
ongoing cost of maintaining registration information and completing and 
filing Form ADV is not accounted for here because the advisers prepare 
and file such forms to meet state registration requirements and would 
continue to do so without regard to this regulation. The ongoing 
incremental cost of this regulation is therefore $100 per adviser per 
year, or $50,000.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520), the Department submitted the information collection request 
(ICR) included in this regulation to the Office of Management and 
Budget (OMB) for review and clearance at the time the Notice of 
Proposed Rulemaking (NPRM) was published in the Federal Register 
(December 9, 2003, 68 FR 68710). OMB approved the ICR under OMB control 
number 1210-0125. The approval will expire on January 31, 2007. The 
public is not required to respond to an information collection request 
unless it displays a currently valid OMB control number. Because the 
ICR is unchanged, no additional submission for approval is made in 
connection with this final rule.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, this rule does not include 
any federal mandate that may result in

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expenditures by State, local, or tribal governments in the aggregate of 
more than $100 million, or increased expenditures by the private sector 
of more than $100 million.

Small Business Regulatory Enforcement Fairness Act

    The rule being issued here is subject to the Congressional Review 
Act provisions of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (5 U.S.C. 801 et seq.) and has been transmitted to Congress 
and the Comptroller General for review. The rule is not a ``major 
rule'' as that term is defined in 5 U.S.C. 804, because it is not 
likely to result in (1) an annual effect on the economy of $100 million 
or more; (2) a major increase in costs or prices for consumers, 
individual industries, or federal, state, or local government agencies, 
or geographic regions; or (3) significant adverse effects on 
competition, employment, investment, productivity, innovation, or on 
the ability of United States-based enterprises to compete with foreign-
based enterprises in domestic or export markets.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency certifies that a final rule will not have a 
significant economic impact on a substantial number of small entities, 
section 604 of the RFA requires that the agency present a regulatory 
flexibility analysis at the time of the publication of the notice of 
final rulemaking describing the impact of the rule on small entities. 
Small entities include small businesses, organizations and governmental 
jurisdictions.
    For purposes of analysis under the RFA, EBSA normally considers a 
small entity to be an employee benefit plan with fewer than 100 
participants, on the basis of the definition found in section 104(a)(2) 
of ERISA. However, this regulation pertains to investment advisers that 
are prohibited from registering with the SEC pursuant to section 203(A) 
of the Advisers Act and SEC rules. This generally includes those 
advisers that have assets of less than $25 million under management. In 
its final rule relating to Electronic Filing by Investment Advisers (65 
FR 57445, note 86), the SEC states that 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 (Rule 0-7 under the Advisers Act).
    Because the entities potentially affected by this rule are similar 
if not identical to those that fall within the SEC definition of small 
entity for RFA purposes, and because the regulation is expected to have 
a direct impact on an existing cost of doing business that investment 
advisers would assume without regard to the regulation, but no economic 
impact that would be passed on to employee benefit plans, the 
Department considers it appropriate in this limited circumstance to use 
the SEC definition for evaluating potential impacts on small entities. 
At the time of the proposed regulation, the Department sought comments 
with respect to its election to use this definition and received no 
comments in response to its request. Accordingly, using this 
definition, the Department certifies that this regulation will not have 
a significant economic impact on a substantial number of small 
entities. The factual basis for this conclusion is described below.
    The SEC states that of about 20,000 investment advisers in the 
United States, some 12,000 do not file with them. As discussed above, 
approximately 500 investment advisers are expected to incur costs under 
this regulation. This represents 2.5 percent of the approximately 
20,000 advisers doing business in the U.S., or 4 percent of the 12,000 
small advisers that do not currently file with the SEC. Thus the number 
of advisers that will incur costs under this regulation is substantial 
neither in absolute terms nor as a fraction of the universe of all or 
of small advisers.
    In addition, the economic impact of the regulation is not expected 
to be significant for any small entity. Seeking investment manager 
status for purposes of ERISA is not mandatory; small advisers 
presumably make efforts to meet the terms of the ERISA investment 
manager definition only when they compute a net benefit for doing so. 
The rule mandates electronic submission of small advisers' registration 
information, but will not change the content or other requirements for 
those registrations. The average cost for affected advisers is 
estimated to be small: about $800 in the initial year, and $100 in each 
following year. It is possible that some portion of this cost will be 
passed on to plans.
    At the time of the proposed rule, EBSA requested comments on the 
potential impact of the proposed regulation on small entities, and on 
ways in which costs could be limited within the stated objectives of 
the proposal; no comments were received that would cause the Department 
to re-evaluate these impacts and costs. On this basis, the Department 
certifies that this rule will not have a significant economic impact on 
a substantial number of small entities.

Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires the adherence to specific 
criteria by federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This rule does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated, that the provisions of Titles I and 
IV of ERISA supersede any and all laws of the States as they relate to 
any employee benefit plan covered under ERISA. Although the 
requirements in this rule do alter the fundamental reporting and 
disclosure requirements of section 3(38)(B) of ERISA with respect to 
state-registered investment advisers, because the duty of these state-
registered advisers to report to the states exists independently of 
ERISA, and the rule merely prescribes that investment advisers seeking 
ERISA investment manager status use a specific filing method that is 
accepted by all states and available as a choice in all states for 
registration purposes, there is neither a direct implication for the 
States, nor is there a direct effect on the relationship or 
distribution of power between the national government and the States. 
This rule only affects those state-registered investment advisers who 
choose to seek investment manager status under section 3(38) of ERISA, 
advisers not seeking such status are unaffected by this regulation.

[[Page 52125]]

Statutory Authority

    The final regulation and amendments to 29 CFR 2509.75-5 are adopted 
pursuant to the authority contained in section 505 of ERISA (Pub. L. 
93-406, 88 Stat. 894; 29 U.S.C. 1135), and the Act of November 10, 
1997, Sec. 1, Pub. L. 105-72, 111 Stat. 1457, and under Secretary of 
Labor's Order 1-2003, 68 FR 5374 (Feb. 3, 2003).

List of Subjects

29 CFR Part 2509

    Employee benefit plans, Employee Retirement Income Security Act, 
Fiduciary responsibility, Pensions, Plan assets.

29 CFR Part 2510

    Employee benefit plans, Employee Retirement Income Security Act, 
Pensions, Plan assets.

0
For the reasons set forth in the preamble, 29 CFR parts 2590 and 2510 
are amended as follows:

PART 2509--[AMENDED]

0
1.The authority citation for part 2509 is revised to read as follows:

    Authority: 29 U.S.C. 1135; Secretary of Labor's Order 1-2003, 68 
FR 5374 (Feb. 3, 2003). Secs 2509.75-10 and 2509-75-2 issued under 
29 U.S.C. 1052, 1053, 1054. Sec. 2509.75-5 also issued under 29 
U.S.C. 1002.


0
2. Amend Sec.  2509.75-5 by revising FR-6 and FR-7 to read as follows:


Sec.  2509.75-5  Questions and answers relating to fiduciary 
responsibility.

* * * * *
    FR-6 Q: May an investment adviser which is neither a bank nor an 
insurance company, and which is neither registered under the Investment 
Advisers Act of 1940 nor registered as an investment adviser in the 
State where it maintains its principal office and place of business, be 
appointed an investment manager under section 402(c)(3) of the Act?
    A: No. The only persons who may be appointed an investment manager 
under section 402(c)(3) of the Act are persons who meet the 
requirements of section 3(38) of the Act--namely, banks (as defined in 
the Investment Advisers Act of 1940), insurance companies qualified 
under the laws of more than one state to manage, acquire and dispose of 
plan assets, persons registered as investment advisers under the 
Investment Advisers Act of 1940, or persons not registered under the 
Investment Advisers Act by reason of paragraph 1 of section 203A(a) of 
that Act who are registered as investment advisers in the State where 
they maintain their principal office and place of business in 
accordance with ERISA section 3(38) and who have met the filing 
requirements of 29 CFR 2510.3-38.
    FR-7 Q: May an investment adviser that has a registration 
application pending for federal registration under the Investment 
Advisers Act of 1940, or pending with the appropriate state regulatory 
body under State investment adviser registration laws if relying on the 
provisions of 29 CFR 2510.3-38 to qualify as a state-registered 
investment manager, function as an investment manager under the Act 
prior to the effective date of their federal or state registration?
    A: No, for the reasons stated in the answer to FR-6 above.
* * * * *

PART 2510--[AMENDED]

0
3.The authority citation for part 2510 is revised to read as follows:

    Authority: 29 U.S.C. 1002(2), 1002(21), 1002(37), 1002(38), 
1002(40), 1031, and 1135; Secretary of Labor's Order 1-2003, 68 FR 
5374; Sec. 2510.3-101 also issued under sec. 102 of Reorganization 
Plan No. 4 of 1978, 43 FR 47713, 3 CFR, 1978 Comp., p. 332 and E.O. 
12108, 44 FR 1065, 3 CFR, 1978 Comp., p. 275, and 29 U.S.C. 1135 
note. Sec. 2510.3-102 also issued under sec. 102 of Reorganization 
Plan No. 4 of 1978, 43 FR 47713, 3 CFR, 1978 Comp., p. 332 and E.O. 
12108, 44 FR 1065, 3 CFR, 1978 Comp., p. 275. Section 2510.3-38 is 
also issued under Sec. 1, Pub. L. 105-72, 111 Stat. 1457.


0
4.Add Sec.  2510.3-38 to read as follows:


Sec.  2510.3-38  Filing requirements for State registered investment 
advisers to be investment managers.

    (a) General. Section 3(38) of the Act sets forth the criteria for a 
fiduciary to be an investment manager for purposes of section 405 of 
the Act. Subparagraph (B)(ii) of section 3(38) of the Act provides 
that, in the case of a fiduciary who is not registered under the 
Investment Advisers Act of 1940 by reason of paragraph (1) of section 
203A(a) of such Act, the fiduciary must be registered as an investment 
adviser under the laws of the State in which it maintains its principal 
office and place of business, and, at the time the fiduciary files 
registration forms with such State to maintain the fiduciary's 
registration under the laws of such State, also files a copy of such 
forms with the Secretary of Labor. The purpose of this section is to 
set forth the exclusive means for investment advisers to satisfy the 
filing obligation with the Secretary described in subparagraph (B)(ii) 
of section 3(38) of the Act.
    (b) Filing Requirement. To satisfy the filing requirement with the 
Secretary in section 3(38)(B)(ii) of the Act, a fiduciary must be 
registered as an investment adviser with the State in which it 
maintains its principal office and place of business and file through 
the Investment Adviser Registration Depository (IARD), in accordance 
with applicable IARD requirements, the information required to be 
registered and maintain the fiduciary's registration as an investment 
adviser in such State. Submitting to the Secretary investment adviser 
registration forms filed with a State does not constitute compliance 
with the filing requirement in section 3(38)(B)(ii) of the Act.
    (c) Definitions. For purposes of this section, the term 
``Investment Adviser Registration Depository'' or ``IARD'' means the 
centralized electronic depository described in 17 CFR 275.203-1.
    (d) Cross Reference. Information for investment advisers on how to 
file through the IARD is available on the Securities and Exchange 
Commission website at ``www.sec.gov/iard.''

    Signed at Washington, DC, this 16th day of August, 2004.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 04-19089 Filed 8-23-04; 8:45 am]
BILLING CODE 4510-29-P