[Federal Register Volume 85, Number 47 (Tuesday, March 10, 2020)]
[Rules and Regulations]
[Pages 13734-13741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04571]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-5454]
RIN 3235-AM68


Exemptions From Investment Adviser Registration for Advisers to 
Certain Rural Business Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are amending the definition of the term ``venture capital 
fund'' and the private fund adviser exemption under the Investment 
Advisers Act of 1940 (the ``Advisers Act'') to reflect in our rules 
exemptions from registration for investment advisers who advise rural 
business investment companies (``RBICs''). These exemptions were 
enacted as part of the RBIC Advisers Relief Act of 2018 (the ``RBIC 
Advisers Relief Act''), which amended Advisers Act sections 203(l) and 
203(m), among other provisions. Specifically, the RBIC Advisers Relief 
Act amended Advisers Act section 203(l), which exempts from investment 
adviser registration any adviser who solely advises venture capital 
funds, by stating that RBICs are venture capital funds for purposes of 
the exemption. Accordingly, we are amending the definition of the term 
``venture capital fund'' to include RBICs. The RBIC Advisers Relief Act 
also amended Advisers Act section 203(m), which exempts from investment 
adviser registration any adviser who solely advises private funds and 
has assets under management in the United States of less than $150 
million, by excluding RBIC assets from counting towards the $150 
million threshold. Accordingly, we are amending the definition of the 
term ``assets under management'' in the private fund adviser exemption 
to exclude the assets of RBICs.

DATES: Effective date: March 10, 2020.

FOR FURTHER INFORMATION CONTACT: Alexis Palascak, Senior Counsel, or 
Jennifer Songer, Branch Chief, Investment Adviser Regulation Office at 
(202) 551-6787 or [email protected]; Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 17 
CFR 275.203(l)-1 [rule 203(l)-1] and 17 CFR 275.203(m)-1 [rule 203(m)-
1] under the Investment Advisers Act of 1940 [15 U.S.C. 80b].\1\
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    \1\ Unless otherwise noted, when we refer to the Advisers Act, 
or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 
80b of the United States Code [15 U.S.C. 80b], at which the Advisers 
Act is codified, and when we refer to Advisers Act rules, or any 
paragraph of these rules, we are referring to title 17, part 275 of 
the Code of Federal Regulations [17 CFR part 275], in which these 
rules are published.
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Table of Contents

I. Background
II. Discussion
    A. The Venture Capital Fund Adviser Exemption and Amendments to 
Advisers Act Rule 203(l)-1
    B. The Private Fund Adviser Exemption and Amendments to Advisers 
Act Rule 203(m)-1
III. Procedural Matters
IV. Economic Analysis
    A. Introduction
    B. Costs and Benefits
    C. Efficiency, Competition, and Capital Formation
V. Paperwork Reduction Act Analysis
VI. Statutory Authority
    Text of the Rule Amendments

I. Background

    The RBIC Advisers Relief Act of 2018 (the ``RBIC Advisers Relief 
Act'') \2\ amended the Investment Advisers Act of 1940 (the ``Advisers 
Act'') to provide one new and two expanded exemptions from registration 
for investment advisers who advise rural business investment

[[Page 13735]]

companies (``RBICs'').\3\ The RBIC Advisers Relief Act added section 
203(b)(8) to the Advisers Act (the ``RBIC adviser exemption''). The 
RBIC adviser exemption exempts from registration any investment adviser 
who solely advises RBICs. An investment adviser who relies on the RBIC 
adviser exemption is not subject to reporting or recordkeeping 
provisions under the Advisers Act and is not subject to examination by 
our staff.\4\ The RBIC Advisers Relief Act also added section 
203A(b)(1)(D) to the Advisers Act, which provides that no law of any 
state or political subdivision thereof requiring the registration, 
licensing, or qualification as an investment adviser or supervised 
person of an investment adviser shall apply to any person that is not 
registered under Advisers Act section 203 because that person is exempt 
from registration under the RBIC adviser exemption, or is a supervised 
person of such person.\5\
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    \2\ Public Law 115-417, 132 Stat. 5438 (Jan. 3, 2019).
    \3\ An RBIC is (other than an entity that has elected to be 
regulated or is regulated as a business development company pursuant 
to section 54 of the Investment Company Act of 1940 (``Investment 
Company Act'')); (1) a rural business investment company (as defined 
in section 384A of the Consolidated Farm and Rural Development Act 
(the ``CFRD'')); or (2) a company that has submitted to the 
Secretary of Agriculture an application in accordance with section 
384D(b) of the CFRD that either (i) has received from the Secretary 
of Agriculture a letter of conditions, which has not been revoked; 
or (ii) is affiliated with one or more rural business investment 
companies (as defined in section 384A of the CFRD). See 15 U.S.C. 
80a-53, 7 U.S.C. 2009cc, 7 U.S.C. 2009cc-3(b). This definition is 
consistent with the definition of RBIC used in sections 203(l) and 
203(m) of the Advisers Act discussed below, and we have used this 
term for purposes of this release. We note that RBIC is also defined 
in Advisers Act section 203(b)(8) as (1) a rural business investment 
company (as defined in section 384A of the CFRD); or (2) a company 
that has submitted to the Secretary of Agriculture an application in 
accordance with section 384D(b) of the CFRD that either (i) has 
received from the Secretary of Agriculture a letter of conditions, 
which has not been revoked; or (ii) is affiliated with one or more 
rural business investment companies (as defined in section 384A of 
the CFRD).
    \4\ Under Advisers Act section 204(a), the Commission has the 
authority to require an investment adviser to maintain records and 
provide reports, as well as the authority to examine such adviser's 
records, unless the adviser is specifically exempted from the 
requirement to register pursuant to Advisers Act section 203(b), 
which includes Advisers Act section 203(b)(8) (the RBIC adviser 
exemption). 15 U.S.C. 80b-4(a), 15 U.S.C. 80b-3(b).
    \5\ 15 U.S.C. 80b-3a(b)(1)(D). See infra footnote 11.
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    In addition, the RBIC Advisers Relief Act expanded the 
applicability of two additional exemptions from investment adviser 
registration for investment advisers to RBICs when the adviser cannot 
rely on the RBIC adviser exemption: The exemption for any adviser who 
solely advises one or more venture capital funds in Advisers Act 
section 203(l) \6\ (the ``venture capital fund adviser exemption''), 
and (2) the exemption for any adviser who solely advises private funds 
and has assets under management in the United States of less than $150 
million in Advisers Act section 203(m) \7\ (the ``private fund adviser 
exemption''). Specifically, the RBIC Advisers Relief Act amended the 
venture capital fund adviser exemption by stating that RBICs are 
venture capital funds for purposes of the exemption. It also amended 
the private fund adviser exemption by excluding RBIC assets from 
counting towards the $150 million threshold. An investment adviser who 
relies on the venture capital fund adviser exemption or the private 
fund adviser exemption is considered an ``exempt reporting adviser'' 
and must maintain such records and submit such reports as the 
Commission determines to be necessary or appropriate in the public 
interest or for the protection of investors.\8\ Exempt reporting 
advisers are required to file with the Commission certain information 
required by Form ADV \9\ but are not subject to many of the other 
substantive requirements to which registered investment advisers are 
subject.\10\ Additionally, an investment adviser who relies on the 
venture capital fund adviser exemption or the private fund adviser 
exemption must evaluate the need for state registration.\11\
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    \6\ 15 U.S.C. 80b-3(l).
    \7\ 15 U.S.C. 80b-3(m).
    \8\ Investment advisers who are exempt from registration in 
reliance on Advisers Act section 203(l) (the venture capital fund 
adviser exemption) or Advisers Act section 203(m) (the private fund 
adviser exemption) are not specifically exempted from the 
requirement to register pursuant to Advisers Act section 203(b), and 
the Commission has authority under Advisers Act section 204(a) to 
require those advisers to maintain records and provide reports, as 
well as the authority to examine such advisers' records. In this 
release, we refer to advisers who rely on the venture capital fund 
adviser exemption and the private fund adviser exemption as ``exempt 
reporting advisers.'' The Advisers Act rule in 17 CFR 275.204-4 
[rule 204-4] sets forth reporting requirements for exempt reporting 
advisers. See 17 CFR 275.204-4.
    \9\ Exempt reporting advisers must complete a subset of items 
and schedules on Form ADV. However, exempt reporting advisers who 
are also registering with a state authority must complete all of 
Form ADV. See Form ADV, General Instruction 3 (How is Form ADV 
organized?), available at https://www.sec.gov/about/forms/formadv-instructions.pdf.
    \10\ For example, registered investment advisers are required to 
comply with the Advisers Act rule in 17 CFR 275.204-2 [rule 204-2] 
(books and records to be maintained by investment advisers), 
Advisers Act rule in 17 CFR 275.204-3 [rule 204-3] (delivery of 
brochures and brochure supplements), Advisers Act rule in 17 CFR 
275.204(b)-1 [rule 204(b)-1] (reporting by investment advisers to 
private funds), Advisers Act rule in 17 CFR 275.204A-1 [rule 204A-1] 
(investment adviser codes of ethics), Advisers Act rule in 17 CFR 
275.206(4)-1 [rule 206(4)-1] (advertisements by investment 
advisers), Advisers Act rule in 17 CFR 275.206(4)-2 [rule 206(4)-2] 
(custody of funds or securities of clients by investment advisers), 
Advisers Act rule in 17 CFR 275.206(4)-3 [rule 206(4)-3] (cash 
payments for client solicitations), Advisers Act rule in 17 CFR 
275.206(4)-6 [rule 206(4)-6] (proxy voting), and Advisers Act rule 
in 17 CFR 275.206(4)-7 [rule 206(4)-7] (compliance procedures and 
practices).
    \11\ Advisers Act section 203A(b)(1) does not specifically 
exempt from state regulatory requirements advisers relying on the 
venture capital fund adviser exemption or the private fund adviser 
exemption. Advisers Act section 222 provides that a state cannot 
require registration, licensing, or qualification as an investment 
adviser if the investment adviser (1) does not have a place of 
business located within the state and (2) during the preceding 12-
month period, has had fewer than six clients who are residents of 
that state. Form ADV, General Instruction 14 provides instructions 
for exempt reporting advisers who may be required to register with 
or submit reports to state securities authorities. 15 U.S.C. 80b-
3a(b)(1), 15 U.S.C. 80b-18a, Form ADV: General Instruction 14 (I am 
an exempt reporting adviser. Is it possible that I might be required 
to also register with or submit a report to a state securities 
authority?) (emphasis omitted), available at https://www.sec.gov/about/forms/formadv-instructions.pdf. Exempt reporting advisers must 
complete all of Form ADV if they are also registering with a state 
securities authority. See id.
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    We are amending our rules to reflect the RBIC Advisers Relief Act 
amendments to the Advisers Act. Specifically, we are amending the 
definition of the term ``venture capital fund'' in Advisers Act rule 
203(l)-1 to include RBICs. We also are amending the definition of the 
term ``assets under management'' in Advisers Act rule 203(m)-1 to 
exclude RBIC assets from counting towards the $150 million threshold.

II. Discussion

A. The Venture Capital Fund Adviser Exemption and Amendments to 
Advisers Act Rule 203(l)-1

    As noted above, the venture capital fund adviser exemption in 
Advisers Act section 203(l) provides an exemption from registration 
under the Advisers Act for investment advisers who solely advise 
venture capital funds.\12\ The RBIC Advisers Relief Act amended 
Advisers Act section 203(l) by stating that RBICs are venture capital 
funds for

[[Page 13736]]

purposes of the venture capital fund adviser exemption.
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    \12\ An adviser may not advise venture capital funds with more 
than $150 million in assets under management in reliance on the 
venture capital fund adviser exemption and also advise other types 
of private funds with less than $150 million in assets under 
management in reliance on the private fund adviser exemption. 
Depending on the facts and circumstances, we may view two or more 
separately formed advisory entities, each of which purports to rely 
on a separate exemption from registration, as a single adviser for 
purposes of assessing the availability of exemptions from 
registration. See Exemptions for Advisers to Venture Capital Funds, 
Private Fund Advisers with Less Than $150 Million in Assets Under 
Management, and Foreign Private Advisers, Investment Advisers Act 
Release No. 3222 (June 22, 2011) [76 FR 39646 (July 6, 2011)] at 
n.314 and accompanying text, n.506 and accompanying text. See also, 
Advisers Act section 208(d), which prohibits a person from doing 
indirectly, or through or by another person, any act or thing which 
it would be unlawful for such person to do directly. 15 U.S.C. 80b-
8.
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    To make our rules consistent with amended Advisers Act section 
203(l), we are amending Advisers Act rule 203(l)-1, which defines the 
term ``venture capital fund'' for purposes of the venture capital fund 
adviser exemption.\13\ Specifically, we are amending Advisers Act rule 
203(l)-1 to provide that the term ``venture capital fund'' includes 
RBICs.\14\ This amendment is designed to reflect that an investment 
adviser who relies on the venture capital fund adviser exemption may 
advise solely venture capital funds, including RBICs.
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    \13\ Advisers Act rule 203(l)-1 currently defines the term 
``venture capital fund'' as any SBIC (defined below) or any private 
fund that (1) represents to investors and potential investors that 
it pursues a venture capital strategy; (2) immediately after the 
acquisition of any asset, other than qualifying investments or 
short-term holdings, holds no more than 20 percent of the amount of 
the fund's aggregate capital contributions and uncalled committed 
capital in assets (other than short-term holdings) that are not 
qualifying investments, valued at cost or fair value, consistently 
applied by the fund; (3) does not borrow, issue debt obligations, 
provide guarantees or otherwise incur leverage, in excess of 15 
percent of the private fund's aggregate capital contributions and 
uncalled committed capital, and any such borrowing, indebtedness, 
guarantee or leverage is for a non-renewable term of no longer than 
120 calendar days, except that any guarantee by the private fund of 
a qualifying portfolio company's obligations up to the amount of the 
value of the private fund's investment in the qualifying portfolio 
company is not subject to the 120 calendar day limit; (4) only 
issues securities the terms of which do not provide a holder with 
any right, except in extraordinary circumstances, to withdraw, 
redeem or require the repurchase of such securities but may entitle 
holders to receive distributions made to all holders pro rata; and 
(5) is not registered under section 8 of the Investment Company Act, 
and has not elected to be treated as a business development company 
pursuant to section 54 of the Investment Company Act. 15 U.S.C. 80a-
8. An SBIC is (other than an entity that has elected to be regulated 
or is regulated as a business development company pursuant to 
section 54 of the Investment Company Act) (1) a small business 
investment company that is licensed under the Small Business 
Investment Act of 1958 (the ``SBIA''); (2) an entity that has 
received from the Small Business Administration notice to proceed to 
qualify for a license as a small business investment company under 
the SBIA, which notice or license has not been revoked; or (3) an 
applicant that is affiliated with one or more small business 
investment companies that are licensed under the SBIA and that has 
applied for another license under the SBIA, which application 
remains pending. See 15 U.S.C. 80b-3(b)(7).
    \14\ Amended Advisers Act rule 203(l)-1(a).
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    An adviser to RBICs who relies on the venture capital fund adviser 
exemption will be required to submit Form ADV reports to the Commission 
as an exempt reporting adviser, consistent with the current 
requirements for advisers relying on the venture capital fund adviser 
exemption.\15\ Furthermore, an adviser to RBICs who relies on the 
venture capital fund adviser exemption will be required to report on 
Form ADV certain information about the private funds it advises, 
consistent with the current requirements for exempt reporting 
advisers.\16\
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    \15\ See 15 U.S.C. 80b-3(l)(1) and supra footnote 8.
    \16\ Form ADV requires exempt reporting advisers to disclose 
information about the private funds they advise.
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B. The Private Fund Adviser Exemption and Amendments to Advisers Act 
Rule 203(m)-1

    The private fund adviser exemption in Advisers Act section 203(m) 
directs the Commission to provide an exemption from registration to any 
investment adviser who solely advises private funds and has assets 
under management in the United States of less than $150 million.\17\ 
The RBIC Advisers Relief Act amended Advisers Act section 203(m) by 
excluding RBIC assets from counting towards the $150 million threshold.
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    \17\ Depending on the facts and circumstances, we may view two 
or more separately formed advisory entities, each of which purports 
to rely on a separate exemption from registration, as a single 
adviser for purposes of assessing the availability of exemptions 
from registration. See supra footnote 12.
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    To make our rules consistent with amended Advisers Act section 
203(m), we are amending Advisers Act rule 203(m)-1(d)(1), which defines 
the term ``assets under management'' for purposes of the private fund 
adviser exemption.\18\ Specifically, we are amending Advisers Act rule 
203(m)-1(d)(1) \19\ to provide that the term ``assets under 
management'' excludes the regulatory assets under management 
attributable to a private fund that is an RBIC.\20\ This amendment is 
designed to reflect that an investment adviser can rely on the private 
fund adviser exemption without counting the assets of its private funds 
that are RBICs towards the $150 million threshold.
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    \18\ Advisers Act rule 203(m)-1(d)(1) currently defines the term 
``assets under management'' as the regulatory assets under 
management as determined under Form ADV, Part 1A, Item 5.F 
(Regulatory Assets Under Management) except that the regulatory 
assets under management attributable to a private fund that is an 
SBIC shall be excluded from the definition of assets under 
management for purposes of the private fund adviser exemption. 17 
CFR 275.203(m)-1(d)(1), Form ADV, Part 1A, Item 5.F (Regulatory 
Assets Under Management), available at https://www.sec.gov/about/forms/formadv-part1a.pdf.
    \19\ Amended Advisers Act rule 203(m)-1(d)(1).
    \20\ The Commission is adding subordinate paragraphs to Advisers 
Act rule 203(m)-1(d)(1) so that Advisers Act rule 203(m)-1(d)(1)(i) 
will concern the exclusion of regulatory assets under management 
attributable to a private fund that is an SBIC and Advisers Act rule 
203(m)-1(d)(1)(ii) will concern the exclusion of regulatory assets 
under management attributable to a private fund that is an RBIC. The 
subordinate paragraphs are designed to make Advisers Act rule 
203(m)-1(d)(1) easier to read than if it were presented without 
subordinate paragraphs.
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    An adviser to RBICs who relies on the private fund adviser 
exemption will be required to submit Form ADV reports to the Commission 
as an exempt reporting adviser, consistent with the current 
requirements for advisers relying on the private fund adviser 
exemption.\21\ Furthermore, an adviser to RBICs who relies on the 
private fund adviser exemption will be required to report on Form ADV 
certain information about the RBICs that it advises, consistent with 
the current requirements for exempt reporting advisers.\22\
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    \21\ See 15 U.S.C. 80b-3(m)(2) and supra footnote 8.
    \22\ Form ADV requires exempt reporting advisers to disclose 
information about the private funds they advise. For an adviser to 
rely on the private fund adviser exemption, any RBIC that it advises 
must be a private fund and, therefore, must be disclosed on Form 
ADV.
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III. Procedural Matters

    The Administrative Procedure Act (``APA'') generally requires an 
agency to publish notice of a proposed rulemaking in the Federal 
Register and provide an opportunity for public comment.\23\ This 
requirement does not apply, however, if the agency, for good cause, 
finds that the notice and public comment are impracticable, 
unnecessary, or contrary to the public interest.\24\ There is good 
cause for the Commission to find that notice and public comment are 
unnecessary because this rulemaking involves a minimal exercise of 
discretion.\25\ We are merely amending our rules to reflect the RBIC 
Advisers Relief Act amendments to the Advisers Act.
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    \23\ See 5 U.S.C. 553.
    \24\ See 5 U.S.C. 553(b).
    \25\ This finding also satisfies the requirements of 5 U.S.C. 
808(2), allowing the rule amendments to become effective 
notwithstanding the requirement of 5 U.S.C. 801 (if a federal agency 
finds that notice and public comment are impractical, unnecessary, 
or contrary to the public interest, a rule shall take effect at such 
time as the federal agency promulgating the rule determines). The 
amendments also do not require analysis under the Regulatory 
Flexibility Act. See 5 U.S.C. 604(a) (requiring a final regulatory 
flexibility analysis only for rules required by the APA or other law 
to undergo notice and comment).
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    The APA generally requires publication of a rule at least 30 days 
before its effective date.\26\ This requirement does not apply, 
however, if the agency finds good cause for making the rule effective 
sooner.\27\ For the same reasons as we are forgoing notice and comment, 
we find good cause to make the rules effective upon publication in the 
Federal Register.
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    \26\ See 5 U.S.C. 553(d).
    \27\ Id.

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[[Page 13737]]

IV. Economic Analysis

A. Introduction

    The Commission is sensitive to the potential economic effects of 
the amendments to Advisers Act rules 203(l)-1 and 203(m)-1. These 
effects include costs and benefits to investment advisers, their funds, 
and the investors in their funds as well as the amendments' 
implications for efficiency, competition, and capital formation. The 
economic effects of the amendments are discussed below.
    We are amending Advisers Act rules 203(l)-1 and 203(m)-1 to reflect 
in our rules the RBIC Advisers Relief Act amendments to the Advisers 
Act. Although the RBIC Advisers Relief Act does not expressly require 
the Commission to amend the Advisers Act rules, the amendments are 
designed to eliminate any confusion that might otherwise exist if 
Advisers Act rules 203(l)-1 and 203(m)-1 were not amended. We are 
amending the definition of the term ``venture capital fund'' in 
Advisers Act rule 203(l)-1 to include RBICs. We also are amending the 
definition of the term ``assets under management'' in Advisers Act rule 
203(m)-1 to exclude RBIC assets from counting towards the $150 million 
threshold.
Economic Baseline
    To establish a baseline useful for evaluating the economic effects 
of the amendments, we briefly describe the nature of RBICs and then 
define the different classes of advisers that could be affected by the 
amendments.
    RBICs are investment funds that make equity investments mostly in 
smaller enterprises located primarily in rural areas.\28\ The United 
States Department of Agriculture (``USDA'') licenses RBICs to promote 
economic development and the creation of wealth and job opportunities 
in rural areas and among individuals living in those communities.\29\
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    \28\ See supra footnote 3 and Rural Business Investment Program, 
USDA (May 2016), available at https://www.rd.usda.gov/files/fact-sheet/RD-Factsheet-RBS-RBusInvestmentProgram.pdf.
    \29\ See 7 CFR 4290.10.
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    Advisers to RBICs may also advise funds that are not RBICs. Prior 
to enactment of the RBIC Advisers Relief Act, advisers to RBICs 
belonged to one of three classes, depending on the amount of assets and 
types of funds they advised: (1) Registered investment advisers solely 
to RBICs; (2) registered investment advisers to RBICs and non-RBICs; or 
(3) exempt reporting advisers. Advisers to RBICs could have been exempt 
reporting advisers by relying on the venture capital fund adviser 
exemption or the private fund adviser exemption, if they met applicable 
requirements.
    Before the RBIC Advisers Relief Act amended the Advisers Act, RBICs 
were not included in the definition of the term ``venture capital 
fund;'' therefore, for an adviser to qualify for the venture capital 
fund adviser exemption, any RBICs that it advised would have had to 
meet the current definition of the term ``venture capital fund.'' \30\ 
An adviser could qualify for the private fund adviser exemption if it 
advised solely private funds and had assets under management in the 
United States, including assets of the private funds that were RBICs, 
of less than $150 million.\31\ As discussed in Section I above, an 
adviser who relies on the venture capital fund adviser exemption or the 
private fund adviser exemption is considered an ``exempt reporting 
adviser'' and must maintain such records and submit such reports as the 
Commission determines to be necessary or appropriate in the public 
interest or for the protection of investors.\32\ Exempt reporting 
advisers are required to file with the Commission certain information 
required by Form ADV but are not subject to many of the other 
substantive requirements to which registered investment advisers are 
subject.\33\ In contrast, registered investment advisers are required 
to file Form ADV and are subject to other substantive requirements, 
including the establishment of a compliance program and a Code of 
Ethics.\34\
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    \30\ See 17 CFR 275.203(l)-1 and supra footnote 13.
    \31\ As discussed above, however, the assets of SBICs are 
excluded for purposes of calculating private fund assets towards the 
$150 million threshold under Advisers Act rule 203(m)-1. See supra 
Section II.B.
    \32\ See supra footnote 8.
    \33\ See supra footnotes 9 and 10.
    \34\ See supra footnote 10.
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    In addition to the three classes of advisers who advised RBICs as 
discussed above, two additional classes of advisers that did not advise 
RBICs are also relevant: (1) Advisers solely to venture capital funds 
that qualify for the venture capital fund adviser exemption from 
registration and are considered exempt reporting advisers; and (2) 
advisers solely to non-RBIC private funds with less than $150 million 
in assets under management in the United States that qualify for the 
private fund adviser exemption from registration and are considered 
exempt reporting advisers. Before the RBIC Advisers Relief Act amended 
the Advisers Act, advisers relying on the venture capital fund adviser 
exemption were required to register with the Commission if they added 
RBIC clients that did not meet the current definition of the term 
``venture capital fund.'' \35\ In addition, before the RBIC Advisers 
Relief Act amended the Advisers Act, advisers relying on the private 
fund adviser exemption were required to register with the Commission if 
they added RBIC clients that caused their total assets under management 
in the United States to equal or exceed $150 million.
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    \35\ See 17 CFR 275.203(l)-1 and supra footnote 13.
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    As of August 2019, after the enactment of the RBIC Advisers Relief 
Act, there were approximately 13,428 registered investment advisers 
reporting a total of approximately $84 trillion in regulatory assets 
under management.\36\ In addition, there were 4,166 exempt reporting 
advisers,\37\ of whom 1,256 relied on the venture capital fund adviser 
exemption,\38\ 3,318 relied on the private fund adviser exemption,\39\ 
and 431 qualified for both exemptions.\40\ For exempt reporting 
advisers that relied on the private fund adviser exemption, total 
private fund assets under management were approximately $3 
trillion.\41\ Registered investment advisers advised approximately 
37,004 private funds, while exempt reporting advisers advised 
approximately 17,643 private funds.\42\ As of August 2019, there were 5 
RBICs who were licensed by the USDA managing approximately $352 million 
in assets.\43\ We are unable to identify which of those RBICs are 
managed by advisers solely to RBICs compared to advisers that also 
advise other types of funds because filers of Form ADV are not required 
to explicitly indicate whether they advise RBICs. Because filers of 
Form ADV are not required to explicitly indicate whether

[[Page 13738]]

they advise RBICs, we are not able to estimate the number of advisers 
that have already taken advantage of the exemptions afforded to them by 
the RBIC Advisers Relief Act's amendments to the Advisers Act, as 
compared to the number of advisers who have not done so due to any 
inconsistencies between the Advisers Act rules and the Advisers Act as 
amended by the RBIC Advisers Relief Act.
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    \36\ Form ADV, Part 1A, Item 2.A, Item 5.F.(2)(c).
    \37\ Form ADV, Part 1A, Item 2.B.
    \38\ Form ADV, Part 1A, Item 2.B.(1).
    \39\ Form ADV, Part 1A, Item 2.B.(2).
    \40\ Form ADV, Part 1A, Item 2.B.(1), Item 2.B.(2). Eighty-two 
advisers indicated in Form ADV, Part 1A, Item 2.B.(3) that they act 
solely as an adviser to private funds, but have assets under 
management in the United States of $150 million or more. The 
subparts of Form ADV Item 2.B are not mutually exclusive to each 
other; therefore, adding up the responses to the subparts of Form 
ADV Item 2.B would not reliably result in the total number of exempt 
reporting advisers.
    \41\ Form ADV, Schedule D, Section 7.B.(1)(A)(11).
    \42\ Form ADV, Schedule D, Section 7.B.(1). A private fund is 
counted for both a registered investment adviser and exempt 
reporting adviser if advised by both types of advisers. To avoid 
double-counting, feeder funds whose master fund is also reported on 
Form ADV, Schedule D, Section 7.B.(1) are removed.
    \43\ Rural Business Investment Company Applications filed with 
the USDA. To contact the USDA for data about Rural Business 
Investment Company Applications filed with the USDA see https://www.rd.usda.gov/programs-services/rural-business-investment-program.
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    By amending sections 203 and 203A of the Advisers Act, the RBIC 
Advisers Relief Act provided the five classes of advisers discussed 
above with additional flexibility:
     Registered investment advisers solely to RBICs can rely on 
the RBIC adviser exemption in Advisers Act section 203(b)(8) to 
withdraw from registration and have no obligation to report information 
to the Commission on Form ADV.
     Registered investment advisers to RBICs and non-RBIC 
funds:
    [cir] Registered investment advisers to private funds that include 
RBICs and non-RBICs may withdraw from registration and report to the 
Commission as exempt reporting advisers if their private fund assets 
under management in the United States are less than $150 million, 
excluding the assets of RBICs and SBICs.
    [cir] Registered investment advisers to RBICs and other venture 
capital funds may withdraw from registration and report to the 
Commission as exempt reporting advisers because the definition of 
venture capital fund now includes RBICs.
     Exempt reporting advisers advising RBICs that qualified 
for the private fund adviser exemption may increase their total private 
fund assets under management in the United States above the $150 
million threshold without triggering a requirement to register with the 
Commission as an investment adviser, provided that their non-RBIC 
private fund assets and non-SBIC private fund assets under management 
in the United States remain below the $150 million threshold.
     Advisers that did not advise RBICs and qualified for the 
venture capital fund adviser exemption may begin advising RBICs without 
changing their registration status.
     Advisers that did not advise RBICs and qualified for the 
private fund adviser exemption may begin advising RBICs without 
changing their registration status regardless of the amount of assets 
attributable to RBICs.
    For those advisers that benefit from the alternatives above, it 
would have been in their economic interest to, depending on their 
class, withdraw from registration, avail themselves of exempt reporting 
adviser status, or attract additional RBIC assets following the passage 
of the RBIC Advisers Relief Act. We believe, therefore, that it is 
likely that such advisers have already exercised these options. Certain 
advisers who intend to advise RBICs solely, may rely on the RBIC 
adviser exemption to not register. Registered advisers who currently 
advise solely RBICs may rely on the RBIC adviser exemption to withdraw 
from registration with the Commission. Registered investment advisers 
to private funds that include RBICs and non-RBICs and have private fund 
assets under management in the United States of less than $150 million, 
excluding the assets of RBICs and SBICs, may have withdrawn from 
registration and begun reporting to the Commission as exempt reporting 
advisers in reliance on the private fund adviser exemption. Registered 
investment advisers to venture capital funds, including RBICs, may have 
withdrawn from registration and begun reporting to the Commission as 
exempt reporting advisers. Finally, advisers that qualified for the 
private fund adviser exemptions before the RBIC Advisers Relief Act 
amended the Advisers Act may have begun advising RBICs without changing 
their registration status independent of the amount of assets 
attributable to RBICs.
    However, inconsistencies in the definitions of venture capital 
funds and private fund assets under management that exist between the 
Advisers Act rules and the Advisers Act as amended by the RBIC Advisers 
Relief Act may have discouraged some advisers from changing business 
practices following passage of the RBIC Advisers Relief Act. 
Furthermore, these inconsistencies may result in private fund assets 
under management being calculated differently by advisers for purposes 
of the private fund adviser exemption, which could lead to similar 
advisers determining their reporting statuses differently.
    The amendments to our rules, which reflect the RBIC Advisers Relief 
Act amendments to the Advisers Act, may affect the classes of 
investment advisers mentioned above, the funds they advise, and the 
investors in those funds. We discuss the potential economic effects of 
the amendments and the RBIC Advisers Relief Act, including costs and 
benefits and impacts on efficiency, competition, and capital formation, 
on these investment advisers and investors in the next two sections.

B. Costs and Benefits

    Because substantial portions of the amendments simply restate 
changes to Advisers Act section 203 that are self-implementing, even in 
the absence of regulatory action, the bulk of the economic effects of 
the amendments are not readily separable from those of the RBIC 
Advisers Relief Act's amendments to the Advisers Act. However, to the 
extent that inconsistencies between the current rules and the Advisers 
Act as amended by the RBIC Advisers Relief Act caused certain advisers 
not to exercise the exemption options under the Advisers Act as amended 
by the RBIC Advisers Relief Act when doing so would have otherwise been 
in their interest, the amendments could produce economic effects in 
addition to those resulting from the RBIC Advisers Relief Act's 
amendments to the Advisers Act themselves.
    Because we believe that it is likely that advisers have already 
exercised any exemption options provided to them by the RBIC Advisers 
Relief Act's amendments to the Advisers Act under the baseline if doing 
so was in their interest, we do not expect the magnitude of the effects 
associated directly with the amendments to be significant. However, we 
do not have information on the extent to which advisers solely to RBICs 
have been deterred from exercising their options under the RBIC 
Advisers Relief Act's amendments to the Advisers Act due to any 
inconsistencies between the Advisers Act and Commission rules under the 
baseline and thus we cannot estimate how many additional advisers would 
exercise these options as a result of the amendments that have not 
already done so.
    Notably, the economic effects of the amendments on advisers that 
had not previously chosen to exercise the exemption options under the 
RBIC Advisers Relief Act's amendments to the Advisers Act are generally 
consistent with the effects on advisers that have already chosen to do 
so; for example, advisers who choose to report to the Commission as 
exempt reporting advisers, whether they did so after the RBIC Advisers 
Relief Act amended the Advisers Act or will choose to do so after the 
amendments to our rules, will likely experience the same change in 
reporting costs. Any costs incurred before this rulemaking by advisers 
that already exercised exemption options provided to them by the RBIC 
Advisers Relief Act's amendments to the Advisers Act are a direct 
effect of the RBIC Advisers Relief Act; however, we do not have 
information to estimate the

[[Page 13739]]

number of advisers that have already exercised these options.
    To the extent that any inconsistencies between the Advisers Act and 
Advisers Act rules 203(l)-1 and 203(m)-1 have discouraged advisers 
solely to RBICs from taking advantage of the venture capital fund 
adviser or private fund adviser exemptions, the amendments could lead 
these advisers to take on additional venture capital or private fund 
clients. Such advisers can weigh the additional fee revenue associated 
with advising non-RBIC private funds or venture capital funds against 
the costs of reporting to the Commission as exempt reporting advisers 
when determining whether to rely on either of the exemptions. We 
estimate that the annual cost of filing Form ADV for an exempt 
reporting adviser, who is not registered with any state securities 
authority, is approximately $983.\44\ In addition, advisers that switch 
from exempt to exempt reporting status may incur indirect costs if the 
information they disclose on Form ADV, such as any disciplinary 
history, reduces investor demand for their advisory services. We are 
unable to estimate how many advisers solely to RBICs would choose to 
take on non-RBIC private funds or non-RBIC venture capital funds as a 
result of the amendments because we do not have information on the 
demand for their advisory services from non-RBIC private funds or non-
RBIC venture capital funds, or whether any additional business 
generated would offset these reporting costs.
---------------------------------------------------------------------------

    \44\ Form ADV under the Investment Advisers Act of 1940 (OMB No. 
3235-0049), Supporting Statement at footnote 43 and accompanying 
text (conclusion date of October 4, 2019). See supra footnote 9.
---------------------------------------------------------------------------

    The amendments provide registered advisers that have not taken 
advantage of the venture capital fund adviser and private fund adviser 
exemptions due to inconsistencies between the RBIC Advisers Relief 
Act's amendments to the Advisers Act and Commission rules with 
clarification on the option to switch from registered investment 
adviser to exempt reporting adviser status. This option provided by the 
RBIC Advisers Relief Act is difficult to value, but its value is 
broadly determined by the cost reductions associated with the change in 
registration status compared to the explicit and implicit costs of 
withdrawing from registration. Advisers that elect to change (like 
those that already did so as a result of the RBIC Advisers Relief Act) 
from registered to exempt reporting adviser status and who are not also 
registering with a state authority should expect to face reduced 
ongoing costs associated with filing Form ADV because, as exempt 
reporting advisers who are not also registered with a state authority, 
they would only be required to complete certain portions of Form 
ADV.\45\ We estimate the annual cost savings associated with filing 
Form ADV as an exempt reporting adviser who is not registered with any 
state securities authority, instead of as a registered investment 
adviser to be approximately $10,361.\46\ Furthermore, such advisers 
would no longer bear the costs associated with the substantive 
requirements of being an adviser registered with the Commission.\47\ 
Such advisers would incur the one-time cost of filing a Form ADV-W 
withdrawal, which we estimate to be approximately $117 per full 
withdrawal and $15 per partial withdrawal.\48\ They may also incur one-
time operational costs associated with switching from registered to 
exempt reporting status, such as those associated with adapting 
information technology systems to a new reporting regime. Finally, to 
the extent that advisers benefit from marketing themselves as 
registered investment advisers to client funds and investors, they will 
forgo this benefit by withdrawing from registration. Because advisers 
are not required to rely on either of the exemptions in Advisers Act 
rule 203(l) or 203(m) even though they may qualify for them, we expect 
only those registered investment advisers would experience a net 
benefit by relying on these exemptions to withdraw from registration.
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    \45\ See supra footnote 9.
    \46\ Form ADV under the Investment Advisers Act of 1940 (OMB No. 
3235-0049), Supporting Statement at footnote 10 (stating the number 
of registered investment advisers), footnote 45 (stating the total 
annual cost of filing Form ADV), footnote 43 (stating the annual 
filing cost per exempt reporting adviser), and accompanying text 
(conclusion date of October 4, 2019). We made the following 
calculations to find the estimated annual cost of filing Form ADV as 
a registered investment adviser: Total cost for registered 
investment advisers and exempt reporting advisers of approximately 
$141 million-total cost for exempt reporting advisers of 
approximately $4.6 million = total cost for registered investment 
advisers of approximately $136.4 million. Total cost for registered 
investment advisers of approximately $136.4 million/12,024 
registered advisers = approximately $11,344 per registered 
investment adviser to file Form ADV annually. The estimated cost for 
an exempt reporting adviser who is not also registered with a state 
securities authority is approximately $983. $11,344-$983 = $10,361.
    \47\ See supra footnote 10.
    \48\ Rule 203-2 and Form ADV-W under the Investment Advisers Act 
of 1940 (OMB Control No. 3235-0313) Supporting Statement at 
footnotes 5 and 7 and accompanying text (conclusion date of November 
22, 2017). An adviser would file a full withdrawal if it was only 
registered with the Commission. An adviser would file a partial 
withdrawal if it was required to remain registered with one or more 
states. See Form ADV-W, Instruction 1.
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    Investors in private funds, venture capital funds, or RBICs may 
experience costs and benefits as a result of the amendments and the 
RBIC Advisers Relief Act. If investors face fixed costs in transacting 
with a given adviser, for example in performing any necessary due 
diligence, they may benefit if the amendments and the RBIC Advisers 
Relief Act encourage more advisers to advise both RBIC and non-RBIC 
private funds, allowing investors to consolidate different types of 
investments with a single adviser. We cannot quantify the extent to 
which investors prefer to use a single adviser or the number of 
advisers who will expand into either RBICs or non-RBIC private funds 
because we do not have the information needed to assess investors' 
latent demand for consolidated advice services or the number of 
advisers that have been deterred from expanding their client bases 
under the baseline. We therefore cannot estimate the magnitude of this 
potential cost reduction for investors.
    In addition, to the extent that the amendments and the RBIC 
Advisers Relief Act result in advisers changing their status from 
registered to exempt reporting, it may impose costs on investors. If 
investors value the transparency provided by complete Form ADV 
reporting and the safeguards associated with the other substantive 
requirements of being a registered investment adviser, then the 
modifications could impose costs on investors if the modifications 
result in advisers changing their status from registered to exempt 
reporting. However, such investors have the option of moving their 
investments to advisers that are registered and, as noted above, we 
expect that advisers will weigh the benefits and costs associated with 
remaining registered in connection with any change in reporting status. 
The amendments and the RBIC Advisers Relief Act could also impose costs 
on investors if any reduction in transparency or the other substantive 
requirements associated with registration reduce the ability of the 
Commission to protect investors from potentially fraudulent investment 
advisory schemes.\49\
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    \49\ See supra footnote 10.
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C. Efficiency, Competition, and Capital Formation

    As discussed above, the RBIC Advisers Relief Act changed 
registration and reporting requirements for advisers solely to RBICs 
and for advisers to non-RBIC private funds or non-RBIC venture

[[Page 13740]]

capital funds, and may have resulted in an increased number of advisers 
in those markets. As a result of the RBIC Advisers Relief Act's 
amendments to the Advisers Act, advisers solely to RBICs may have 
entered the market for venture capital or other private fund advisory 
services, and current advisers to non-RBIC private funds or non-RBIC 
venture capital funds, may have entered the market for RBIC advisory 
services. As with the costs and benefits discussed above, the effects 
of the amendments on efficiency, competition, and capital formation are 
not readily separable from those of the RBIC Advisers Relief Act's 
amendments to the Advisers Act. We expect the amendments will only 
affect efficiency, competition, and capital formation to the extent 
that advisers have not already exercised the exemption options provided 
to them under the baseline due to any inconsistencies between the RBIC 
Advisers Relief Act's amendments to the Advisers Act, and Commission 
rules. Because we expect most advisers that would choose to change 
business practices because of amendments to the Advisers Act pursuant 
to the RBIC Advisers Relief Act already have done so, we do not expect 
the magnitude of these effects attributable solely to the amendments to 
be significant.
    Changes in the costs of advising RBICs while also advising non-RBIC 
private funds or non-RBIC venture capital funds, as described above, 
could have several competitive effects. First, to the extent that non-
RBIC private fund or non-RBIC venture capital fund advisers find it 
profitable to enter the market for RBICs under the amendments and the 
RBIC Advisers Relief Act's amendments to the Advisers Act, competition 
may increase in that market, resulting in reduced profits for RBIC 
advisers and lower advisory fees for RBICs and their investors. 
Similarly, to the extent that RBIC advisers find it profitable to enter 
the non-RBIC private fund or non-RBIC venture capital fund advisory 
market, competition in those markets may increase, resulting in reduced 
profits for non-RBIC private fund and non-RBIC venture capital fund 
advisers and lower advisory fees for non-RBIC private funds and non-
RBIC venture capital funds and their investors. Whether such a 
reallocation of advisory services manifests depends on whether advisers 
find it profitable to expand operations into new markets and whether 
they can do so without changing the quality or quantity of services in 
current markets. While we cannot precisely estimate the relative 
likelihood of the above competitive effects, the fact that RBIC 
advisers operate in a market that is an order of magnitude smaller than 
the market in which non-RBIC private fund and non-RBIC venture capital 
fund advisers operate suggests that non-RBIC private fund and non-RBIC 
venture capital fund advisers are more likely to benefit from entry 
into the RBIC market following the RBIC Advisers Relief Act's 
enactment, thereby increasing the amount of competition in that market. 
As discussed above, it is likely that most advisers would have already 
exercised the options afforded them by the RBIC Advisers Relief Act if 
it was in their interest to do so. Therefore, the bulk of the 
competitive effects just discussed would have already been realized and 
the competitive effects directly attributable to the amendments are not 
likely to be significant.
    Any relative shift of advisory talent from one segment of the 
market to another could also have effects on efficiency and capital 
formation. To the extent that advisers who expand into new markets 
possess skill in identifying investment opportunities, an increase in 
the supply of advisers in the RBIC, non-RBIC private fund, and non-RBIC 
venture capital fund markets could result in more efficient investment 
decisions and market prices that more accurately reflect the 
fundamental value of assets where applicable (for example, certain 
RBICs invest in private businesses that do not trade on public 
exchanges,\50\ but some private funds invest in publicly-traded 
securities). Also, any increase in the number of advisers in the RBIC 
market could make more capital available to businesses in rural 
communities if the increased supply of RBIC advisers attracts more 
capital to that market. In addition, to the extent that there are 
economies of scale in the provision of advisory services, advisory 
services may be provided at lower aggregate cost if there is an 
expansion of advisers in either the RBIC, non-RBIC private fund or non-
RBIC venture capital fund market. To the extent that the amendments and 
the RBIC Advisers Relief Act's amendments to the Advisers Act result in 
reduced transparency into advisers because they opt to switch from 
registered to exempt reporting status, and to the extent that investors 
rely on that transparency when making investment decisions, these 
changes might cause a reduction in the efficiency of investor 
allocations to these advisers. Any reduction in transparency could also 
reduce the aggregate amount of capital managed by investment advisers 
if investors cannot find suitable registered investment advisers as 
replacements and these investors value transparency more than any 
benefits, such as potentially lower advisory fees, of the amendments 
and the RBIC Advisers Relief Act's amendments to the Advisers Act. 
Finally, if these changes increase the supply of investment advisers to 
RBICs, non-RBIC private funds and non-RBIC venture capital funds, and 
these advisers attract assets that were not already invested in other 
markets, they may increase the aggregate amount of capital investment.
---------------------------------------------------------------------------

    \50\ See 7 CFR 4290.700.
---------------------------------------------------------------------------

V. Paperwork Reduction Act Analysis

    We do not believe that the amendments to reflect changes that the 
RBIC Advisers Relief Act made to the Advisers Act make any substantive 
modifications to any existing collection of information requirements or 
impose any new substantive recordkeeping or information collection 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\51\ Accordingly, we are not revising any burden and cost 
estimates in connection with these amendments.\52\
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    \51\ 44 U.S.C. 3501 et seq. As discussed in Section IV, only 
approximately 5 advisers would be affected by the amendments. 
Therefore, we believe that the amendments do not substantively 
change the current burdens and cost estimates because they may 
marginally affect the overall population of respondents.
    \52\ Form ADV under the Investment Advisers Act of 1940 (OMB No. 
3235-0049) (conclusion date of October 4, 2019).
---------------------------------------------------------------------------

VI. Statutory Authority

    The Commission is amending rule 203(l)-1 under the authority set 
forth in sections 211(a) and 203(l) of the Advisers Act, (15 U.S.C. 
80b-11(a) and 80b-3(l), respectively). The Commission is amending rule 
203(m)-1 under the authority set forth in sections 211(a) and 203(m) of 
the Advisers Act (15 U.S.C. 80b-11(a) and 80b-3(m), respectively).

List of Subjects in 17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

Text of The Rule Amendments

    For the reasons set forth in the preamble, the Commission is 
amending title 17, chapter II of the Code of Federal Regulations as 
follows:

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

0
1. The authority citation for part 275 continues to read in part as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-

[[Page 13741]]

4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *
0
2. Amend Sec.  275.203(l)-1 by revising the introductory text to 
paragraph (a) to read as follows:


Sec.  275.203(l)-1  Venture capital fund defined.

    (a) Venture capital fund defined. For purposes of section 203(l) of 
the Act (15 U.S.C. 80b-3(l)), a venture capital fund is any entity 
described in subparagraph (A), (B), or (C) of section 203(b)(7) of the 
Act (15 U.S.C. 80b-3(b)(7)) (other than an entity that has elected to 
be regulated or is regulated as a business development company pursuant 
to section 54 of the Investment Company Act of 1940 (15 U.S.C. 80a-53)) 
or any entity described in subparagraph (A) or (B) of section 203(b)(8) 
of the Act (15 U.S.C. 80b-3(b)(8)) (other than an entity that has 
elected to be regulated or is regulated as a business development 
company pursuant to section 54 of the Investment Company Act of 1940 
(15 U.S.C. 80a-53)) or any private fund that:
* * * * *

0
3. Amend Sec.  275.203(m)-1 by revising paragraph (d)(1) to read as 
follows:


Sec.  275.203(m)-1  Private fund adviser exemption.

* * * * *
    (d) * * *
    (1) Assets under management means the regulatory assets under 
management as determined under Item 5.F of Form ADV (Sec.  279.1 of 
this chapter), except the following shall be excluded from the 
definition of assets under management for purposes of this section:
    (i) The regulatory assets under management attributable to a 
private fund that is an entity described in subparagraph (A), (B), or 
(C) of section 203(b)(7) of the Act (15 U.S.C. 80b- 3(b)(7)) (other 
than an entity that has elected to be regulated or is regulated as a 
business development company pursuant to section 54 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-53)); and
    (ii) The regulatory assets under management attributable to a 
private fund that is an entity described in subparagraph (A) or (B) of 
section 203(b)(8) of the Act (15 U.S.C. 80b-3(b)(8)) (other than an 
entity that has elected to be regulated or is regulated as a business 
development company pursuant to section 54 of the Investment Company 
Act of 1940 (15 U.S.C. 80a-53).
* * * * *

    By the Commission.

    Dated: March 2, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-04571 Filed 3-9-20; 8:45 am]
BILLING CODE 8011-01-P