[Federal Register: August 24, 2004 (Volume 69, Number 163)]
[Rules and Regulations]
[Page 52119-52125]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24au04-19]
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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
[[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 http://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-
[[Page 52123]]
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
[[Page 52124]]
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 ``http://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