[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Proposed Rules]
[Pages 77052-77190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29956]
[[Page 77051]]
-----------------------------------------------------------------------
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
31 Parts 275 and 279
Rules Implementing Amendments to the Investment Advisers Act of 1940;
Proposed Rules
Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 /
Proposed Rules
[[Page 77052]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-3110; File No. S7-36-10]
RIN 3235-AK82
Rules Implementing Amendments to the Investment Advisers Act of
1940
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission is proposing new rules
and rule amendments under the Investment Advisers Act of 1940 to
implement provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. These rules and rule amendments are designed to give
effect to provisions of Title IV of the Dodd-Frank Act that, among
other things, increase the statutory threshold for registration by
investment advisers with the Commission, require advisers to hedge
funds and other private funds to register with the Commission, and
require reporting by certain investment advisers that are exempt from
registration. In addition, we are proposing rule amendments, including
amendments to the Commission's pay-to-play rule, that address a number
of other changes to the Advisers Act made by the Dodd-Frank Act.
DATES: Comments must be received on or before January 24, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-36-10 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-36-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's Web
site (http://www.sec.gov/rules/proposed.shtml). Comments are also
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549 on official
business days between the hours of 10 a.m. and 3 p.m. All comments
received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Jennifer R. Porter, Attorney-Adviser,
Daniele Marchesani, Senior Counsel, Melissa A. Roverts, Senior Counsel,
Devin F. Sullivan, Senior Counsel, Matthew N. Goldin, Branch Chief,
Daniel S. Kahl, Branch Chief, or Sarah A. Bessin, Assistant Director,
at (202) 551-6787 or [email protected], Office of Investment Adviser
Regulation, Division of Investment Management, U.S. Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing rules 203A-5 and
204-4 [17 CFR 275.203A-5 and 275.204-4] under the Investment Advisers
Act of 1940 [15 U.S.C. 80b] (``Advisers Act'' or ``Act''),\1\
amendments to rules 0-7, 203A-1, 203A-2, 203A-3, 204-1, 204-2, 206(4)-
5, 222-1, and 222-2 [17 CFR 275.0-7, 275.203A-1, 275.203A-2, 275.203A-
3, 275.204-1, 275.204-2, 275.206(4)-5, 275. 222-1, and 275.222-2] under
the Advisers Act, and amendments to Form ADV, Form ADV-H, and Form ADV-
NR [17 CFR 279.1, 279.3, and 279.4] under the Advisers Act. The
Commission is also proposing to rescind rule 203A-4 [17 CFR 275.203A-4]
under the Advisers Act.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 80b. 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, at which the Advisers
Act is codified, and when we refer to rule 0-7, rule 202(a)(11)-1,
rule 203(b)(3)-1, rule 203(b)(3)-2, rule 203A-1, rule 203A-2, rule
203A-3, rule 203A-4, rule 203A-5, rule 204-1, rule 204-2, rule 204-
4, rule 206(4)-5, rule 222-1, or rule 222-2, or any paragraph of
these rules, we are referring to 17 CFR 275.0-7, 17 CFR
275.202(a)(11)-1, 17 CFR 275.203(b)(3)-1, 17 CFR 275.203(b)(3)-2, 17
CFR 275.203A-1, 17 CFR 275.203A-2, 17 CFR 275.203A-3, 17 CFR
275.203A-4, 17 CFR 275.203A-5, 17 CFR 275.204-1, 17 CFR 275.204-2,
17 CFR 275.204-4, 17 CFR 275.206(4)-5, 17 CFR 275.222-1, or 17 CFR
275.222-2, respectively, of the Code of Federal Regulations, in
which these rules are published, or would be published, if adopted.
---------------------------------------------------------------------------
Table of Contents
I. Background
II. Discussion
A. Eligibility for Registration With the Commission: Section 410
1. Transition to State Registration
2. Amendments to Form ADV
3. Assets Under Management
4. Switching Between State and Commission Registration
5. Exemptions From the Prohibition on Registration With the
Commission
a. NRSROs
b. Pension Consultants
c. Multi-State Advisers
6. Elimination of Safe Harbor
7. Mid-Sized Advisers
a. Required To Be Registered
b. Subject to Examination
B. Exempt Reporting Advisers: Sections 407 and 408
1. Reporting Required
2. Information in Reports
3. Updating Requirements
4. Transition
C. Form ADV
1. Private Fund Reporting: Item 7.B.
2. Advisory Business Information: Employees, Clients and
Advisory Activities: Item 5
3. Other Business Activities and Financial Industry
Affiliations: Items 6 and 7
4. Participation in Client Transactions: Item 8
5. Reporting $1 Billion in Assets: Item 1
6. Other Amendments to Form ADV
D. Other Amendments
1. Amendments to ``Pay to Play'' Rule
2. Technical and Conforming Amendments
a. Rules 203(b)(3)-1 and 203(b)(3)-2
b. Rule 204-2
c. Rule 0-7
d. Rule 222-1
e. Rule 222-2
f. Rule 202(a)(11)-1
III. General Request for Comment
IV. Cost-Benefit Analysis
A. Benefits
B. Costs
C. Request for Comment
V. Paperwork Reduction Act Analysis
A. Rule 203A-2(e)
B. Form ADV
C. Rule 203A-5
D. Form ADV-NR
E. Rule 203-2 and Form ADV-W
F. Form ADV-H
G. Rule 204-2
H. Request for Comment
VI. Initial Regulatory Flexibility Analysis
A. Need for the New Rules and Rule Amendments
B. Objectives and Legal Basis
C. Small Entities Subject to Rules and Rule Amendments
D. Reporting, Recordkeeping and Other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Solicitation of Comments
VII. Effects on Competition, Efficiency and Capital Formation
VIII. Consideration of Impact on the Economy
IX. Statutory Authority
Text of Rule and Form Amendments
APPENDIX A: Form ADV: General Instructions
[[Page 77053]]
APPENDIX B: Form ADV: Instructions for Part 1A
APPENDIX C: Form ADV: Glossary of Terms
APPENDIX D: Form ADV, Part 1A
APPENDIX E: Form ADV Execution Pages
APPENDIX F: Form ADV-H
APPENDIX G: Form ADV-NR
I. Background
On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'')
which, among other things, amends certain provisions of the Advisers
Act.\2\ Title IV of the Dodd-Frank Act includes most of the amendments
to the Advisers Act. These amendments include provisions that
reallocate responsibility for oversight of investment advisers by
delegating generally to the states responsibility over certain mid-
sized advisers, i.e., those that have between $25 and $100 million of
assets under management.\3\ This provision will require a significant
number of advisers currently registered with the Commission to withdraw
their registrations with the Commission and to switch to registration
with one or more State securities authorities. In addition, Title IV
repeals the ``private adviser exemption'' contained in section
203(b)(3) of the Advisers Act under which advisers, including those to
many hedge funds, private equity funds and venture capital funds, had
relied in order to avoid registration under the Act and our
oversight.\4\ In eliminating this provision, Congress created, or
directed us to adopt other, in some ways narrower, exemptions for
advisers to certain types of private funds--e.g., venture capital
funds--which provide that the Commission shall require such advisers to
submit reports ``as the Commission determines necessary or appropriate
in the public interest.'' \5\ These provisions in Title IV of the Dodd-
Frank Act will be effective on July 21, 2011.\6\
---------------------------------------------------------------------------
\2\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\3\ See section 410 of the Dodd-Frank Act; Advisers Act section
203A. See also National Securities Markets Improvement Act of 1996,
Public Law 104-290, 110 Stat. 3416, Sec. 303 (1996) (``NSMIA'')
(allocating to states responsibility for small investment advisers
with less than $25 million in assets under management).
\4\ See section 403 of the Dodd-Frank Act. Section 203(b)(3)
exempts from registration any investment adviser who during the
course of the preceding twelve months has had fewer than fifteen
clients and who neither holds himself out generally to the public as
an investment adviser nor acts as an investment adviser to any
investment company registered under the Investment Company Act of
1940 (15 U.S.C. 80a-1) (``Investment Company Act''), or a company
which has elected to be a business development company pursuant to
section 54 of the Investment Company Act (15 U.S.C. 80a-54). Section
403 of the Dodd-Frank Act eliminates this ``private adviser''
exemption from section 203(b)(3) and replaces it with a new
exemption for ``foreign private advisers.'' We are proposing a rule
to clarify the definition of a ``foreign private adviser'' in a
separate release. 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. 3111, published elsewhere in this issue of the Federal
Register (``Exemptions Release''). Commenters wishing to address
issues related to foreign private advisers should submit comments on
the Exemptions Release.
\5\ See sections 407 and 408 of the Dodd-Frank Act (``The
Commission shall require [such advisers to] provide to the
Commission such annual or other reports as the Commission determines
necessary or appropriate in the public interest or for the
protection of investors''). Section 407 of the Dodd-Frank Act, which
adds section 203(l) to the Advisers Act, exempts advisers solely to
one or more venture capital funds. Section 408, which added section
203(m) to the Advisers Act, exempts advisers solely to private funds
with assets under management in the United States of less than $150
million.
\6\ See section 419 of the Dodd-Frank Act. For purposes of this
Release, when we refer to the effective date of the Dodd-Frank Act,
we are referring to the effective date of Title IV, which is July
21, 2011, unless we indicate otherwise.
---------------------------------------------------------------------------
We are proposing to adopt new rules and amend existing rules and
forms to give effect to these provisions. In addition, we are proposing
rule amendments, including amendments to the Commission's ``pay to
play'' rule, that address a number of other changes to the Advisers Act
made by the Dodd-Frank Act. Also, in light of our increased
responsibility for oversight of private funds, we are proposing to
require advisers to those funds to provide us with additional
information about the operation of those funds. As discussed in more
detail below, this information would permit us to provide better
oversight of these advisers by focusing our examination and enforcement
resources on those advisers to private funds that appear to present
greater compliance risks. Finally, we are proposing additional changes
to Form ADV that we believe would enhance our oversight of advisers and
also will enable us to identify advisers that are subject to the Dodd-
Frank Act's requirements concerning certain incentive-based
compensation arrangements.\7\
---------------------------------------------------------------------------
\7\ See section 956 of the Dodd-Frank Act.
---------------------------------------------------------------------------
II. Discussion
A. Eligibility for Registration With the Commission: Section 410
Section 203A of the Advisers Act generally prohibits an investment
adviser regulated by the State in which it maintains its principal
office and place of business from registering with the Commission
unless it has at least $25 million of assets under management,\8\ and
preempts certain State laws regulating advisers that are registered
with the Commission.\9\ This provision, enacted in 1996 as part of the
National Securities Markets Improvement Act (``NSMIA''), eliminated the
duplicative regulation of advisers by the Commission and State
securities authorities, making the states the primary regulators of
smaller advisers and the Commission the primary regulator of larger
advisers.\10\
---------------------------------------------------------------------------
\8\ Advisers Act section 203A(a)(1). The prohibition does not
apply if the investment adviser is an adviser to an investment
company registered under the Investment Company Act, or the adviser
is eligible for one of six exemptions the Commission has adopted.
See id.; rule 203A-2; infra section II.A.5. of this Release. Section
403 of the Dodd-Frank Act also added exemptions to Section 203 of
the Advisers Act for: (i) Any investment adviser that is registered
with the Commodity Futures Trading Commission as a commodity trading
advisor and advises a private fund; and (ii) any investment adviser,
other than a business development company, that solely advises
certain small business investment companies.
\9\ An investment adviser must register with the Commission
unless it is prohibited from registering under section 203A of the
Advisers Act or is exempt from registration under section 203(b).
Advisers Act section 203(a). Investment advisers that are prohibited
from registering with the Commission are subject to regulation by
the states, but the anti-fraud provisions of the Advisers Act
continue to apply to them. See Advisers Act sections 203A(b), 206.
For SEC-registered investment advisers, State laws requiring
registration, licensing and qualification are preempted, but states
may investigate and bring enforcement actions alleging fraud or
deceit, may require notice filings of documents filed with the
Commission, and may require investment advisers to pay State notice
filing fees. See Advisers Act section 203A(b); NSMIA, supra note 3,
at sections 307(a) and (b). The Dodd-Frank Act did not amend
sections 203A(a)(1) or 203(a) of the Advisers Act. See section 410
of the Dodd-Frank Act.
\10\ See S. Rep. No. 104-293, at 4 (1996). See also Rules
Implementing Amendments to the Investment Advisers Act of 1940,
Investment Advisers Act Release No. 1633, section I (May 15, 1997)
[62 FR 28112 (May 22, 1997)] (``NSMIA Adopting Release'').
---------------------------------------------------------------------------
Section 410 of the Dodd-Frank Act creates a new group of ``mid-
sized advisers'' and shifts primary responsibility for their regulatory
oversight to the State securities authorities. It does this by
prohibiting from registering with the Commission an investment adviser
that is registered as an investment adviser in the State in which it
maintains its principal office and place of business and that has
assets under management between $25 million and $100 million.\11\
Unlike a small adviser, a mid-sized adviser is not prohibited from
registering with the Commission: (i) If the adviser is not required to
be registered as an
[[Page 77054]]
investment adviser with the securities commissioner (or any agency or
office performing like functions) of the State in which it maintains
its principal office and place of business; (ii) if registered, the
adviser would not be subject to examination as an investment adviser by
that securities commissioner; or (iii) if the adviser is required to
register in 15 or more states.\12\ Section 203A(c) of the Advisers Act,
which was not amended by the Dodd-Frank Act, permits the Commission to
exempt advisers from the prohibition on Commission registration,
including small and mid-sized advisers, if the application of the
prohibition from registration would be ``unfair, a burden on interstate
commerce, or otherwise inconsistent with the purposes'' of section
203A.\13\ Under this authority, we have adopted six exemptions from the
prohibition on registration.\14\
---------------------------------------------------------------------------
\11\ See section 410 of the Dodd-Frank Act. This amendment
increases the threshold above which all investment advisers must
register with the Commission from $25 million to $100 million. See
S. Rep. No. 111-176, at 76 (2010) (``Senate Committee Report'').
\12\ See section 410 of the Dodd-Frank Act. A mid-sized adviser
also will be required to register with the Commission if it is an
adviser to a registered investment company or business development
company under the Investment Company Act. Id. As a result, mid-sized
advisers to registered investment companies and business development
companies will not have to withdraw their Commission registrations.
Compare section 410 of the Dodd-Frank Act with Advisers Act section
203A(a)(1).
\13\ The Commission's exercise of this authority would not only
permit registration with the Commission, but would result in the
preemption of State law with respect to the advisers that register
with us as a result of the exemption. See Advisers Act sections
203(a), 203A(b) and (c).
\14\ See rule 203A-2 (permitting the following types of advisers
to register with the Commission: (i) Nationally recognized
statistical rating organizations (``NRSROs''); (ii) pension
consultants; (iii) investment advisers affiliated with an adviser
registered with the Commission; (iv) investment advisers expecting
to be eligible for Commission registration within 120 days of filing
Form ADV; (v) multi-State investment advisers; and (vi) internet
advisers).
---------------------------------------------------------------------------
As a consequence of section 410 of the Dodd-Frank Act, we estimate
that approximately 4,100 SEC-registered advisers will be required to
withdraw their registrations and register with one or more State
securities authorities.\15\ We are working closely with the State
securities authorities to assure an orderly transition of investment
adviser registrants to State regulation. In addition, we are today
proposing rules and rule amendments that would provide us a means of
identifying advisers that must transition to State regulation, clarify
the application of new statutory provisions, and modify certain of the
exemptions from the prohibition on registration that we have adopted
under section 203A of the Act.
---------------------------------------------------------------------------
\15\ According to data from the Investment Adviser Registration
Depository (``IARD'') as of September 1, 2010, 4,136 SEC-registered
advisers either: (i) Had assets under management between $25 million
and $100 million and did not indicate on Form ADV Part 1A that they
are relying on an exemption from the prohibition on Commission
registration; or (ii) were permitted to register with us because
they rely on the registration of an SEC-registered affiliate that
has assets under management between $25 million and $100 million and
are not relying on an exemption.
---------------------------------------------------------------------------
1. Transition to State Registration
We are proposing a new rule, rule 203A-5, which would require each
investment adviser registered with us on July 21, 2011 to file an
amendment to its Form ADV no later than August 20, 2011, 30 days after
the July 21, 2011 effective date of the amendments to section 203A, and
to report the market value of its assets under management determined
within 30 days of the filing.\16\ This filing would be the first step
by which an adviser no longer eligible for Commission registration
would transition to State registration. It would require each
investment adviser to determine whether it meets the revised
eligibility criteria for Commission registration, and would provide the
Commission and the State regulatory authorities with information
necessary to identify those advisers required to transition to State
registration and to understand the reason for the transition or basis
for continued Commission registration.\17\ An adviser no longer
eligible for Commission registration would have to withdraw its
Commission registration by filing Form ADV-W no later than October 19,
2011 (60 days after the required refiling of Form ADV).\18\ We would
expect to cancel the registration of advisers that fail to file an
amendment or withdraw their registrations in accordance with the
rule.\19\ Finally, the proposed rule would permit us to postpone the
effectiveness of, and impose additional terms and conditions on, an
adviser's withdrawal from SEC registration if we institute certain
proceedings before the adviser files Form ADV-W.\20\
---------------------------------------------------------------------------
\16\ Proposed rule 203A-5(a). We propose to give advisers 30
days from the effective date of the Dodd-Frank Act to prepare and
submit the amended Form ADV. This approach would avoid requiring an
adviser to respond to items about its eligibility to register with
the Commission before the statutory changes affecting that
eligibility will be effective on July 21, 2011. The additional 30
days would provide an adviser with the opportunity to evaluate the
effect of the legislation (and our rules) on its eligibility and
seek the advice of legal counsel, if necessary, before submitting an
amendment. By permitting a 30-day period we also seek to avoid a
large volume of filings on a single day (i.e., July 21).
\17\ Proposed amended Item 2.A. of Form ADV, Part 1A would
reflect the requirements of the Advisers Act (as amended by the
Dodd-Frank Act) and the related rules, and would require an
investment adviser to mark Item 2.A.(13) if the adviser is no longer
eligible to remain registered with the Commission. For a discussion
of the proposed rules, see infra sections II.A.5. and II.A.7. of
this Release, and for a discussion of Item 2.A, see infra section
II.A.2. of this Release.
\18\ Proposed rule 203A-5(b).
\19\ See Advisers Act section 203(h). As provided in the
Advisers Act, an adviser would be given appropriate notice and
opportunity for hearing to show why its registration should not be
cancelled. Advisers Act section 211(c).
\20\ Proposed rule 203A-5(c) (``If, prior to the effective date
of the withdrawal from registration of an investment adviser on Form
ADV-W, the Commission has instituted a proceeding pursuant to
section 203(e) * * * to suspend or revoke registration, or pursuant
to section 203(h) * * * to impose terms or conditions upon
withdrawal, the withdrawal from registration shall not become
effective except at such time and upon such terms and conditions as
the Commission deems necessary or appropriate in the public interest
or for the protection of investors.''). This language largely is
consistent with rule 203A-5 adopted after NSMIA. See NSMIA Adopting
Release, supra note 10.
---------------------------------------------------------------------------
We propose to use our exemptive authority under section 203A(c)
\21\ to provide for a transitional process with two ``grace periods,''
the first providing 30 days from the July 21, 2011 effective date of
the Dodd-Frank Act for an adviser to determine whether it is eligible
for Commission registration and to file an amended Form ADV, and the
second providing an additional 60 days (following the end of the first
30-day period) for an adviser to register in the states and to arrange
for its associated persons to qualify for investment adviser
representative registration, which may include preparing for and
passing an examination, before withdrawing from Commission
registration.\22\ We are proposing a 90-day transition process, which
is shorter than the 180-day transition period that our rules currently
provide for advisers switching from SEC to State registration, in order
to promptly implement this Congressional mandate and accommodate the
processing of renewals and fees for State registration and licensing
via the IARD system, while allowing for an orderly transition.\23\
---------------------------------------------------------------------------
\21\ See supra note 13 and accompanying text.
\22\ Proposed rule 203A-5. We would also amend the instructions
on Form ADV to explain this process. See proposed Form ADV: General
Instructions (special one-time instruction for Dodd-Frank transition
filing for SEC-registered advisers).
\23\ Our current rule provides an SEC-registered adviser that
has to switch to State registration a period of 180 days after its
fiscal year end to file an annual amendment to Form ADV and to
withdraw its SEC registration after reporting to us that it is no
longer eligible to remain registered with us. See rule 203A-1(b)(2);
cf. rule 204-1(a) (requiring an adviser to file an annual amendment
90 days after its fiscal year end).
---------------------------------------------------------------------------
We request comment on proposed rule 203A-5. Specifically, we
request comment on the proposed transition process, including the
amount of time we propose for advisers to transition to State
registration by filing an amended
[[Page 77055]]
Form ADV within 30 days after July 21, 2011 and withdrawing from
Commission registration within 60 days after the required Form ADV
filing. We request comment on whether a transition process is necessary
(e.g., whether we should require advisers that do not meet the new
eligibility requirements to withdraw from Commission registration as of
July 21, 2011), whether two grace periods are necessary (e.g., whether
we should require the Form ADV filing and withdrawal of an adviser's
registration to occur within the same period), or whether we should
provide for a longer period (e.g., whether we should provide 180 days
to parallel our current switching rule).\24\ Further, should the rule
permit us to postpone the effectiveness of, and impose additional terms
and conditions on, an adviser's withdrawal from SEC registration?
---------------------------------------------------------------------------
\24\ See rule 203A-1(b)(2); cf. 204-1(a).
---------------------------------------------------------------------------
Our ability to effect the timely transition to State regulation of
advisers no longer eligible to register with the Commission may also be
affected by our need to re-program the IARD system, through which
advisers will file their amendments to Form ADV. We are working closely
with the Financial Industry Regulatory Authority (``FINRA''), our IARD
contractor, to make the needed modifications, but the programming may
not be completed until after we adopt these rules. If IARD is unable to
accept filings of Form ADV, including the proposed revisions discussed
below to Item 2 of Part 1A, we may need to use our exemptive authority
to further delay implementation of the increased threshold for mid-
sized adviser registration until the system can accept electronic
filing of the revised form. Should we instead require an alternative
procedure, such as a paper filing, for advisers to indicate their
eligibility for registration or lack thereof? \25\
---------------------------------------------------------------------------
\25\ See Custody of Funds or Securities of Clients by Investment
Advisers, Investment Advisers Act Release No. 2968, n. 53 (Dec. 30,
2009) [75 FR 1456 (Jan. 11, 2010)] (requiring paper filing of Form
ADV-E until IARD was upgraded to accept the form electronically);
NSMIA Adopting Release at section II.A. (requiring advisers to file
a separate paper form (Form ADV-T) to indicate whether they were
eligible for SEC registration).
---------------------------------------------------------------------------
Since the enactment of the Dodd-Frank Act, our staff has received
inquiries from State-registered advisers and advisers registering for
the first time expressing concern that they might be required to
register with the Commission (because their assets under management are
more than $30 million) only to have to withdraw their registration next
year when we implement section 410 of the Dodd-Frank Act (raising the
threshold for Commission registration to $100 million of assets under
management). To avoid such regulatory burdens, we will not object if
any State-registered or newly registering adviser is not registered
with us if, on or after January 1, 2011 until the end of the transition
process (which would be October 19, 2011 under proposed rule 203A-5),
the adviser reports on its Form ADV that it has between $30 million and
$100 million of assets under management, provided that the adviser is
registered as an investment adviser in the State in which it maintains
its principal office and place of business, and it has a reasonable
belief that it is required to be registered with, and is subject to
examination as an investment adviser by, that State.\26\ Such advisers
should remain registered with, or in the case of a newly registering
adviser, apply for registration with, the State securities
authorities.\27\
---------------------------------------------------------------------------
\26\ For a discussion of these requirements, see infra section
II.A.7. of this Release.
\27\ As discussed above, the Dodd-Frank Act amendments to
Advisers Act section 203A(a) will not be effective until July 21,
2011. See supra note 6 and accompanying text. Until that date,
section 203A continues to apply, and all investment advisers
registered with the Commission that remain eligible for registration
under the current requirements must maintain their registrations and
comply with the Advisers Act.
---------------------------------------------------------------------------
2. Amendments to Form ADV
Item 2 of Part 1A of Form ADV requires each investment adviser
applying for registration to indicate its basis for registration with
the Commission and to report annually whether it is eligible to remain
registered. Item 2 reflects the current statutory threshold for
registration with the Commission as well as our current rules. We
propose to revise Item 2 to reflect the new statutory threshold and the
revisions we propose to make to related rules as a result of the Dodd-
Frank Act.\28\ More specifically, we propose to amend Item 2 to require
each adviser registered with us (and each applicant for registration)
to identify whether, under section 203A, as amended, it is eligible to
register with the Commission because it: (i) Is a large adviser (having
$100 million or more of regulatory assets under management); \29\ (ii)
is a mid-sized adviser that does not meet the criteria for State
registration and examination; \30\ (iii) has its principal office and
place of business in Wyoming (which does not regulate advisers) or
outside the United States; \31\ (iv) meets the requirements for one or
more of the exemptive rules under section 203A of the Act (as we
propose to amend and discuss below); \32\ (v) is an adviser (or
subadviser) to a registered investment company; \33\ (vi) is an adviser
to a business development company and has at least $25 million of
regulatory assets under management; \34\ or (vii) has some other basis
for registering with the Commission.\35\ We also expect to modify IARD
to prevent an applicant from registering with us, and an adviser from
continuing to be registered with us, unless it represents that it meets
the eligibility criteria set forth in the Advisers Act and our
rules.\36\ We request comment on each of the changes we propose to make
to Item 2. Are the requirements clearly stated? Do the proposed changes
fairly reflect the new eligibility requirements under the Dodd-Frank
Act and the amendments we are proposing to make to our rules?
---------------------------------------------------------------------------
\28\ We also propose to revise the terms used in the rules and
Form ADV to refer to the securities authorities in each State with a
single defined term, ``State securities authority.'' Compare
proposed rules 203A-1, 203A-2(c) and (d), 203A-3(e); proposed Form
ADV: Glossary with rules 203A-1(b)(1), 203A-2(e)(1), 203A-4; Form
ADV: Glossary. See generally section 410 of the Dodd-Frank Act.
\29\ Proposed Form ADV, Part 1A, Item 2.A.(1). We are proposing
to revise Form ADV to use the term ``regulatory assets under
management'' instead of ``assets under management.'' For a
discussion of regulatory assets under management, see infra section
II.A.3. of this Release.
\30\ Proposed Form ADV, Part 1A, Item 2.A.(2). For a discussion
of the criteria for State registration and examination for mid-sized
advisers, see infra section II.A.7. of this Release.
\31\ Proposed Form ADV, Part 1A, Items 2.A.(3), 2.A.(4).
\32\ Proposed Form ADV, Part 1A, Items 2.A.(7)-2.A.(11). For a
discussion of the exemptive rules, see infra section II.A.5. of this
Release.
\33\ Proposed Form ADV, Part 1A, Item 2.A.(5).
\34\ Proposed Form ADV, Part 1A, Item 2.A.(6).
\35\ Proposed Form ADV, Part 1A, Item 2.A.(12). We also propose
to delete current Item 2.A.(5) for NRSROs. For a discussion of
NRSROs, see infra section II.A.5.a. of this Release.
\36\ We would also amend Item 2.A and the related items in
Schedule D to reflect proposed revisions to rule 203A-2, which
provides exemptions from the prohibition on registration with the
Commission. See proposed Form ADV Items 2.A.(7), (10) and Section
2.A.(10) of proposed Schedule D; infra section II.A.5. of this
Release. Additionally, we propose to make conforming changes to the
instructions for Form ADV. See proposed Form ADV: Instructions for
Part 1A, instr. 2.
---------------------------------------------------------------------------
3. Assets Under Management
In most cases, the amount of assets an adviser has under management
will determine whether the adviser must be registered with the
Commission or the states. Section 203A(a)(2) of the Act defines
``assets under management'' as the ``securities portfolios'' with
respect to which an adviser provides ``continuous and regular
supervisory or
[[Page 77056]]
management services.'' \37\ Instructions to Form ADV provide advisers
with guidance in applying this provision, including a list of certain
types of assets that advisers may (but are not required to)
include.\38\ Today, we are proposing revisions to these instructions in
order to implement a uniform method to calculate assets under
management that can be used under the Act for purposes in addition to
assessing whether an adviser is eligible to register with the
Commission.\39\ We also propose to amend rule 203A-3 to continue to
require that the calculation of ``assets under management'' for
purposes of Section 203A be the calculation of the securities
portfolios with respect to which an investment adviser provides
continuous and regular supervisory or management services, as reported
on the investment adviser's Form ADV.\40\
---------------------------------------------------------------------------
\37\ Advisers Act section 203A(a)(2). The Dodd-Frank Act
renumbered current paragraph 203A(a)(2) as 203A(a)(3), but did not
amend this definition. See section 410 of the Dodd-Frank Act.
\38\ See Form ADV: Instructions for Part 1A, instr. 5.b. These
assets include proprietary assets, assets an adviser manages without
receiving compensation, and assets of foreign clients.
\39\ Compare Form ADV: Instructions for Part 1A, instr. 5.b with
proposed Form ADV: Instructions for Part 1A, instr. 5.b.
\40\ See proposed rule 203A-3(d).
---------------------------------------------------------------------------
We provided the current instructions on calculating assets under
management in 1997 as part of our implementation of the $25 million of
assets threshold for registering with the Commission provided for in
NSMIA.\41\ In that limited context, we provided some options for
advisers in determining what assets must be included, and which are not
mandated by the Advisers Act. In light of the additional uses of the
term ``assets under management'' by the Dodd-Frank Act \42\ and any new
regulatory requirements related to systemic risk that might be
triggered by registration with the Commission,\43\ we are proposing to
eliminate the choices we have given advisers in the Form ADV
instructions.\44\ Our proposed change would eliminate an adviser's
ability to opt into or out of State or Federal regulation (by including
or excluding a class of assets such as proprietary assets) and any such
regulatory requirements. We also would provide additional guidance to
advisers on how to count assets managed through private funds.\45\
Finally, we propose to alter the terminology we use in Part 1A of Form
ADV to refer to an adviser's ``regulatory assets under management'' in
order to acknowledge the distinction from the amount of assets under
management the adviser discloses to clients in Part 2 of Form ADV,
which need not necessarily meet the requirements of section 203A.\46\
---------------------------------------------------------------------------
\41\ See NSMIA Adopting Release at section II.B.
\42\ See sections 402(a) and 408 of the Dodd-Frank Act (adding
section 202(a)(30) of the Act defining a foreign private adviser as
having ``assets under management'' attributable to U.S. clients and
private fund investors of less than $25 million, and section 203(m)
directing the Commission to provide for an exemption for advisers
solely to private funds with assets under management in the United
States of less than $150 million).
\43\ Section 404 of the Dodd-Frank Act gives the Commission
authority to impose on investment advisers registered with the
Commission reporting and recordkeeping requirements for systemic
risk assessment purposes. The Commission could require registered
advisers that meet a certain threshold of assets under management to
submit systemic risk data pursuant to our authority in section 404
of the Dodd-Frank Act. See also section 203(n) of the Advisers Act,
as amended by section 408 of the Dodd-Frank Act (``In prescribing
regulations to carry out the requirements of [Section 203 of the
Act] with respect to investment advisers acting as investment
advisers to mid-sized private funds, the Commission shall take into
account the size * * * of such funds to determine whether they pose
systemic risk, and shall provide for registration and examination
procedures with respect to the investment advisers of such funds
which reflect the level of systemic risk posed by such funds.'').
\44\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(1).
\45\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(1), (4). See also section 402 of the Dodd-Frank Act (defining
private fund as ``an issuer that would be an investment company, as
defined in section 3 of the Investment Company Act of 1940 (15
U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act'');
Exemptions Release at section II.A.8. (discussing when a fund
qualifies as a private fund) and at section II (providing additional
descriptions of the proposed rules and their application for
purposes of the new exemptions available to private fund advisers).
\46\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.; Amendments to Form ADV, Investment Advisers Act Release No.
3060 (July 28, 2010) [75 FR 49234 (Aug. 12, 2010)] (``Part 2
Release'').
---------------------------------------------------------------------------
More specifically, we propose to require all advisers to include in
their regulatory assets under management securities portfolios for
which they provide continuous and regular supervisory or management
services, regardless of whether these assets are proprietary assets,
assets managed without receiving compensation, or assets of foreign
clients, all of which an adviser currently may (but is not required to)
exclude.\47\ In addition, we would not allow an adviser to subtract
outstanding indebtedness and other accrued but unpaid liabilities,
which remain in a client's account and are managed by the adviser.\48\
---------------------------------------------------------------------------
\47\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(1).
\48\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(2). Accordingly, an adviser would not be able to deduct accrued
fees, expenses, or the amount of any borrowing.
---------------------------------------------------------------------------
We are proposing these changes in order to preclude some advisers
from excluding certain assets from their calculation and thus remaining
below the new assets threshold for registration with the Commission.
The changes would result in some advisers reporting greater assets
under management than they do today, but the assets we would require
advisers to include in their assets under management are, in fact,
assets managed by the adviser and allowing advisers to exclude such
assets may have substantially more significant regulatory consequences
than in 1997. The management of such assets, for example, may suggest
that the adviser's activities are of national concern or have
implications regarding the reporting for the assessment of systemic
risk, a matter Congress considered important in enacting amendments to
the Advisers Act in the Dodd-Frank Act.\49\ The Commission, moreover,
is proposing that advisers be required to include these assets so that
the calculations would be more consistent among advisers. The
Commission also believes that requiring that these assets be included
in the calculation would better achieve the objective of the Dodd-Frank
Act regarding which advisers must register with the Commission, which
advisers must register with the states, and which advisers are exempt
from Commission registration.
---------------------------------------------------------------------------
\49\ See supra note 43. Congress did not address these systemic
risk implications when it adopted NSMIA.
---------------------------------------------------------------------------
We also propose, as discussed below, to provide guidance regarding
how an adviser that advises private funds determines the amount of
assets it has under management. Form ADV currently provides no specific
instructions applicable to this circumstance. We have designed our
proposed instructions both to provide advisers with greater certainty
in their calculation of regulatory assets under management, which they
would also use as a basis to determine their eligibility for certain
exemptions that we are proposing today in the Exemptions Release,\50\
as well as to prevent advisers from understating those assets to avoid
registration. First, we would require an adviser to include in its
regulatory assets under management the value of any private fund over
which it exercises continuous and regular supervisory or management
services, regardless of the nature of the assets held by the fund.\51\
As would be required for any other securities portfolio, a sub-adviser
to a private fund would include in its assets under management only
that portion of the
[[Page 77057]]
value of the portfolio for which it provides sub-advisory services.
---------------------------------------------------------------------------
\50\ See Exemptions Release at sections II.B.2. and II.C.5.
\51\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(1).
---------------------------------------------------------------------------
Second, we propose to require such adviser to include in its
calculation of regulatory assets under management the amount of any
uncalled capital commitments made to the fund.\52\ Private funds, such
as venture capital and private equity funds, typically make investments
following capital calls on their investors, who are contractually
obligated to fund their committed capital amounts.\53\ Advisers to
these types of private funds provide supervisory or management services
to the funds in anticipation of all investors fully funding their
capital commitments, describe the size of their funds on the basis of
these capital commitments and, in the early years of a fund's life,
typically earn fees based on the total amount of capital committed.\54\
---------------------------------------------------------------------------
\52\ Id. A capital commitment is a contractual obligation of an
investor to acquire an interest in, or provide the total commitment
amount over time to, a private fund, when called by the fund.
\53\ See, e.g., James Schell, Private Equity Funds: Business
Structure and Operations Sec. 1.01 (2010) (``Schell'') (typical
private equity fund partnership agreement requires investors to
commit to make capital contributions to the fund, which would be
paid as needed rather than upfront and would be used to pay expenses
and make investments); Stephanie Breslow & Phyllis Schwartz, Private
Equity Funds, Formation and Operation 2010, at Sec. 2:5.6
(discussing the various remedies that may be imposed in the event an
investor fails to fund its contractual capital commitment,
including, but not limited to, ``the ability to draw additional
capital from non-defaulting investors;'' ``the right to force a sale
of the defaulting partner's interests at a price determined by the
general partner;'' and ``the right to take any other action
permitted at law or in equity'').
\54\ See, e.g., Schell, supra note 53 at Sec. 1.01 (noting that
capital contributions made by the investors are used to ``make
investments in a manner consistent with the investment strategy or
guidelines for the Fund.'') and at Sec. 1.03 (``Management fees in
a Venture Capital Fund are usually an annual amount equal to a fixed
percentage of total Capital Commitments.'').
---------------------------------------------------------------------------
Third, we propose to add an instruction to require advisers to use
the fair value of private fund assets in order to ensure that advisers
value private fund assets on a more meaningful and consistent
basis.\55\ Use of the cost basis (i.e., the value at which the assets
were originally acquired), for example, could under certain
circumstances grossly understate the value of appreciated assets, and
thus result in advisers avoiding registration with the Commission. Use
of the fair valuation method by all advisers, moreover, would result in
more consistent asset calculations and reporting across the industry
and, therefore, in a more coherent application of the Act's regulatory
requirements and of our staff's risk assessment program. We understand
that many, but not all, private funds value assets based on their fair
value in accordance with U.S. generally accepted accounting principles
(``GAAP'') or other international accounting standards.\56\ We
acknowledge some private funds do not use fair value methodologies,
which may be more difficult to apply when the fund holds illiquid or
other types of assets that are not traded on organized markets.\57\ We
believe, however, that for the reasons stated above it is important for
all advisers to use the fair valuation method to calculate their
private fund assets under management.
---------------------------------------------------------------------------
\55\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(4). A fund's governing documents may provide for a specific
process for calculating fair value (e.g., that the general partner,
rather than the board of directors, determines the fair value of the
fund's assets). An adviser would be able to rely on such a process
also for purposes of calculating its ``regulatory assets under
management.''
\56\ See, e.g., Comment Letter of National Venture Capital
Association, dated July 28, 2009, at 2, commenting on the
Commission's proposed custody rule (Investment Advisers Act Release
No. 2876) (the ``vast majority of venture capital funds provide
their LPs [i.e., investors] quarterly and audited annual financial
reports. These reports are prepared under generally accepted
accounting principles, or GAAP, and audited under the standards
established for all investment companies, including the largest
mutual fund complexes.''); Comment Letter of Managed Funds
Association, dated July 28, 2009, at 3 (a ``substantial proportion
of hedge fund managers, whether or not they are registered with the
Commission, provide independently audited financial statements of
the [hedge] fund to investors.''). Furthermore, advisers to private
funds that prepare and distribute financial statements prepared in
accordance with GAAP may be deemed to satisfy certain requirements
of our custody rule. See rule 206(4)-2(b)(4) under the Advisers Act.
\57\ Those assets include, for example, ``distressed debt''
(such as securities of companies or government entities that are
either already in default, under bankruptcy protection, or in
distress and heading toward such a condition) or certain types of
emerging market securities that are not readily marketable. See
Gerald T. Lins et al., Hedge Funds and Other Private Funds: Reg and
Comp Sec. 5:22 (2009) (``At any given time, some portion of a hedge
fund's portfolio holdings may be illiquid and/or difficult to value.
This is particularly the case for certain types of hedge funds, such
as those focusing on distressed securities, activist investing,
etc.'').
---------------------------------------------------------------------------
Advisers, as discussed below, would apply this revised method to
calculate assets under management for various purposes under the
Advisers Act. As they do today, advisers would calculate their assets
under management for purposes of assessing whether they are eligible to
register with the Commission. As a result of the proposed amendments to
rule 203A-1, which would remove the requirement that an adviser
determine its eligibility for registration by the assets under
management reported on Form ADV, we are proposing a new provision, rule
203A-3(d), to retain the requirement that the calculation of ``assets
under management'' under section 203A and the related rules be made in
accordance with the Form ADV calculation.\58\ Advisers would also apply
the method for purposes of the new exemptions for foreign private
advisers and with respect to certain private fund advisers, which we
address in the Exemptions Release. For purposes of calculating the
assets under management relevant under the exemptions, our proposed
rules cross-reference the method for calculating ``regulatory assets
under management'' under Form ADV.\59\ A uniform method of calculating
assets under management for purposes of determining eligibility for SEC
registration, reporting assets under management on Form ADV, and the
new exemptions from registration under the Advisers Act would result in
a more coherent application of the Act's regulatory requirements and
more consistent reporting across the industry.
---------------------------------------------------------------------------
\58\ See proposed rule 203A-3(d) (requiring advisers to
determine ``assets under management'' by calculating the securities
portfolios with respect to which an investment adviser provides
continuous and regular supervisory or management services as
reported on the investment adviser's Form ADV). This new provision
reflects the current requirement in subsection (a) of rule 203A-1
that we propose to eliminate to remove the $5 million buffer, which
also requires advisers to determine their eligibility to register
with the Commission based on the amount of assets under management
reported on Form ADV. See rule 203A-1(a).
\59\ See Exemptions Release at sections II.B.2. and II.C.5.;
proposed rules 202(a)(30)-1 (definitions of foreign private adviser
exemption terms) and 203(m)-1 (private fund adviser exemption).
---------------------------------------------------------------------------
We request comment on our proposed changes to the instructions
relating to the calculation of ``regulatory assets under management.''
Are changes to the rule and instructions necessary? Should we instead
consider different changes? If so, in what way should we amend them? In
particular, is our understanding that most private funds prepare
financial statements using fair value accounting correct? Would the
proposed approach result in advisers valuing their private fund assets
in a generally uniform manner and in comparability of the valuations?
We are not proposing to require advisers to determine fair value in
accordance with GAAP. Should we adopt such a requirement? If not,
should we specify that advisers may only determine the fair value of
private fund assets in accordance with a body of accounting principles
used in preparing financial statements? We understand that GAAP does
not require some funds to fair value certain investments. Should we
provide for an exception from the proposed fair valuation requirement
with respect to any of those investments?
[[Page 77058]]
Should we adopt a different approach altogether and allow advisers
to use a method other than fair value? Are there other methods that
would not understate the value of fund assets? Should the instructions
permit advisers to rely on the method set forth in a fund's governing
documents, or the method used to report the value of assets to
investors or to calculate fees (or other compensation) for investment
advisory services? What method should apply if a fund uses different
methods for different purposes? Should we modify the proposed rule to
require that the valuation be derived from audited financial statements
or be subject to review by auditors or another independent third party?
Advisers are currently only required to update their assets under
management reported on Form ADV annually.\60\ Should we require more
frequent updating? For instance, should we require an adviser to update
its regulatory assets under management quarterly or any time the
adviser files an other-than-annual amendment? \61\
---------------------------------------------------------------------------
\60\ See General Instruction 4 to Form ADV.
\61\ See, e.g., Exemptions Release at section II.B.2. (proposed
rule 203(m)-1 would require quarterly evaluation of private fund
assets); Part 2 Release, supra note 46, at nn.46-48 and accompanying
text (requiring advisers to update the amount of assets under
management reported in Part 2 annually and when there are material
changes if the adviser files an interim amendment for a separate
reason).
---------------------------------------------------------------------------
4. Switching Between State and Commission Registration
Rule 203A-1 currently contains two means of preventing an adviser
from having to switch frequently between State and Commission
registration as a result of changes in the value of its assets under
management or the departure of one or more clients.\62\ First, the rule
provides for a $5 million buffer that permits an investment adviser
having between $25 million and $30 million of assets under management
to remain registered with the states and does not subject the adviser
to cancellation of its Commission registration until its assets under
management fall below $25 million.\63\ Second, the rule permits an
adviser to rely on the firm's assets under management reported annually
in the firm's annual updating amendments for purposes of determining
its eligibility to register with the Commission, allowing an adviser to
avoid the need to change registration status based upon fluctuations
that occur during the course of the year.\64\ If an adviser is no
longer eligible for Commission registration, the rule provides a 180-
day grace period from the adviser's fiscal year end to allow it to
switch to State registration.\65\
---------------------------------------------------------------------------
\62\ See rule 203A-1(a), (b); NSMIA Adopting Release, supra note
10, at section II.C.; Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment Advisers Act Release No.
1601, section II.C. (Dec. 20, 1996) [61 FR 68480 (Dec. 27, 1996)]
(``NSMIA Proposing Release'').
\63\ Rule 203A-1(a).
\64\ Rule 203A-1(b). See also rule 204-1(a) (requiring annual
amendment to Form ADV within 90 days of fiscal year end); General
Instruction 4 (annual amendment to Form ADV must update amount of
assets under management reported). Other criteria to determine an
adviser's eligibility to register with the Commission must also be
determined annually. See rule 203A-1(b)(2).
\65\ Rule 203A-1(b)(2).
---------------------------------------------------------------------------
We propose to amend rule 203A-1 to eliminate the $5 million buffer
for advisers having between $25 million and $30 million of assets under
management, but to retain the ability of an adviser to avoid the need
to change registration status based upon intra-year fluctuations in its
assets under management for purposes of determining its eligibility to
register with the Commission.\66\ The current buffer seems unnecessary
in light of Congress's determination generally to require most advisers
having between $30 million and $100 million of assets under management
to be registered with the states.\67\ Moreover, at this time, we
believe it is not necessary to increase the $100 million threshold in
order to provide a similar buffer for advisers crossing that threshold
and becoming registered with the Commission under the amended statutory
provisions. We believe that the requirement that advisers only assess
their eligibility for registration annually and the grace periods
provided to switch to and from State registration will be sufficient to
address the concern that an investment adviser with assets under
management approaching $100 million or affected by changes in other
eligibility requirements will frequently have to switch between State
and Federal registration.\68\
---------------------------------------------------------------------------
\66\ See proposed rule 203A-1. In addition, the proposed rule
would permit an adviser to rely on an affirmation of other criteria
reported in its annual updating amendments for purposes of
determining its eligibility to register with the Commission. See
proposed rule 203A-1(b) (continuing to require an adviser filing an
annual updating amendment to its Form ADV reporting that it is not
eligible for Commission registration to withdraw its registration
within 180 days of its fiscal year end).
\67\ See H.R. Rep. No. 111-517, at 867 (2010) (``Conference
Committee Report'') (discussing fact that legislation ``raise[d] the
assets threshold for Federal regulation of investment advisers from
$30 million to $100 million.'').
\68\ If during the 180-day grace period to switch to State
registration an adviser's assets under management increase, making
the adviser eligible for Commission registration again, the adviser
could amend its Form ADV to indicate the new amount of assets under
management and continue to remain registered with the Commission.
See proposed rule 203A-1(b) (adviser must withdraw from SEC
registration within 180 days of its fiscal year end unless it then
is eligible for registration).
---------------------------------------------------------------------------
We request comment on our proposed elimination of the $5 million
buffer. Do many advisers currently use this buffer? Should we retain
the buffer given the new provisions regarding mid-sized advisers?
Should we adopt a similar buffer for the new $100 million dollar
threshold in amended section 203A? If so, what should be the amount of
the buffer? Should it be $5 million, or higher or lower, and why? Do
Item 2.A of Form ADV, Part 1A and the related instructions provide
sufficient information to advisers about their eligibility to register
with the Commission, or is additional guidance necessary?
5. Exemptions From the Prohibition on Registration With the Commission
Section 203A(c) of the Advisers Act provides the Commission with
the authority to permit investment advisers to register with the
Commission even though they would be prohibited from doing so
otherwise.\69\ As also noted above, under this authority, we have
adopted six exemptions in rule 203A-2 from the prohibition on
registration.\70\ Our authority under this provision was unchanged by
the Dodd-Frank Act and therefore extends to the new mid-sized adviser
category in section 203A(a)(2) of the Act, as amended.\71\ As a result,
as currently drafted, each of these exemptions would, by its terms,
apply to mid-sized advisers-exempting them from the prohibition on
registering with the Commission if they meet the requirements of rule
203A-2. We are proposing amendments to three of the
[[Page 77059]]
exemptions to reflect developments since their adoption, including the
enactment of the Dodd-Frank Act. We request comment on whether we
should amend the rules so that some, or all, of the exemptions should
not be available to mid-sized advisers.\72\
---------------------------------------------------------------------------
\69\ See Advisers Act section 203A(c). An investment adviser
exempted from the prohibition on registration must register with the
Commission, unless it otherwise qualifies for an exemption from
registration under section 203(b) of the Advisers Act. Advisers Act
section 203(a).
\70\ See supra note 14 and accompanying text. The Commission has
permitted six types of investment advisers to register with the
Commission under rule 203A-2: (i) NRSROs; (ii) pension consultants;
(iii) investment advisers affiliated with an adviser registered with
the Commission; (iv) investment advisers expecting to be eligible
for Commission registration within 120 days of filing Form ADV; (v)
multi-State investment advisers; and (vi) internet advisers.
\71\ Today, rule 203A-2 provides that advisers meeting the
criteria for a category of advisers under the rule will not be
prohibited from registering with us by Advisers Act section 203A(a).
See rule 203A-2; NSMIA Adopting Release at section II.D. We are not
proposing to amend this part of rule 203A-2. The new prohibition on
mid-sized advisers registering with the Commission also is
established under Advisers Act section 203A(a); therefore, mid-sized
advisers meeting the requirements for a category of exempt advisers
under rule 203A-2 would be eligible to register with us. See section
410 of the Dodd-Frank Act; proposed rule 203A-2.
\72\ We are also renumbering and making minor conforming changes
to, rule 203A-2(c), (d) and (f) regarding investment advisers
affiliated with an SEC-registered adviser, newly formed advisers
expecting to be eligible for Commission registration within 120
days, and internet advisers. See proposed rule 203A-2(b), (c) and
(e).
---------------------------------------------------------------------------
a. NRSROs
We propose an amendment to eliminate the exemption in rule 203A-
2(a) from the prohibition on Commission registration for nationally
recognized statistical rating organizations (``NRSROs''). Since we
adopted this exemption, Congress amended the Act to exclude NRSROs from
the Act \73\ and provided for a separate regulatory regime for NRSROs
under the Securities Exchange Act of 1934 (``Exchange Act'').\74\ Only
one NRSRO remains registered as an investment adviser under the Act and
reports that it has more than $100 million of assets under management
and thus would not rely on the exemption.\75\ Should we retain this
exemption? If so, why?
---------------------------------------------------------------------------
\73\ Credit Rating Agency Reform Act of 2006, Public Law 109-
291, 120 Stat. 1327, Sec. 4(b)(3)(B) (2006) (``Credit Rating Agency
Reform Act''). See also Advisers Act section 202(a)(11)(F)
(excluding an NRSRO from the definition of investment adviser unless
it issues recommendations about purchasing, selling, or holding
securities or engages in managing assets that include securities).
\74\ Credit Rating Agency Reform Act, supra note 73, at sections
4(a), 5.
\75\ Based on IARD data as of September 1, 2010.
---------------------------------------------------------------------------
b. Pension Consultants
We propose to amend the exemption available to pension consultants
in rule 203A-2(b) to increase the minimum value of plan assets from $50
million to $200 million.\76\ Pension consultants typically do not have
``assets under management,'' but we have required these advisers to
register with us because their activities have a direct effect on the
management of large amounts of pension plan assets.\77\ We had set the
threshold at $50 million of plan assets for these advisers to ensure
that, in order to register with us, a pension consultant's activities
are significant enough to have an effect on national markets.\78\ We
propose to increase this threshold to $200 million in light of
Congress's determination to increase from $25 million to $100 million
the amount of ``assets under management'' that requires all advisers to
register with the Commission.\79\ This threshold would maintain a ratio
to the statutory threshold that is the same as the ratio of the $50
million plan asset threshold and $25 million assets under management
threshold currently in place. As a result, advisers currently relying
on the pension consultant exemption advising plan assets of less than
$200 million may be required to register with one or more states.\80\
---------------------------------------------------------------------------
\76\ See proposed rule 203A-2(a).
\77\ See NSMIA Adopting Release at section II.D.2.; NSMIA
Proposing Release at section II.D.2. Pension consultants provide
services to pension and employee benefit plans and their
fiduciaries, including assisting them to select investment advisers
that manage plan assets. See rule 203A-2(b)(2), (3); NSMIA Adopting
Release at section II.D.2. The exemption does not apply to pension
consultants that solely provide services to plan participants. See
NSMIA Adopting Release at section II.D.2.
\78\ See NSMIA Adopting Release at n. 60 (the $50 million
``higher threshold is necessary to demonstrate that a pension
consultant's activities have an effect on national markets.''). The
higher asset requirement also reflects that a pension consultant has
substantially less control over client assets than an adviser that
has ``assets under management.'' Id. To determine the aggregate
value of plan assets, a pension consultant may only include the
portion of the plan's assets for which the consultant provided
investment advice. Rule 203A-2(b)(3).
\79\ See section 410 of the Dodd-Frank Act.
\80\ We note, however, that a pension consultant required to
register in 15 or more states would be eligible to register with the
SEC pursuant to proposed rule 203A-2(d). See infra section II.A.5.c.
of this Release.
---------------------------------------------------------------------------
We request comment on our proposed amendment. Does an adviser
advising plan assets of $200 million or more have an impact on national
markets? Should we use another amount instead? Does an adviser advising
a smaller amount of plan assets also have an impact on national
markets? Should we instead increase the threshold by the same amount
that Congress increased the statutory threshold of assets under
management, which would be $125 million of plan assets?
c. Multi-State Advisers
We propose to amend the multi-state adviser exemption to align the
rule with the multi-State exemption Congress built into the mid-sized
adviser provision under section 410 of the Dodd-Frank Act.\81\ Under
rule 203A-2(e), the prohibition on registration with the Commission
does not apply to an investment adviser that is required to register in
30 or more states. Once registered with the Commission, the adviser
remains eligible for Commission registration as long as it would be
obligated, absent the exemption, to register in at least 25 states.\82\
The Dodd-Frank Act provides that a mid-sized adviser that otherwise
would be prohibited may register with the Commission if it would be
required to register with 15 or more states.\83\
---------------------------------------------------------------------------
\81\ See proposed rule 203A-2(d).
\82\ Rule 203A-2(e)(1). An investment adviser relying on this
exemption also must: (i) include a representation on Schedule D of
Form ADV that the investment adviser has concluded that it must
register as an investment adviser with the required number of
states; (ii) undertake to withdraw from registration with the
Commission if the adviser indicates on an annual updating amendment
to Form ADV that it would be required by the laws of fewer than 25
states to register as an investment adviser with the State; and
(iii) maintain a record of the states in which the investment
adviser has determined it would, but for the exemption, be required
to register. Rule 203A-2(e)(2)-(4). Advisers relying on rule 203A-
2(e) may not include in the number of states those in which they are
not required to register because of applicable State laws or the
national de minimis standard of section 222(d) of the Advisers Act.
See Exemption for Investment Advisers Operating in Multiple States;
Revisions to Rules Implementing Amendments to the Investment
Advisers Act of 1940; Investment Advisers with Principal Offices and
Places of Business in Colorado or Iowa, Investment Advisers Act
Release No. 1733, n. 17 (July 17, 1998) [63 FR 39708 (July 24,
1998)] (``Multi-State Adviser Adopting Release'').
\83\ See section 410 of the Dodd-Frank Act (``* * * if by effect
of this paragraph an investment adviser would be required to
register with 15 or more States, then the adviser may register under
section 203.''). Section 203A(a)(1) of the Advisers Act does not
include a similar exemption from the prohibition on Commission
registration for small advisers required to register in a particular
number of states.
---------------------------------------------------------------------------
We believe that this provision of the Dodd-Frank Act reflects a
Congressional view on the number of states with which an adviser must
be required to be registered before the regulatory burdens associated
with such regulation warrant registration solely with the Commission
and application of the preemption provision.\84\ Thus, we are
reconsidering the threshold of our multi-State exemption, and propose
to amend rule 203A-2(e) to permit all investment advisers required to
register as an investment adviser with 15 or more states to register
with the Commission.\85\ We also propose to eliminate the provision in
the rule that permits advisers to remain registered until the number of
states in which they must register falls below 25 states, and we are
not proposing a similar cushion for the 15-State threshold.\86\ The
Dodd-Frank Act contains no such cushion for mid-sized advisers.\87\ We
also believe that the requirement that advisers only assess their
eligibility for registration annually and the grace periods provided
[[Page 77060]]
to switch to and from State registration may be sufficient to address
the concern that an investment adviser required to register in 15
states would frequently have to switch between State and Federal
registration.\88\
---------------------------------------------------------------------------
\84\ See Conference Committee Report, supra note 67, at 867
(bill ``raises the assets threshold for Federal regulation of
investment advisers from $30 million to $100 million. Those advisers
who qualify to register with their home State must register with the
SEC should the adviser operate in more than 15 states.'').
\85\ See proposed rule 203A-2(d)(1).
\86\ See proposed rule 203A-2(d).
\87\ See section 410 of the Dodd-Frank Act.
\88\ See supra notes 66-68 and related text. We also note that
proposed rule 203A-2(d) would permit an adviser to choose to
maintain its State registrations and not switch to SEC registration.
See proposed rule 203A-2(d)(2) (adviser elects to rely on the
exemption by making the required representations on Form ADV).
---------------------------------------------------------------------------
We request comment on whether the 15-State threshold should be
applied to small advisers as well as mid-sized advisers. If not, should
the threshold of 30 or more states continue to apply to small advisers?
Should we, as proposed, eliminate the ``cushion'' that permits advisers
to remain registered with us even if they are no longer registered in
five of the states in which they were initially registered? Should we
retain that provision or, alternatively, include a different number of
states? Does the grace period currently provided in rule 203A-1 prevent
the transient registration problems that the five-State cushion was
designed to address? \89\
---------------------------------------------------------------------------
\89\ See proposed rule 203A-1; supra notes 66-68 and related
text; Multi-State Adviser Adopting Release at section II.A. (five-
State provision creates a cushion to prevent an adviser from having
to de-register and then re-register with the Commission frequently
as a result of a change in registration obligations in one or a few
states).
---------------------------------------------------------------------------
6. Elimination of Safe Harbor
Rule 203A-4 provides a safe harbor from Commission registration for
an investment adviser that is registered with the State securities
authority of the State in which it has its principal office and place
of business, based on a reasonable belief that it is prohibited from
registering with the Commission because it does not have sufficient
assets under management.\90\ Advisers have not, in our experience,
asserted, as a defense, the availability of this safe harbor, which
protects only against enforcement actions by us and not any private
actions, and we are not proposing to extend it to the higher threshold
established by the Dodd-Frank Act. This rule was designed for smaller
advisory businesses with assets under management of less than $30
million,\91\ which may not employ the same tools or otherwise have a
need to calculate assets as precisely as advisers with greater assets
under management. We view it as unlikely that an adviser would be
reasonably unaware that it has more than $100 million of regulatory
assets under management when it is required to report its regulatory
assets under management on Form ADV.\92\ Commenters are requested to
address whether advisers do, in fact, rely on this safe harbor today.
We also request comment on whether we should, as we propose, rescind
this safe harbor or, alternatively, extend its availability to the
higher registration threshold of the Dodd-Frank Act.
---------------------------------------------------------------------------
\90\ Rule 203A-4.
\91\ See rule 203A-4; NSMIA Adopting Release at section II.B.3.
\92\ We believe that whether an adviser has $100 million of
assets under management is unlikely to be determined by whether non-
discretionary assets could be treated as assets under management or
whether the adviser provides continuous and regular supervisory or
management services with respect to certain assets, which was the
basis for the safe harbor. See NSMIA Adopting Release at section
II.B.3.; NSMIA Proposing Release at section II.B.4.
---------------------------------------------------------------------------
7. Mid-Sized Advisers
As discussed above, section 203A(a)(2) of the Advisers Act, as
amended by the Dodd-Frank Act, will prohibit mid-sized advisers from
registering with the Commission, but only if: (i) the adviser is
required to be registered as an investment adviser with the securities
commissioner (or any agency or office performing like functions) of the
State in which it maintains its principal office and place of business;
and (ii) if registered, the adviser would be subject to examination as
an investment adviser by such commissioner, agency, or office.\93\ The
Dodd-Frank Act does not explain how to determine whether a mid-sized
adviser is ``required to be registered'' or is ``subject to
examination'' by a particular State securities authority.\94\ We
propose to incorporate into Form ADV an explanation of how we construe
these provisions.\95\
---------------------------------------------------------------------------
\93\ See section 410 of the Dodd-Frank Act.
\94\ The Advisers Act defines the term ``State'' to include any
U.S. State, the District of Columbia, Puerto Rico, the Virgin
Islands, or any other possession of the United States. Advisers Act
section 202(a)(19). For purposes of section 203A of the Advisers Act
and the rules thereunder, rule 203A-3(c) defines ``principal office
and place of business'' to mean the executive office of the
investment adviser from which its officers, partners, or managers
direct, control, and coordinate its activities. We are not proposing
changes to this definition. See rule 203A-3(c). For a discussion of
amendments we propose to make to the calculation of assets under
management, see supra section II.A.3. of this Release.
\95\ See proposed Form ADV: Instructions for Part 1A, instr.
2.b.
---------------------------------------------------------------------------
a. Required To Be Registered
Under section 203A(a)(1) of the Act, an adviser that is not
regulated or required to be regulated as an investment adviser in the
State in which it has its principal office and place of business must
register with the Commission regardless of the amount of assets it has
under management.\96\ We have interpreted ``regulated or required to be
regulated'' to mean that a State has enacted an investment adviser
statute, regardless of whether the adviser is actually registered in
that State.\97\ This interpretation has two relevant consequences.
First, advisers with a principal office and place of business in
Wyoming, or in foreign countries, must register with the Commission
regardless of whether they have assets under management and would not
otherwise be eligible for one of our exemptive rules.\98\ Second, some
smaller advisers exempt from State registration are not subject to
registration with either the Commission or any of the states.\99\
---------------------------------------------------------------------------
\96\ Advisers Act section 203A(a)(1). See also Advisers Act
section 203(a).
\97\ See NSMIA Adopting Release at section II.E.1.
\98\ See NSMIA Adopting Release at section II.E.; NSMIA
Proposing Release at section II.E. Currently, all U.S. states except
Wyoming require certain investment advisers to register. See
Transition Rule for Ohio Investment Advisers, Investment Advisers
Act Release No. 1794, n. 4 (Mar. 25, 1999) [64 FR 15680 (Apr. 1,
1999)].
\99\ See, e.g., Advisers Act section 203A(a)(1); Uniform
Securities Act Sec. Sec. 102(15), 403(b) (2002) (``Uniform
Securities Act'') (defining ``investment adviser'' and providing
exemptions from State registration as an investment adviser).
---------------------------------------------------------------------------
We believe that Congress was concerned with the latter consequence
when it passed this provision of the Dodd-Frank Act. The bills
originally introduced and passed in the House and Senate increased up
to $100 million the threshold for Commission registration under the
``regulated or required to be regulated'' standard that is used today
in section 203A(a)(1).\100\ Accordingly, some advisers with a
significant amount (more than $25 million) of assets under management
could have escaped oversight by either the Commission or any of the
states by taking advantage of State registration exemptions. Perhaps to
avoid this possibility, the Conference Committee included a provision
to prohibit a mid-sized adviser from registering with the Commission
if, among other things, it is ``required to be registered'' as an
adviser with the State securities authority where it maintains its
principal office and place of business.\101\ A mid-sized adviser that
can and does rely on an exemption under the law of the State in which
it
[[Page 77061]]
has its principal office and place of business such that it is ``not
required to be registered'' with the State securities authority \102\
must register with the Commission, unless an exemption from
registration with the Commission otherwise is available.\103\ An
adviser not registered under a State adviser statute in contravention
of the statute, however, would not be eligible for registration with
the Commission.
---------------------------------------------------------------------------
\100\ See The Wall Street Reform and Consumer Protection Act of
2009, H.R. 4173, 111th Cong. Sec. 7418 (2009) (requiring an adviser
with between $25 million and $100 million of assets under management
that ``is regulated and examined, or required to be regulated and
examined, by a State'' to register with and be subject to
examination by such State); Restoring American Financial Stability
Act of 2010, S. 3217, 111th Cong. Sec. 410 (2010) (prohibiting an
investment adviser with assets under management of less than $100
million from registering with the Commission if the adviser ``is
regulated or required to be regulated as an investment adviser'' in
the State where it maintains its principal office and place of
business).
\101\ See section 410 of the Dodd-Frank Act.
\102\ See, e.g., Uniform Securities Act, supra note 99, at
sections 102(15), 403(b).
\103\ See, e.g., Advisers Act sections 203(a) and (b), 203A(b);
rule 203A-2. Such an adviser could not voluntarily register with the
State securities authorities to avoid SEC registration.
---------------------------------------------------------------------------
We are proposing changes to Form ADV to require a mid-sized adviser
filing with us to affirm, upon application and annually thereafter,
that it is not required to be registered as an adviser with the State
securities authority in the State where it maintains its principal
office and place of business.\104\ An adviser reporting that it is no
longer able to make such an affirmation thereafter would have 180 days
from its fiscal year end to withdraw from Commission registration.\105\
Thus, the rule would operate to permit an adviser to rely on this
affirmation reported in its annual updating amendments for purposes of
determining its eligibility to register with the Commission.\106\
Should these requirements apply to mid-sized advisers? Are there
alternative interpretations of ``required to be registered'' that we
should consider and why?
---------------------------------------------------------------------------
\104\ See proposed Form ADV, Part 1A, Item 2.A.(2)(a). For a
discussion of proposed changes to Form ADV, Part 1A, Item 2, see
supra section II.A.2. of this Release.
\105\ See proposed rule 203A-1(b).
\106\ This would allow an adviser to change registration status
based upon a change during the course of the year regarding whether
it is required to be registered with a State.
---------------------------------------------------------------------------
b. Subject to Examination
Not all State securities authorities conduct compliance
examinations of advisers registered with them.\107\ Congress therefore
determined to require a mid-sized adviser to register with the
Commission if the adviser is not subject to examination as an
investment adviser by the State in which the adviser has its principal
office and place of business.\108\
---------------------------------------------------------------------------
\107\ See, e.g., North American Securities Administrators
Association, Inc., State Securities Regulators Report on Regulatory
Effectiveness and Resources with Respect to Broker-Dealers and
Investment Advisers, 7 (2010) (``NASAA Report''). The NASAA Report
was submitted in connection with the Commission's study regarding
obligations of brokers, dealers, and investment advisers, and is
available on the Commission's Web site at http://www.sec.gov/comments/4-606/4606-2789.pdf.
\108\ See section 410 of the Dodd-Frank Act.
---------------------------------------------------------------------------
The Commission does not intend either to review or evaluate each
State's investment adviser examination program.\109\ Instead, we will
correspond with each State securities commissioner (or official with
similar authority) and request that each advise us whether an
investment adviser registered in the State would be subject to
examination as an investment adviser by that State's securities
commissioner (or agency or office with similar authority).\110\ We
believe that the states, being most familiar with their own
circumstances, are in the best position to determine whether advisers
in their State are subject to examination. Using the responses that we
receive, we will identify for advisers filing on IARD the states in
which the securities commissioner did not certify that advisers are
subject to examination and incorporate that list into IARD to ensure
that only mid-sized advisers with their principal office and place of
business in one of those states (or, as discussed above, mid-sized
advisers that are not registered with the states where they maintain
their principal office and place of business) will register with the
Commission.\111\ We request comment on whether the Commission should
take additional steps to determine whether an investment adviser would
be subject to examination in a State, as well as any alternatives the
Commission may adopt. We also request comment on the steps the
Commission should take if a State determines not to respond to our
request.
---------------------------------------------------------------------------
\109\ The bill introduced in the House included a requirement
that we publish a list of the states that regulate and examine, or
require regulation and examination of, investment advisers. See The
Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173,
111th Cong. Sec. 7418 (2009). Congress did not include this
requirement in the Dodd-Frank Act. See section 410 of the Dodd-Frank
Act.
\110\ We also will request that each State notify the Commission
promptly if advisers in the State will begin to be subject to
examination or will no longer be subject to examination.
\111\ See proposed Form ADV, Part 1A, Item 2.A.(2)(b). We will
also make the list available on our Web site at http://www.sec.gov.
---------------------------------------------------------------------------
B. Exempt Reporting Advisers: Sections 407 and 408
As discussed above, the Dodd-Frank Act, effective July 21, 2011,
also repealed the ``private adviser exemption'' contained in section
203(b)(3) of the Advisers Act on which advisers to many hedge funds and
other pooled investment vehicles had relied in order to avoid
registration under the Act.\112\ In eliminating this provision,
Congress amended the Act to create, or direct us to adopt, other, in
many ways narrower, exemptions for advisers to certain types of
``private funds.'' Both section 203(l) of the Advisers Act (which
provides an exemption for an adviser that advises solely one or more
``venture capital funds'') and section 203(m) of the Advisers Act
(which instructs the Commission to exempt any adviser that acts solely
as an adviser to private funds and has assets under management in the
United States of less than $150 million) provide that the Commission
shall require such advisers to maintain such records, which we have the
authority to examine,\113\ and to submit reports ``as the Commission
determines necessary or appropriate in the public interest.'' \114\ We
refer to these advisers in this release as ``exempt reporting
advisers.''
---------------------------------------------------------------------------
\112\ Section 403 of the Dodd-Frank Act. Section 203(b)(3)
exempts from registration any investment adviser who during the
course of the preceding twelve months has had fewer than fifteen
clients and who neither holds himself out generally to the public as
an investment adviser nor acts as an investment adviser to any
investment company registered under the Investment Company Act, or a
company which has elected to be a business development company
pursuant to Section 54 of the Investment Company Act (15 U.S.C. 80a-
53).
\113\ Under section 204(a) of the Advisers Act, the Commission
has the authority to examine records, unless the adviser is
``specifically exempted'' from the requirement to register pursuant
to section 203(b) of the Advisers Act. Investment advisers that are
exempt from registration in reliance on section 203(l) or 203(m) of
the Advisers Act are not ``specifically exempted'' from the
requirement to register pursuant to section 203(b).
\114\ See sections 407 and 408 of the Dodd-Frank Act, adding
Advisers Act sections 203(l) and (m). See supra note 45 for a
discussion of the term ``private fund.'' See also Exemptions Release
at section II. See also current section 204(a) of the Advisers Act
and section 204(b)(5), as added by section 404 of the Dodd-Frank
Act.
---------------------------------------------------------------------------
To implement sections 203(l) and 203(m), we are proposing a new
rule to require exempt reporting advisers to submit, and to
periodically update, reports to us by completing a limited subset of
items on Form ADV.\115\ We are also proposing amendments to Form ADV to
permit the form to serve as a reporting, as well as a registration,
form and to specify the seven items exempt reporting advisers must
complete.\116\
---------------------------------------------------------------------------
\115\ Recordkeeping requirements for exempt reporting advisers
will be addressed in a future release. See sections 407 and 408
(providing that the Commission shall require investment advisers
exempt from registration under either section 407 or 408 to maintain
such records as the Commission determines necessary or appropriate
in the public interest or for the protection of investors.).
\116\ For a discussion of additional amendments we are proposing
to Part 1 of Form ADV, see infra section II.C. of this Release.
---------------------------------------------------------------------------
[[Page 77062]]
1. Reporting Required
We are proposing a new rule, rule 204-4, to require exempt
reporting advisers to file reports with the Commission electronically
on Form ADV.\117\ Rule 204-4 would require these advisers to submit
their reports through the IARD using the same process as registered
investment advisers.\118\ Each Form ADV would be considered filed with
the Commission upon acceptance by the IARD,\119\ and advisers filing
the form would be required to pay a filing fee.\120\ As we do for IARD
filings by registered advisers, we would approve, by order, the amount
of the filing fee charged by FINRA.\121\ We anticipate that filing fees
would be the same as those for registered investment advisers, which
currently range from $40 to $200, based on the amount of assets an
adviser has under management.\122\ The filing fees would be set at
amounts that are designed to pay the reasonable costs associated with
the filing and the maintenance of the IARD.
---------------------------------------------------------------------------
\117\ Proposed rule 204-4(a).
\118\ Proposed rule 204-4(b). See General Instructions 6, 7, 8
and 9 (providing guidance about the IARD entitlement process,
signing the form, and submitting it for filing).
\119\ Proposed rule 204-4(c). Cf. rule 0-4(a)(2) (``All filings
required to be made electronically with the * * * [IARD] shall,
unless otherwise provided by the rules and regulations in this part,
be deemed to have been filed with the Commission upon acceptance by
the IARD.'').
\120\ Proposed rule 204-4(d).
\121\ See section 204(b) of the Advisers Act.
\122\ The current fee schedule may be found on our Web site at
http://www.sec.gov/divisions/investment/iard/iardfee.shtml.
---------------------------------------------------------------------------
The reports filed by exempt reporting advisers would be publicly
available on our Web site.\123\ Exempt reporting advisers unable to
file electronically as a result of unanticipated technical difficulties
may qualify for a temporary hardship exemption.\124\ We also are
proposing technical amendments to Form ADV-H, the form advisers use to
request a hardship exemption from electronic filing, and Form ADV-NR,
used to appoint the Secretary of the Commission as an agent for service
of process for certain non-resident advisers.\125\
---------------------------------------------------------------------------
\123\ The Investment Adviser Public Disclosure System (``IAPD'')
allows the public to access the most recent Form ADV filing made by
an investment adviser and is available at http://www.adviserinfo.sec.gov. We would, however, make it clear to the
public viewing reports filed by an exempt reporting adviser on IAPD
that the adviser is not registered with us.
\124\ See proposed rule 204-4(e) (providing a temporary hardship
exemption for an adviser having unanticipated technical difficulties
that prevent submission of a filing to IARD). The temporary hardship
exemption is based on a similar exemption for registered advisers
contained in rule 203-3(a) under the Act [17 CFR 275.203-3(a)],
which provides an exemption of no more than seven business days
after the filing was due.
\125\ See proposed amended Form ADV-H, proposed amended Form
ADV-NR, and proposed General Instruction 18. The amendments to Form
ADV-H and Form ADV-NR would reflect that exempt reporting advisers
would be filing on IARD and the forms would be used in the same way
and for the same purpose as they are currently used by registered
investment advisers.
---------------------------------------------------------------------------
We are proposing to require reporting on Form ADV through the IARD
to avoid the expense and delay of developing a new form and because the
IARD already has the capacity to accept electronic filing of the form.
Moreover, much of the information we propose that exempt reporting
advisers would provide is required by Form ADV. Because exempt
reporting advisers may be required to register on Form ADV with one or
more State securities authorities,\126\ use of the existing form and
filing system would also permit exempt reporting advisers to satisfy
both State and Commission requirements with a single electronic
filing.\127\ Our proposed approach would permit an adviser to
transition from filing reports with us to applying for registration
under the Act by simply amending its Form ADV; the adviser would check
the box to indicate it is filing an initial application for
registration, complete the items it did not have to answer as an exempt
reporting adviser, and update the pre-populated items that it already
has on file.\128\
---------------------------------------------------------------------------
\126\ The Dodd-Frank Act exempts exempt reporting advisers from
registration with the Commission. See sections 407 and 408 of the
Dodd-Frank Act. It does not, however, exempt these advisers from
registering or filing reports with State securities regulators. See
also section 410 of the Dodd-Frank Act (re-allocating SEC and State
jurisdiction over investment advisers); proposed rule 203A-1
(proposing the process for switching to or from State or SEC
registration); and proposed General Instruction 13 to Form ADV
(noting that exempt reporting advisers who file reports with the SEC
may continue to be subject to State registration, reporting, or
other obligations).
\127\ Form ADV is used by advisers both to register with the
Commission and with State securities authorities. At the request of
the State securities authorities, we expect to add to Form ADV a
check box and instructions that would permit exempt reporting
advisers to direct the filing of reports filed with the Commission
to the State securities authorities. Because these revisions to Form
ADV and the obligation to file the report with the State securities
authorities would not arise from a Federal law or Commission rule,
we are not proposing them for comment. We urge interested persons to
submit comments directly to the North American Securities
Administrators Association, Inc. (``NASAA'') for consideration by
the State securities authorities at the following e-mail address:
[email protected]. In addition, we understand that NASAA may
propose a model rule that would exempt certain exempt reporting
advisers from State registration but would require these advisers to
submit to the States a report identical to the report an exempt
reporting adviser would be required to submit to the SEC. Interested
persons should visit the NASAA Web site at http://www.nasaa.org for
the full text of any proposed rule and to respond to any request for
comment.
\128\ See proposed General Instruction 14 (providing procedural
guidance to advisers that no longer meet the definition of exempt
reporting adviser). See also infra note 140.
---------------------------------------------------------------------------
We request comment on proposed rule 204-4 and its requirement that
exempt reporting advisers file reports by responding to a subset of
items on Form ADV and filing the report through IARD. Should we instead
create a new form and/or a new filing system for exempt reporting
advisers? Rather than use IARD or a new system, should we instead
require exempt reporting advisers to use EDGAR? Should we not make this
information available to the public on our Web site? Are there
alternative approaches to reporting by exempt reporting advisers that
we should consider? If so, please explain. Are there additional ways
the Commission could distinguish between registered advisers and exempt
reporting advisers?
2. Information in Reports
We are proposing several amendments to Form ADV to facilitate
filings by exempt reporting advisers. First, we would re-title the form
to reflect its dual purpose as both the ``Uniform Application for
Investment Adviser Registration,'' as well as the ``Report by Exempt
Reporting Advisers.'' Second, we are proposing to amend the cover page
so that exempt reporting advisers would indicate the type of report
they are filing.\129\ Finally, we propose to amend Item 2 of Part 1A,
which requires advisers to indicate their eligibility for SEC
registration, by adding a new subsection C that would require an exempt
reporting adviser to identify the exemption(s) that it is relying on to
report, rather than register, with the Commission.\130\
---------------------------------------------------------------------------
\129\ An adviser would indicate whether it is submitting an
initial report, an annual updating amendment, an other-than-annual-
amendment, or a final report. We also propose corresponding changes
to General Instruction 2.
\130\ An adviser would check that it qualifies for an exemption
from registration: (i) As an adviser solely to one or more venture
capital funds; and/or (ii) because it acts solely as an adviser to
private funds and has assets under management in the United States
of less than $150 million. See proposed Form ADV, Part 1A, Item 2.C.
An adviser relying on the latter exemption, for private fund
advisers, would also be required to indicate the amount of private
fund assets it manages in Section 2.C. of Schedule D to Form ADV,
Part 1A. Investment advisers who have their principal office and
place of business outside of the United States, however, would need
only to include private fund assets that they manage from a place of
business in the United States. See Exemptions Release at section
II.B.2.
---------------------------------------------------------------------------
Form ADV is today designed to obtain information from registered
advisers that provide a wide variety of types of
[[Page 77063]]
advisory services, including providing advice to private funds.
Therefore, the information that we propose to collect from exempt
reporting advisers is for the most part currently required by Form
ADV.\131\ We would provide an instruction to these advisers to complete
only certain items in the form, but we do not propose to change the
content of the items for exempt reporting advisers.\132\ As noted
above, we propose to require exempt reporting advisers to complete a
limited subset of Form ADV items, which would provide us and the public
with some basic information about the adviser and its business, but is
not all of the information we require registered advisers to submit to
us, and which is designed to support our regulatory program. We propose
to require exempt reporting advisers to complete the following items in
Part 1A of Form ADV: Items 1 (Identifying Information), 2.C. (SEC
Reporting by Exempt Reporting Advisers), 3 (Form of Organization), 6
(Other Business Activities), 7 (Financial Industry Affiliations and
Private Fund Reporting), 10 (Control Persons), and 11 (Disclosure
Information). In addition, exempt reporting advisers would have to
complete corresponding sections of Schedules A, B, C, and D. We would
not require exempt reporting advisers to complete and file with us
other Items in Part 1A or prepare a client brochure (Part 2).\133\
---------------------------------------------------------------------------
\131\ Some of the amendments we propose to Form ADV would apply
to both registered and exempt reporting advisers. See infra section
II.C. of this Release.
\132\ We propose amending General Instruction 3 to explain which
portions of Form ADV are applicable to exempt reporting advisers.
\133\ Part 2 of Form ADV, which requires advisers to prepare a
narrative, plain English client brochure, contains 18 items
including information on the adviser's business practices, conflicts
of interest, and background. Part 2 also requires advisers to
prepare brochure supplements that include information about advisory
personnel on whom clients rely for investment advice. Currently,
only a registered adviser must deliver a brochure under rule 204-3,
and only an adviser that must deliver a brochure must prepare and
file one as part of its Form ADV. See rule 203-1.
---------------------------------------------------------------------------
Congress gave us broad authority to require exempt reporting
advisers to file reports as necessary or appropriate in the public
interest or for the protection of investors.\134\ The Dodd-Frank Act
neither specifies the types of information we could require in the
reports nor specifies the purpose for which we would use the
information.\135\ We have sought information that we believe would
assist us to identify the advisers, their owners, and their business
models. The items that we have proposed would also provide us with
information as to whether these advisers or their activities might
present sufficient concerns as to warrant our further attention in
order to protect their clients, investors, and other market
participants. We have also considered the broader public interest in
making this information generally available and believe there may be
benefits of providing information about their activities to the public.
We acknowledge that there may be costs associated with providing this
information to us, and that the adviser may provide some or all of this
information to private fund investors or prospective investors, however
we believe there will be benefits, which we describe in more detail
below.
---------------------------------------------------------------------------
\134\ See sections 407 and 408 of the Dodd-Frank Act.
\135\ The Dodd-Frank Act does, however, specify that the reports
are those ``the Commission determines necessary or appropriate in
the public interest or for the protection of investors.'' Id.
---------------------------------------------------------------------------
Items 1, 3, and 10 would elicit basic identification details about
an exempt reporting adviser such as name, address, contact information,
form of organization, and who owns the adviser. Items 6 and 7.A. would
provide us with details regarding other business activities that the
adviser and its affiliates are engaged in, which would permit us to
identify conflicts that the adviser may have with its clients that may
suggest significant risks to those clients. Item 11 would require
advisers to disclose the disciplinary history for the adviser and its
employees. An exempt reporting adviser that has, for example, an
officer that has been found guilty of fraud or other crimes or has
committed substantial regulatory infractions would be of concern to us
and to investors and prospective investors in funds advised by the
exempt reporting adviser.
Because exempt reporting advisers manage private funds, we also
propose to require them to complete Item 7.B. and Section 7.B of
Schedule D for the private funds they advise. As discussed in more
detail in Section II.C. below, we are proposing significant amendments
to Section 7.B.1. of Schedule D that are designed to provide us with a
comprehensive overview, or census, of private funds.\136\ Exempt
reporting advisers' responses to Item 7.B., and Section 7.B.1. of
Schedule D, in conjunction with information provided by registered
advisers, would provide us with important data about these funds that
we would use to identify risks to their investors.
---------------------------------------------------------------------------
\136\ For instance, advisers who complete section 7.B.1. of
Schedule D would have to provide identifying information about each
private fund, such as its name and domicile, as well as information
about its ownership, service providers, and its total and net
assets. See proposed Form ADV, Part 1A, Schedule D, Section 7.B.1.
---------------------------------------------------------------------------
Do commenters agree with our judgments regarding the items
applicable to exempt reporting advisers? We have not proposed to
require exempt reporting advisers to complete Items 4, 5, 8, 9, or 12
of Part 1 of Form ADV. We request comment on whether we should require
exempt reporting advisers to complete any of these items to provide us
and investors with the information required by those items.
Part 2 of Form ADV, the client brochure, is required of registered
advisers to provide clients and potential clients with detailed
information about their qualifications, investment strategies, and
business practices. Our proposal would not require exempt reporting
advisers to prepare Part 2 of Form ADV. Should we require exempt
reporting advisers to complete Part 2 of Form ADV, file it with us on
IARD, and make it available to the public on our Web site? Would some
or all of this information be helpful to clients and potential clients
of these advisers? Should we not require exempt reporting advisers to
complete certain items of Part 2? For example, should we exclude those
items that would require information similar to those items of Part 1
that we are not proposing to require exempt reporting advisers to
complete? Are there other items we should include or not include?
Should we require these advisers to complete brochure supplements?
Would the information in the brochure supplements be helpful to the
clients of these advisers? Do investors currently receive this type of
information as a result of their investment in a private fund?
Should the reporting requirements be identical for exempt reporting
advisers as they are for registered advisers? Are there items that we
have proposed to apply to exempt reporting advisers that we should not
apply or are unnecessary, and why? Is any of the information we propose
to require not readily available to an exempt reporting adviser? Would
any of the items require disclosure of proprietary or competitively
sensitive information? If so, which items, and if competitively
sensitive, describe the competitive impact. Would any of these
disclosure requirements, either individually or cumulatively, impose a
significant burden? Would they require disclosure of proprietary or
competitively sensitive information such that they could impact or
influence business or other decisions by these advisers? Would they
materially affect a decision by an adviser whether to form a private
fund? If so, why?
[[Page 77064]]
3. Updating Requirements
We are also proposing to amend rule 204-1 under the Advisers Act,
which requires advisers to update their Form ADV filings, to require
exempt reporting advisers to file updating amendments to reports filed
on Form ADV.\137\ Proposed rule 204-1(a) would require an exempt
reporting adviser, like a registered adviser, to amend its reports on
Form ADV: (i) At least annually, within 90 days of the end of the
adviser's fiscal year; and (ii) more frequently, if required by the
instructions to Form ADV. Consequently, we are proposing to amend
General Instruction 4 to Form ADV to require an exempt reporting
adviser to update Items 1 (Identification Information), 3 (Form of
Organization), or 11 (Disciplinary Information) promptly if they become
inaccurate in any way, and to update Item 10 (Control Persons) if it
becomes materially inaccurate.\138\ We are proposing the same updating
requirements with respect to these Items as are applicable to
registered advisers because we believe it is equally important for
exempt reporting advisers to report information on a timely basis. We
also believe it could create confusion to apply different updating
standards within each item of the form depending on who completes the
item. Consequently, we are proposing to require exempt reporting
advisers to follow the same instructions applicable to the items they
must complete, although they are required to complete fewer items than
a registered adviser.
---------------------------------------------------------------------------
\137\ Proposed rule 204-1. We also propose to amend the title of
the rule to be ``Amendments to Form ADV,'' rather than ``Amendments
to application for registration,'' to reflect use of the Form by
exempt reporting advisers.
\138\ See General Instruction 4 to Form ADV.
---------------------------------------------------------------------------
We request comment on the proposed amendments to rule 204-1 to
extend its requirements to exempt reporting advisers. Should exempt
reporting advisers be permitted to update Form ADV, or certain items,
less frequently? If so, what should be the updating requirements, and
should we be concerned that, as a result, an exempt reporting adviser
that is also registered with a State securities regulator would have to
update its Form ADV on a different schedule than an exempt reporting
adviser that is not also registered with a State? Would less frequent
reporting result in information that is less useful or materially
inaccurate? Should exempt reporting advisers be required to update
other items more frequently than annually?
We propose to include a provision in rule 204-4 to require an
exempt reporting adviser to file an amendment to its Form ADV when it
ceases to be an exempt reporting adviser.\139\ The exempt reporting
adviser would indicate in this amendment that it is filing a final
report pursuant to rule 204-4 in order to alert us that the adviser no
longer will be filing reports, and allow us to distinguish such a filer
from one that is inattentive to its filing obligations.\140\ We request
comment on this proposed final report requirement. Is there an
alternative approach we could take?
---------------------------------------------------------------------------
\139\ See proposed rule 204-4(f).
\140\ Proposed rule 204-4(f). Advisers filing a final report
would not be required to pay a filing fee. We note that failure to
file a final report would result in a violation of the rule.
---------------------------------------------------------------------------
Finally, we propose amending the instructions to Form ADV to
provide guidance to exempt reporting advisers who file final reports
because they must register with the Commission. Such a transition may
occur, for example, if an adviser relying on the ``venture capital
exemption'' in section 203(l) of the Advisers Act accepts a client that
is not a venture capital fund,\141\ or the value of the assets under
management in the United States of an adviser relying on the ``private
fund exemption'' in section 203(m) of the Advisers Act meets or exceeds
$150 million.\142\ A transitioning adviser would file an amendment to
its Form ADV simultaneously indicating that the filing will be its
final ``report'' on Form ADV and applying for registration with the
Commission.\143\ We request comment on this proposed guidance.
---------------------------------------------------------------------------
\141\ See section 407 of the Dodd-Frank Act.
\142\ See section 408 of the Dodd-Frank Act.
\143\ See proposed General Instruction 14. In the Exemptions
Release we propose that an adviser relying on the private fund
adviser exemption would have three months from the end of a calendar
quarter at which it failed to qualify for the exemption because of a
fluctuation in private fund assets to apply to the Commission for
registration unless it qualifies for another exemption. See proposed
rule 203(m)-1(d).
---------------------------------------------------------------------------
4. Transition
We propose requiring each exempt reporting adviser to file its
initial report with us on Form ADV no later than August 20, 2011, 30
days after the July 21, 2011 effective date of the Dodd-Frank Act.\144\
We believe this would provide sufficient time to enable an adviser to
determine whether it must report to us and to take the steps necessary
to complete and submit its initial filing. We request comment on our
proposed transition, including the amount of time we propose for exempt
reporting advisers to submit their initial reports.
---------------------------------------------------------------------------
\144\ See sections 403, 407, 408, and 419 of the Dodd Frank Act.
---------------------------------------------------------------------------
As discussed above, our ability to effect this transition may be
affected by our need to reprogram IARD.\145\ We are working closely
with FINRA, our IARD contractor, to make the needed modifications, but
the programming may not be completed until after we adopt these rules.
If IARD is unable to accept filings of amended Form ADV by that time,
we may want to delay the reporting deadline until the system can accept
electronic filing of the revised form. Should we instead require an
alternative procedure, such as a paper filing, for advisers to indicate
their eligibility for this exemption from registration and to satisfy
their reporting requirements?
---------------------------------------------------------------------------
\145\ See supra section II.A.1. of this Release.
---------------------------------------------------------------------------
C. Form ADV
Data collected from Form ADV is of critical importance to our
regulatory program and our ability to protect investors. We use
information reported to us on Form ADV for a number of purposes, one of
which is to efficiently allocate our examination resources based on the
risks we discern or the identification of common business activities
from information provided by advisers. The information is used to
create risk profiles of investment advisers and permits our examiners
to better prepare for, and more efficiently conduct, their on-site
examinations. Moreover, the information in Form ADV allows us to better
understand the investment advisory industry and evaluate the
implications of policy choices we must make in administering the
Advisers Act.
To enhance our ability to oversee investment advisers, we are
proposing to require advisers to provide us additional information
about three areas of their operations.\146\ First, we are proposing to
require advisers to provide information regarding private funds they
advise. Second, we are proposing to expand the data advisers provide
about their advisory business, (including data about the types of
clients they have, their employees, and their advisory activities), as
well as about their business practices that may present significant
conflicts of interest (such as the use of affiliated brokers, soft
dollar arrangements, and compensation for client referrals). Third, we
are proposing to require additional information about advisers'
[[Page 77065]]
non-advisory activities and their financial industry affiliations. We
are also proposing certain additional changes intended to improve our
ability to assess compliance risks and also to identify advisers that
are subject to the Dodd-Frank Act's requirements concerning certain
incentive-based compensation arrangements.\147\ We understand that
advisers would have ready access to all of the new information as part
of their normal operations or compliance programs, and thus these new
requirements should impose few additional regulatory burdens. We
request comment on whether our understanding is correct. In addition to
(or instead of) these three areas of operations, are there other areas
about which we should require advisers to report additional
information?
---------------------------------------------------------------------------
\146\ In addition, we are proposing several clarifying or
technical amendments based on frequently asked questions we receive
from advisers as well as in our experience administering the form.
See infra section II.C.6. of this release.
\147\ See section 956 of the Dodd-Frank Act.
---------------------------------------------------------------------------
1. Private Fund Reporting: Item 7.B.
We propose to expand the information we require advisers to provide
us about the private funds they advise in response to Item 7.B., and
Schedule D. Both registered and exempt reporting advisers would
complete this Item. The information would provide us with a more
complete understanding of the private funds advised by advisers and
would permit us to enhance our assessment of private fund advisers for
purposes of targeting our examinations. The information also would help
us identify particular practices that may harm investors. We have been
concerned that unregistered funds have been used as a vehicle for
perpetrating fraud on investors.\148\ The private fund reporting
requirements we are proposing would provide a level of transparency
that we believe would help us to identify practices that may harm
investors,\149\ and would deter advisers' fraud and facilitate earlier
discovery of potential misconduct.\150\
---------------------------------------------------------------------------
\148\ For example, since January 2009, the Commission has
brought more than 50 enforcement cases in which we assert hedge fund
advisers have defrauded hedge fund investors or used the fund to
defraud others.
\149\ For instance, census data about a private fund's
gatekeepers, including administrators and auditors, would be
available on proposed Section 7.B.1. of Schedule D and would be
verifiable by investors and the Commission. Recent enforcement
actions suggest that the availability of such information could be
helpful. See, e.g., SEC v. Grant Ivan Grieve, et al., Litigation
Release No. 21402 (Feb. 2, 2010) (default judgment against hedge
fund adviser that was alleged to have fabricated and disseminated
false financial information for the fund that was ``certified'' by a
sham independent back-office administrator and phony accounting
firm); See In the Matter of John Hunting Whittier, Investment
Advisers Act Release No. 2637 (Aug. 21, 2007) (settled action
against hedge fund manager for, among other things, misrepresenting
to fund investors that a particular auditor audited certain hedge
funds, when in fact it did not).
\150\ See, e.g., Second Amended Complaint, SEC v. Hoover, Civil
Action No. 01-10751-RGS, (D. Mass. Mar. 20, 2002) available at
http://www.sec.gov/litigation/complaints/complr17487.htm (adviser
allegedly participated in a scheme to defraud clients of his
advisory firm by, among other things, misappropriating assets and
overbilling expenses. When he became aware that the Commission staff
was investigating his firm, he established a separate, unregistered
advisory firm and perpetuated his fraud through use of a hedge fund
he created and controlled.); SEC v. Hoover, Litigation Release No.
17981 (Feb. 11, 2003) (announcing final judgment by consent).
---------------------------------------------------------------------------
Currently, Item 7 requires each adviser to complete Section 7.B. of
Schedule D for any ``investment-related limited partnership'' that the
adviser or a related person advises. A separate Schedule D must be
completed for each partnership. We propose to modify the scope of Item
7 by requiring completion of Section 7.B. only for a private fund that
the adviser (and not a related person) advises. This amendment would
incorporate the new term ``private fund,'' defined in section
202(a)(29) of the Act, the primary effect of which would be to require
advisers to report pooled investment vehicles regardless of whether
they are organized as limited partnerships.\151\ We would no longer
require an adviser to report to us funds that are advised by
affiliates, which in many cases would now be reported to us by an
affiliate that is either registered under the Act or is now an exempt
reporting adviser.\152\
---------------------------------------------------------------------------
\151\ See supra note 45 (discussing the definition of private
fund). In 2004, the Commission adopted amendments to Form ADV to
require reporting of ``private fund'' information, including a
similar amendment to Item 7. A Federal appeals court vacated the
2004 amendments to Item 7 that we had adopted for private funds. See
Registration under the Advisers Act of Certain Hedge Fund Advisers,
Investment Advisers Act Release No. 2333 (Dec. 2, 2004) [69 FR 72054
(Dec. 10, 2004)] (``Hedge Fund Adviser Registration Release'');
Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C.
Cir. June 23, 2006) (``Goldstein''). The amendments we propose
would, in part, reinstate these amendments we adopted in 2004.
\152\ Currently, a related person may be able to rely on the
private adviser exemption from registration, which, as discussed
above, was repealed by the Dodd Frank Act effective July 21, 2011.
See supra at sections I, II.B. of this Release.
---------------------------------------------------------------------------
To avoid multiple reporting for each private fund, we propose to
permit a sub-adviser to exclude private funds for which an adviser is
reporting on another Schedule D,\153\ and would permit an adviser
sponsoring a master-feeder arrangement to submit a single Schedule D
for the master fund and all of the feeder funds that would otherwise be
submitting substantially identical data.\154\ Finally, we propose to
permit an adviser with a principal office and place of business outside
the United States to omit a Schedule D for a private fund that is not
organized in the United States and that is not offered to, or owned by,
``United States persons.'' \155\ This approach is designed to limit the
reporting burden imposed on foreign advisers with respect to funds in
which U.S. investors have no direct interest.
---------------------------------------------------------------------------
\153\ If an investment adviser completes section 7.B.1. of
Schedule D for a private fund, other advisers to that fund (most of
which are likely to be sub-advisers) would not have to complete
section 7.B.1. for that private fund. See proposed Form ADV, Part
1A, Note to Item 7.B.; proposed Section 7.B.2. of Schedule D. When
filing Section 7.B.1. of Schedule D for a private fund, an adviser
would acquire a unique identification number to the fund. The
adviser would be required to continue to use the same identification
number whenever it amends Section 7.B.1. for that fund. Any adviser
that files a Section 7.B.1. for a private fund for which an
identification number has already been acquired by another adviser
would not be permitted to acquire a new identification number, but
would be required to instead utilize the existing number. See
proposed Form ADV: Instructions for Part 1A, instr. 6.b.
\154\ See proposed Form ADV: Instructions for Part 1A, instr. 6.
In a master-feeder arrangement, one or more funds (``feeder funds'')
invest all or substantially all of their assets in a single fund
(``master fund''). Advisers would report on a single Schedule D if
their responses to certain questions of Section 7.B.1. of Schedule D
would be identical for each master and feeder fund. Our staff
estimates that most master-feeder arrangements involving private
funds would meet this condition. An adviser filing a single Schedule
D for a master-feeder arrangement would complete its Schedule D
under the name of the master fund, following our proposed
instructions for Section 7.B.
\155\ Id. See also proposed Form ADV: Glossary. We propose to
define ``United States person'' by reference to the definition in
proposed rule 203(m)-1(e)(8), which tracks the definition of a
``U.S. person'' under Regulation S, except that it contains a
special rule for discretionary accounts maintained for the benefit
of United States persons. See Exemptions Release at section II.B.4.
As discussed in the Exemptions Release, our proposed use of the
Regulation S definition for various purposes under the Advisers Act
would lessen the burden imposed on advisers, which are familiar with
the definition because they apply it for other purposes under the
securities laws.
---------------------------------------------------------------------------
We request comment on the scope of the Schedule D filing
requirements about private funds. Should we, as proposed, require
exempt reporting advisers to file Section 7.B. of Schedule D? Would the
disclosure of private fund information by exempt reporting advisers
impact or influence business or other decisions by these advisers, such
as whether to form additional private funds or discourage entry into
management of private funds all together?
Should we require advisers to report information also about other
pooled investment vehicles they may advise, such as foreign funds not
offered to U.S. persons? Specifically, are there sufficient investor
protection or other concerns that the Commission should seek to require
this information? Is information about these funds important to
understand conduct that directly
[[Page 77066]]
involves U.S. investors? Are the instructions eliminating multiple
filing of Section 7.B. by advisers helpful? Are there different
approaches we might take to achieve our intended goals? We request that
commenters review our proposed instructions and identify any
ambiguities that we should address.
We propose to amend Section 7.B. of Schedule D, which currently
requires very limited information about limited partnerships
established by an adviser, and which provides us with little data about
the operations of the many large hedge funds and other types of private
funds advised by a growing number of advisers registered with the
Commission.\156\ New Section 7.B.1. would expand on the identifying
information currently required to be reported in order to provide us
with basic organizational, operational and investment characteristics
of the fund; the amount of assets held by the fund; the nature of the
investors in the fund; and the fund's service providers.\157\ Although
we are proposing several new items of information that would be
reported to us, much of the information should be readily available to
private fund advisers (e.g., the amount of fund assets) and the
responses to many of the items are unlikely to change from year to year
(e.g., on which exclusion from the Investment Company Act the fund
relies) and thus the additional reporting should not involve a
significant reporting burden. As discussed in more detail below, the
information will help us identify potential compliance risks and inform
our regulatory activities.
---------------------------------------------------------------------------
\156\ Today, Section 7.B. of Schedule D requires an adviser to a
private fund that is a limited partnership or limited liability
company to identify: (1) The name of the fund; (2) the name of the
general partner or manager; (3) whether the adviser's clients are
solicited to invest in the fund; (4) the approximate percentage of
the adviser's clients that have invested in the fund; (5) the
minimum investment commitment; and (6) the current value of the
total assets of the fund.
\157\ We have considered the potential application of section
210(c) of the Advisers Act (which precludes us from requiring
advisers to disclose to us the ``identity, investments, or affairs''
of any of its clients) to the information about private fund clients
of advisers and have concluded that the Dodd-Frank Act permits us to
require this information in Form ADV. See, e.g., section 404(2) of
the Dodd-Frank Act, adding Advisers Act section 204(b)(1)(A)
(authorizing the Commission to require any investment adviser
registered under the Act ``to maintain such records of, and file
with the Commission such reports regarding, private funds advised by
the investment adviser, as necessary and appropriate in the public
interest and for the protection of investors * * *'').
---------------------------------------------------------------------------
Part A of the Section would require identifying information,
including the name of the private fund. We propose to add an
instruction to the item to permit an adviser that seeks to preserve the
anonymity of a private fund client by maintaining its identity in code
in its records to identify the private fund in Schedule D using the
same code.\158\ We request comment on this new instruction.
---------------------------------------------------------------------------
\158\ Rule 204-2(d) permits any books and records required to be
maintained by the rule ``in such manner that the identity of any
client to whom such investment adviser renders investment
supervisory services is indicated by numerical or alphabetical code
or some similar designation.'' We included the provision in the rule
in 1961 to reconcile our then new examination authority (the
exercise of which has required us to examine client records) with
section 210(c) of the Act. See Notice of Proposed Rule to Require
Investment Advisers to Maintain Specified Books and Records Under
the Investment Advisers Act of 1940, Investment Advisers Act Release
No. 111 (Jan. 25, 1961) [26 FR 987 (Feb. 1, 1961)]. We are proposing
to add the instruction to permit the few advisers that in our
experience have sought to encode the identity of their clients to do
so.
---------------------------------------------------------------------------
We also propose to revise Part A to require an adviser to identify
the State or country where the private fund is organized, and the name
of its general partner, directors, trustees or persons occupying
similar positions.\159\ The item would ask information about the
organization of the fund, including whether it is a master or a feeder
fund, and some information about the regulatory status of the fund and
its adviser, including the exclusion from the Investment Company Act on
which it relies, whether the adviser is subject to a foreign regulatory
authority, and whether the fund relies on an exemption from
registration of its securities under the Securities Act of 1933.\160\
The Item also would contain questions regarding whether the adviser is
a subadviser to the private fund and would require the adviser to
identify by name and SEC file number any other advisers to the
fund.\161\ We are proposing several questions to help us better
understand the private fund's investment activities and other areas of
potential investor protection concerns. For example, we would ask about
the size of the fund, including both its gross and net assets, from
which we could better understand the scope of its operations and the
extent of leverage it employs.\162\ We would ask the adviser to
identify within seven broad categories (which the applicable
instruction would define) the type of investment strategy employed by
the adviser,\163\ and to break down the assets and liabilities held by
the fund by class and categorization in the fair value hierarchy
established under U.S. generally accepted accounting principles
(GAAP).\164\ Many private funds managed by investment advisers that
would be reporting to us prepare financial statements in accordance
with GAAP.\165\ Others may use international accounting standards
requiring substantially similar information. Their adviser, therefore,
should have access to this information from such financial statements.
We would ask about both the number and the types of investors in the
fund, as well as the minimum amounts required to be invested by fund
investors to get a better idea of the types of investors the fund is
intended to serve and to get a sense of the extent to which investors
may themselves be in a position to exercise oversight of the
adviser.\166\ Finally, some items would ask information about
characteristics of the fund that may present the fund manager with
conflicts of interest with fund investors of the sort that may
implicate the adviser's fiduciary obligations to the fund and, in some
cases, create risks for the fund investors. Thus we would continue to
ask whether clients of the adviser are solicited to invest in the fund
and what percentage of the other clients has invested in the fund.\167\
---------------------------------------------------------------------------
\159\ See proposed Form ADV, Part 1A, Section 7.B.1.A. of
Schedule D, questions 2-3.
\160\ Id. questions 4-7 and questions 23-24 (asking whether the
fund relies on Regulation D and what is the fund's Form D file
number, if any).
\161\ Id. questions 19-20.
\162\ Id. question 11.
\163\ Id. question 10. The categories include: (i) Hedge fund;
(ii) liquidity fund; (iii) private equity fund; (iv) real estate
fund; (v) securitized asset fund; (vi) venture capital fund; and
(vii) other private fund.
\164\ Id. question 12. See FASB ASC 820-10-50-2b. We also
propose to ask whether the fund invests in securities of registered
investment companies, which is relevant to evaluating compliance
with the fund of funds provision of the Investment Company Act,
section 12(d)(1). See section 12(d)(1) of the Investment Company
Act; proposed Form ADV, Part 1A, Section 7.B.1.A. of Schedule D,
question 9.
\165\ See supra note 56. In addition, advisers to private funds
that prepare and distribute financial statements prepared in
accordance with GAAP may be deemed to satisfy certain requirements
of our custody rule. See Advisers Act rule 206(4)-2(b)(4).
\166\ See proposed Form ADV, Part 1A, Section 7.B.1.A. of
Schedule D, questions 13-18.
\167\ Id. questions 21-22.
---------------------------------------------------------------------------
In Part B of the Section, we propose to require advisers to report
information concerning five types of service providers that generally
perform important roles as ``gatekeepers'' for private funds (i.e.,
auditors, prime brokers, custodians, administrators and
marketers).\168\ We would require that an adviser identify them,
provide their location, and State whether they are related persons. For
each of these service providers, we would also require specific
information that would clarify the services they provide and include
certain identifying information such as
[[Page 77067]]
registration status. This information includes the following for each
service provider. For the auditors, whether they are independent,
registered with the Public Company Accounting Oversight Board (PCAOB)
and subject to its regular inspection, and whether audited statements
are distributed to fund investors.\169\ For the prime broker, whether
it is SEC-registered and whether it acts as custodian for the private
fund.\170\ For the custodian, whether it is a related person of the
adviser.\171\ For the administrator, whether it prepares and sends to
investors account statements and what percentage of the fund's assets
are valued by the administrator or another person that is not a related
person of the adviser.\172\ Finally, for marketers, whether they are
related persons of the adviser, their SEC file number (if any), and the
address of any Web site they use to market the fund.\173\ The questions
in Part B are generally designed to improve our ability to assess
conflicts and potential risks, identify funds with service provider
arrangements that raise a ``red flag,'' and identify firms for
examination. For instance, it would be relevant to us to know that a
private fund is using a service provider that we are separately
investigating for alleged misconduct.
---------------------------------------------------------------------------
\168\ See proposed Form ADV, Part 1A, Section 7.B.1.B. of
Schedule D.
\169\ See proposed Form ADV, Part 1A, Section 7.B.1.B. of
Schedule D, question 25. We are also proposing amendments to the
instructions contained in Item 9 to avoid having advisers reporting
overlapping information (relevant to compliance with rule 206(4)-2,
the ``custody rule'') under Section 9 and Section 7.B. of Schedule
D.
\170\ See id. question 26.
\171\ See id. question 27. ``Related Person'' is defined in Form
ADV: Glossary.
\172\ See id. question 28.
\173\ See id. question 29. For purposes of this question,
marketers include placement agents, consultants, finders,
introducers, municipal advisors or other solicitors, or similar
persons.
---------------------------------------------------------------------------
The information we propose to require advisers to report on private
funds is similar to (although less extensive than) the information that
we understand investors in hedge funds and other private funds commonly
seek in their due diligence questionnaires.\174\ Professional investors
use information acquired as part of their vetting process before they
invest. We likewise are seeking to acquire the information to help us
identify private fund advisers that present investors with greater
compliance or other risks. Each particular item of information may not
itself indicate an elevated risk of a compliance failure, but could
serve as an input to the risk metrics by which our staff identifies
potential risk and allocates examination resources. The staff conducts
similar analyses today, but have limited inputs, which constrains their
effectiveness.
---------------------------------------------------------------------------
\174\ See, e.g., AIMA's Illustrative Questionnaire For Due
Diligence of Hedge Fund Managers, available at (registration
required) http://www.aima.org/en/knowledge_centre/index.cfm.
---------------------------------------------------------------------------
The information would be publicly available as is other information
on Form ADV, and we expect it would be used by investors to supplement
their due diligence efforts. We expect the use of these data could
further help investors and other industry participants protect against
fraud. For example, using the IARD data, auditors would be able to
compare their list of funds they audit with those whose advisers report
them as auditor in order to uncover false representations.\175\
Investors (and their consultants) would be able to compare
representations made on Schedule D with those made in private offering
documents or other material provided to prospective investors.
---------------------------------------------------------------------------
\175\ See In the Matter of John Hunting Whittier, Investment
Advisers Act Release No. 2637 (Aug. 21, 2007) (settled action
against hedge fund manager for, among other things, misrepresenting
to fund investors that a particular auditor audited certain hedge
funds, when in fact it did not.)
---------------------------------------------------------------------------
We request comment on our proposed amendments to Section 7.B. of
Schedule D. Should we modify our requests for information? Is there
information requested in due diligence questionnaires that would yield
additional or more relevant risk information and that we should
require? For instance, should we require advisers to report information
regarding their legal counsel? If so, what information? Is the
information we request readily available to fund managers, and in
particular to sub-advisers? If not, is there information that is
readily available that could serve the same purpose?
In crafting these new disclosure items, we have sought to avoid
requiring disclosure of proprietary information that could harm the
interests of the fund or fund investors. Have we succeeded? Commenters
asserting that information not be reported should identify the specific
harm asserted. Do commenters agree with our belief that reporting and
disclosure of private fund information will be beneficial to investors
(although they may currently receive some or all of this information)
as well as prospective investors and other market participants?
Will it be burdensome for registered or exempt reporting advisers
to use for purposes of Question 12 the valuation hierarchy established
under GAAP with respect to those funds that do not have financial
statements prepared in accordance with GAAP? If we require all advisers
to fair value their private fund assets under management as
proposed,\176\ would advisers be able to rely on such a valuation for
purposes of Question 12? Should we require that the information
provided in response to Question 12 be part of audited financial
statements or be subject to review by auditors or another independent
third party? Are there additions, deletions, or changes to the
definitions of the seven categories of private fund we would require
advisers to use to identify a private fund that we should consider?
Should some of the items apply only to certain types of private funds
(e.g., hedge funds)? If so, which items and why?
---------------------------------------------------------------------------
\176\ See supra section II.A.3.
---------------------------------------------------------------------------
2. Advisory Business Information: Employees, Clients and Advisory
Activities: Item 5
Item 5 of Part 1A requires an adviser to provide basic information
regarding the business of the adviser that allows us to identify the
scope of the adviser's business, the types of services it provides, and
the types of clients to whom it provides those services. The item
requires information from the adviser about the number of its
employees, the amount of assets it manages, the number and types of its
clients, and the types of advisory services provided. The modifications
we are proposing today, which primarily refine or expand existing
questions, would help us better understand the operations of advisers.
First, we propose to seek additional information about the
adviser's employees. Currently, Item 5 asks for the number of employees
that are registered representatives of a broker-dealer, which we would
expand to ask for the number of employees that are registered as
investment adviser representatives or insurance agents.\177\ In order
to obtain more precise data, we also propose that advisers provide a
single numerical approximate response to the questions about employees,
instead of checking a box corresponding to a range of numbers, as is
currently required.\178\ This additional employee data would, for
instance, permit us to develop ratios (e.g., number of employees to
assets under management of clients) that we can use to identify
[[Page 77068]]
advisers to inform our risk-based examination program.
---------------------------------------------------------------------------
\177\ Proposed Form ADV, Part 1A, Items 5.B.(3) and (5).
\178\ For instance, proposed Item 5.B.(1) asks how many of an
adviser's employees perform advisory functions. Under the current
Form, an adviser with seven such employees would check a box for
``6-10.'' We propose the adviser simply fill in a blank with the
number ``7.''
---------------------------------------------------------------------------
Second, we propose to add some questions to help us better
understand an adviser's business by reference to the types of clients
the adviser services. Items 5.C. and D. currently require an adviser to
report how many clients it has (in ranges) and to indicate the types of
clients, e.g. high net worth individuals, investment companies. We
propose to expand the list of types of clients provided in Item 5.D.,
to include business development companies, insurance companies, and
other investment advisers, as well as to distinguish pension and
profit-sharing plans subject to ERISA \179\ from those that are not. As
amended, this Item also would require an adviser to indicate the
approximate amount of its regulatory assets under management
attributable to each client type.\180\ We also propose to ask
approximately what percentage of the adviser's clients are not United
States persons.\181\ This additional information would allow us to
better understand the focus of an adviser's business.
---------------------------------------------------------------------------
\179\ Employee Retirement Income Security Act of 1974 (29 U.S.C.
18).
\180\ Proposed Form ADV, Part 1A, Item 5.D. We are also
proposing amendments to the calculation of an adviser's regulatory
assets under management. See supra section II.A.3. of this Release.
\181\ Proposed Form ADV, Part 1A, Item 5.C.(2). See supra note
155 (discussing the definition of ``United States person''). We also
propose to add an instruction to Item 5.C., 5.D. and 5.H. to clarify
that advisers should not count as clients the investors in a private
fund they advise unless they have a separate advisory relationship
with them.
---------------------------------------------------------------------------
Third, we are proposing two amendments related to the advisory
activities that are reported in Item 5. Item 5.G. requires an adviser
to select from a list the advisory services that it provides, such as
financial planning or portfolio management. We propose to expand the
list of advisory activities to include portfolio management for pooled
investment vehicles, other than registered investment companies, and
educational seminars or workshops.\182\ We would also require advisers
to provide the SEC file number for a registered investment company if
they check the box for portfolio management for an investment company,
which would permit our examination staff to link information reported
on Form ADV to information reported on forms filed through our EDGAR
system by investment companies managed by these advisers.\183\ We are
proposing new Item 5.J. that would require advisers to select from a
list the types of investments about which they provided advice during
the fiscal year for which they are reporting.\184\ These changes would
provide us with more details regarding the services an adviser
provides, allowing us to better identify candidates if, for instance,
we choose to do a risk-targeted examination of advisers based on the
nature of the advice they provide.
---------------------------------------------------------------------------
\182\ Proposed Form ADV, Part 1A, Item 5.G.
\183\ Proposed Form ADV, Part 1A, Schedule D, Section 5.G.(3).
\184\ Advisers would also be required to indicate the types of
investments, such as various types of swaps and variable life
insurance, about which they provided advice. Proposed Form ADV, Part
1A, Item 5.J.
---------------------------------------------------------------------------
We request comment on our proposed amendments to Item 5. Would
advisers readily have access to the additional data we request? Does
the switch from ranges to a single approximate number of employees in
Items 5.A. and 5.B. pose any significant problems or burdens for
advisers? If so, would providing an instruction to permit an adviser to
round its responses up or down help? Are there additional types of
clients, advisory activities, and investments we should add to our
proposed lists in Items 5.D., 5.G., and 5.J., respectively?
3. Other Business Activities and Financial Industry Affiliations: Items
6 and 7
Items 6 and 7 of Part 1A require advisers, including exempt
reporting advisers, to report those financial services the adviser or a
related person is actively engaged in providing from lists of financial
services set forth in the items. We are proposing several changes to
these Items that would provide us with a more complete picture of the
activities of an adviser and its related persons, which would better
allow us to assess the conflicts of interest and risks that may be
created by those relationships and to identify affiliated financial
service businesses. We propose to expand the lists in both Items 6 and
7 to include business as a trust company, registered municipal advisor,
registered security-based swap dealer, and major security-based swap
participant, the latter three of which are new SEC-registrants under
the Dodd-Frank Act's amendments to the Exchange Act.\185\ We also
propose to add accountants (or accounting firms) and lawyers (or law
firms) to the list in Item 6, to parallel current Item 7. We are also
proposing to move from Item 7.B. to Item 7.A. the question that asks
whether a related person is a sponsor or the general partner or
managing member of a pooled investment vehicle.\186\ Finally, we would
clarify in the instruction to Item 7 that advisers are to include
related persons that are foreign affiliates.
---------------------------------------------------------------------------
\185\ Proposed Form ADV, Part 1A, Items 6.A. and 7.A. Section
975 of the Dodd-Frank Act amends the Exchange Act to require
``municipal advisors'' to register with the Commission, Section 761
of that Act amends the Exchange Act to define the terms ``security-
based swap dealer'' and ``major security-based swap participant,''
and section 764 amends the Exchange Act to require these entities to
register with the Commission.
\186\ The question we propose to ask in Item 7.A. would,
therefore, retain information about related persons that would
otherwise not be required as a result of our proposed changes to
Item 7.B. As discussed above, we are proposing to require advisers
to report in Item 7.B. and section 7.B.1. of Schedule D private fund
information only about funds they advise, not funds advised by a
related person. See supra section II.C.1. of this Release. We would
also delete ``investment company'' from the list in Item 7 as
duplicative of information we obtain in Item 5. See, e.g., Form ADV,
Part 1A, Items 5.D., 5.G., and proposed Form ADV, Part 1A, Section
5.G.(3) of Schedule D. See also supra note 183 and accompanying
text.
---------------------------------------------------------------------------
We are also proposing to require additional reporting in the
corresponding sections of Schedule D for Items 6 and 7. First, we
propose a new Section 6.A. of Schedule D that would require an adviser
that checks the box that it is engaged in another business under a
different name to list those other business names and the other lines
of business in which the adviser engages using that name.\187\ Second,
we propose a similar modification to Item 6.B. to require advisers
primarily engaged in another business under a different name to also
provide that name in Section 6.B. of Schedule D. Third, we propose to
amend Section 7.A. of Schedule D, which currently requires that
advisers provide identifying information for related persons that are
investment advisers or broker-dealers. We propose to require advisers
to provide this same information with respect to any type of related
person listed in Item 7.A. We also propose to expand the information we
collect regarding these related persons to include more details about
the relationship between the adviser and the related person, whether
the related person is registered with a foreign financial regulatory
authority, and how they share personnel and confidential
information.\188\ This additional information on related persons would
allow us to link disparate pieces of information that we have access to
concerning an adviser and its affiliates as well as identifying whether
the adviser controls the related
[[Page 77069]]
person or vice versa. It would also provide us with a tool to identify
where there may be advisory activities by unregistered affiliates.
Finally, we propose to relocate to this section a question currently
under Section 9 that requires reporting of whether a related person
bank or futures commission merchant is a qualified custodian for client
assets under the adviser custody rule, and to ask, if the adviser is
reporting a related person investment adviser, whether the related
person is exempt from registration.\189\
---------------------------------------------------------------------------
\187\ For example, an adviser registered with us under the name
``Adam Bob Charlie Advisers LLC'' that is also actively engaged in
business as an insurance agent under the name ``ABC Insurance LLC''
would put the name ``ABC Insurance LLC'' in Section 6.A. of Schedule
D and would check the box for ``Insurance broker or agent.''
\188\ Proposed Form ADV, Part 1A, Section 7.A., questions 1, 2,
5 and 6.
\189\ Proposed Form ADV, Part 1A, Section 7.A., questions 3 and
4. We are also proposing a technical change to remove the same
question in section 9.D. of Schedule D.
---------------------------------------------------------------------------
We request comment on these proposed amendments. Should we request
additional information about advisers' and their related persons' other
business? Should we request less information? Are there other types of
financial services providers we should include in the lists contained
in Items 6 and 7? Are there other questions in Section 7.A. that we
should ask to determine additional conflicts of interest advisers face
through related persons? Is the information advisers need to complete
the proposed additional questions contained in Section 7.A. readily
available?
4. Participation in Client Transactions: Item 8
Item 8 requires an adviser to report information about its
transactions, if any, with clients, including whether the adviser or a
related person engages in transactions with clients as a principal,
sells securities to clients, or has discretionary authority over client
assets. This item also currently requires an adviser to indicate if it
has discretionary authority to determine the brokers or dealers for
client transactions and if it recommends brokers or dealers to
clients.\190\ We propose to further ask whether any of the brokers or
dealers are related persons of the adviser.\191\ An adviser that
indicates that it receives ``soft dollar benefits'' would also report
whether all those benefits qualify for the safe harbor under section
28(e) of the Exchange Act for eligible research or brokerage
services.\192\ Finally, we would add a new question requiring an
adviser to indicate whether it or its related person receives direct or
indirect compensation for client referrals to complement the existing
question concerning whether the adviser compensates any person for
client referrals.\193\ The amendments we are proposing would enhance
our ability to identify additional conflicts of interest that advisers
may face that we have identified through our experience administering
the Advisers Act.
---------------------------------------------------------------------------
\190\ Form ADV, Part 1A, Items 8.C.3. and 8.E.
\191\ Proposed Form ADV, Part 1A, Items 8.F.
\192\ Proposed Form ADV, Part 1A, Item 8.G.(2). Commission
Guidance Regarding Client Commission Practices Under Section 28(e)
of the Securities Exchange Act of 1934, Exchange Act Release No.
54165 (July 18, 2006) [71 FR 41978 (July 24, 2006)].
\193\ Proposed Form ADV, Part 1A, Item 8.I.
---------------------------------------------------------------------------
We request comment on our proposed amendments. Should we request
additional information about advisers' receipt of soft dollar benefits,
such as requiring advisers to quantify the benefits they receive or
disclose the names of the brokers or dealers from whom the adviser
receives soft dollar benefits? Is there other information that would
assist us in identifying conflicts of interest?
5. Reporting $1 Billion in Assets: Item 1
Section 956 of the Dodd-Frank Act requires us, jointly with certain
other Federal regulators, to adopt rules or guidelines addressing
certain excessive incentive-based compensation arrangements, including
those of investment advisers with $1 billion or more in assets.\194\ To
enable us to identify those advisers that would be subject to section
956, we propose to require each adviser to indicate in Item 1 whether
or not the adviser had $1 billion or more in assets as of the last day
of the adviser's most recent fiscal year.\195\ We propose that for
purposes of this reporting requirement, the amount of assets would be
the adviser's total assets determined in the same manner as the amount
of ``total assets'' is determined on the adviser's balance sheet for
its most recent fiscal year end.\196\ We request comment on whether
Form ADV generally, and the proposed requirement in particular, is the
appropriate method to identify these investment advisers. Should we
identify these advisers by other means, and if so, what other means? We
also request comment on the proposed method that advisers must use to
determine the amount of their assets.
---------------------------------------------------------------------------
\194\ See sections 956(a)-(c), (e)(2)(D), (f) of the Dodd-Frank
Act. The other Federal regulators include the Board of Governors of
the Federal Reserve System, the Office of the Comptroller of the
Currency, the Board of Directors of the Federal Deposit Insurance
Corporation, the Director of the Office of Thrift Supervision, the
National Credit Union Administration Board, and the Federal Housing
Finance Agency.
\195\ See proposed Form ADV, Part 1A, Item 1.O. (adviser would
mark ``yes'' or ``no'' to indicate whether it had $1 billion or more
in assets).
\196\ See proposed Form ADV: Instructions for Part 1A, instr.
1.b. We construe section 956 as specifying, and thus propose to
define ``assets'' to mean, the total assets of the advisory firm
rather than the total ``assets under management,'' i.e., assets
managed on behalf of clients.
---------------------------------------------------------------------------
6. Other Amendments to Form ADV
The proposed amendments also include a number of additional changes
unrelated to the Dodd-Frank Act that are intended to improve our
ability to assess compliance risks. First, we propose changes to
improve certain identifying information we obtain from other items of
Part 1A of Form ADV. Item 1 currently requires an adviser to provide
contact information for an employee designated to handle inquiries
regarding the adviser's Form ADV. We propose instead to require an
adviser to provide contact information for its chief compliance officer
to give us direct access to the person designated to be in charge of
its compliance program.\197\ Advisers would have the option, in Item
1.K., to provide an additional regulatory contact for Form ADV, neither
of which would be viewable by the public on our Web site.\198\ We also
propose to amend Item 1 to require an adviser to indicate whether it or
any of its control persons is a public reporting company under the
Exchange Act.\199\ This would provide a signal, not only to us, but to
investors and to prospective investors, that additional public
information is available about the adviser and/or its control persons.
In addition, we propose to add ``Limited Partnership'' as another
choice advisers may select to indicate how their organization is
legally formed.\200\
---------------------------------------------------------------------------
\197\ Proposed Form ADV, Part 1A, Item 1.J. An adviser is
currently required to provide the name of its chief compliance
officer on Schedule A of Form ADV, but not other identifying
information. See also 17 CFR 275.206(4)-7; Compliance Programs of
Investment Companies and Investment Advisers, Investment Advisers
Act Release No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)]
(adopting rule 206(4)-7 requiring registered investment advisers to
designate a chief compliance officer). An exempt reporting adviser
that does not have a chief compliance officer would instead provide
a designated person's contact information in Item 1.K. Proposed Form
ADV, Part 1A, Item 1.K. Likewise, we would not require an exempt
reporting adviser to provide the name of a chief compliance officer
on Schedule A of Form ADV.
\198\ Proposed Form ADV, Part 1A, Item 1.K. We note that clients
will be provided with a supervisory contact in brochure supplements.
See Part 2 Release, supra note 46.
\199\ Proposed Form ADV, Part 1A, Items 1.N., 10.B., and Section
10.B. of Schedule D.
\200\ Proposed Form ADV, Part 1A, Item 3.A.
---------------------------------------------------------------------------
We are also proposing to add an additional custody question to Item
9 to require advisers to indicate the total number of persons that act
as qualified custodians for the adviser's clients in connection with
advisory services the adviser provides to its clients.\201\ We recently
modified Item 9 to elicit
[[Page 77070]]
information about the adviser or its related person(s) acting as
qualified custodian.\202\ We did not, however, request information
about other qualified custodians. We expect this discrete piece of
additional data to provide us with a more complete picture of an
adviser's custodial practices.\203\
---------------------------------------------------------------------------
\201\ Proposed Form ADV, Part 1A, Item 9.F.
\202\ See Custody of Funds or Securities of Clients by
Investment Advisers, Investment Advisers Act Release No. 2968 (Dec.
30, 2009) [75 FR 1456 (Jan. 11, 2010)].
\203\ Consistent with the updating requirements for Items
9.A.(2), 9.B.(2), and 9.E., we propose requiring new Item 9.F. to be
updated only annually. See proposed General Instruction 4.
---------------------------------------------------------------------------
Finally, we are proposing three technical changes with respect to
the reporting of disciplinary events. First, we propose to add a box to
Item 11 for advisers to check if any disciplinary information reported
in that item and the corresponding disclosure reporting pages is being
reported about the adviser or any of its supervised persons.\204\ This
would enable us to easily determine if an adviser is only reporting
disciplinary events for its affiliates, and would facilitate our
ability to focus examination and enforcement resources on those
advisers that appear to present the greatest compliance risks. Second,
we propose to add a third reason to each disclosure reporting page
(DRP) that permits an adviser to remove the DRP from its filing by
adding a box an adviser could check if it was filed in error. Third, we
propose to amend Item 3.D. of Part 2B, the brochure supplement, to
correct a drafting error regarding when a brochure supplement would
need to include disclosure regarding the revocation or suspension of a
professional attainment, designation, or license. The amendment would
replace ``proceeding'' in that item with ``hearing or formal
adjudication.'' \205\ By using the term ``proceeding,'' which is
defined in the Form ADV Glossary, this item limits the required
disclosure to actions initiated by a government agency, self-regulatory
organization or foreign financial regulatory authority. The item was
intended to require disclosure of actions taken by the designating
authority to revoke or suspend the use of the attainment, designation,
or license that it administers, and not actions taken by regulatory
authorities who are unlikely to bring an action to revoke or suspend a
professional designation.
---------------------------------------------------------------------------
\204\ Proposed Form ADV, Part 1A, Item 11.
\205\ If adopted, the revised item would State ``[A]ny other
hearing or formal adjudication in which a professional attainment,
designation, or license of the supervised person was revoked or
suspended because of a violation of rules relating to professional
conduct. If the supervised person resigned (or otherwise
relinquished the attainment, designation, or license) in
anticipation of such a hearing or formal adjudication (and the
adviser knows, or should have known, of such resignation or
relinquishment), disclose the event.''
---------------------------------------------------------------------------
We request comment on these proposed changes. Are there additional
items we should consider amending, and why? We are considering whether
to add an additional reporting requirement to Item 1 that would require
advisers to provide a unique identification code to provide additional
uses for the data that we collect. For example, the Office of Financial
Research (OFR) is required to publish a financial company reference
database as part of its role in assisting the Financial Stability
Oversight Council (FSOC) under the Dodd-Frank Act.\206\ Would a unique
identification code assigned by, on behalf of, or otherwise used by
FSOC or OFR that is reported on Form ADV permit cross-referencing of
the data we collect with this future database? Is there a reason why we
should not require an adviser to report such an identifier on Form ADV
if one is provided?
---------------------------------------------------------------------------
\206\ See sections 154(b)(2)(A) and 201(a)(11) of the Dodd Frank
Act.
---------------------------------------------------------------------------
Should we consider accelerating any of the updating requirements
for Form ADV to improve the usefulness of the form to the Commission
and to investors? For instance, while we have accelerated filing
deadlines in for other types of reports,\207\ since 1979, advisers have
had 90 days from their fiscal year ends to provide an annual update to
Form ADV.\208\ To provide more timely information to us and the public,
should advisers be required to file their annual amendments to Form ADV
within 60 days of the end of the adviser's fiscal year or some other
shorter time period?
---------------------------------------------------------------------------
\207\ See, e.g.,Acceleration of Periodic Report Filing Dates and
Disclosure Concerning Web site Access to Reports, Exchange Act
Release No. 46464 (Sept. 5, 2002) [67 FR 58480 (Sept. 16, 2002)], at
nn. 22-24 and accompanying text (noting that the deadline to file
Form 10-K within 90 days after a company's fiscal year end had not
been changed in 32 years and accelerating it to 60 days for ``large
accelerated filers'' and 75 days for ``accelerated filers,'' each as
defined in rule 12b-2 under the Exchange Act, in order to modernize
the periodic reporting system and improve the usefulness of periodic
reports to investors).
\208\ See Investment Adviser Requirements Concerning Disclosure,
Recordkeeping, Applications for Registration and Annual Filings,
Investment Advisers Act Release No. 664 (Jan. 30, 1979) [44 FR 7870
(Feb. 7, 1979)] (adopting rule 204-1).
---------------------------------------------------------------------------
D. Other Amendments
1. Amendments to ``Pay to Play'' Rule
Adopted last July, rule 206(4)-5, generally prohibits registered
and certain unregistered advisers from engaging directly or indirectly
in pay to play practices identified in the rule.\209\ We are proposing
three amendments to the rule that we believe are needed as a result of
the enactment of the Dodd-Frank Act.
---------------------------------------------------------------------------
\209\ Political Contributions by Certain Investment Advisers,
Investment Advisers Act Release No. 3043 (July 1, 2010) [75 FR
41018, 41024 (July 14, 2010)] (``Pay to Play Release''). The rule
prohibits covered advisers from (i) providing advisory services for
compensation to a government client for two years after the adviser
or certain of its executives or employees makes certain political
contributions; (ii) paying any third party to solicit advisory
business from any government entity unless the person is a
``regulated person,'' subject to similar pay to play restrictions;
and (iii) soliciting others, or coordinating, contributions to
certain elected officials or candidates or payments to political
parties where the adviser is providing or seeking government
business. See id.
---------------------------------------------------------------------------
First, we propose to amend the scope of the rule to make it apply
to exempt reporting advisers and foreign private advisers.\210\ Rule
206(4)-5 currently applies to advisers that are either registered with
the Commission, or unregistered in reliance on the exemption under
section 203(b)(3) of the Advisers Act.\211\ As a consequence of the
repeal of the private adviser exemption in section 203(b)(3), many
unregistered advisers will register under the Act and will be subject
to rule 206(4)-5 (albeit pursuant to a different clause of the
rule).\212\ In addition, the Dodd-Frank Act has added an exemption for
``foreign private advisers'' in section 203(b)(3) of the Act, which
will result in these advisers being subject to the pay to play
rule.\213\ However, some unregistered advisers to which the rule
currently applies because of section 203(b)(3) will remain exempt from
registration because of the new exemptions for exempt reporting
advisers, which we did not contemplate when we adopted rule 206(4)-5,
and will no longer be subject to the rule. To prevent unintended
narrowing of the application of the rule as a result of the amendments
to the Advisers Act, we are
[[Page 77071]]
proposing to extend the rule to apply it to exempt reporting advisers,
as well as foreign private advisers.
---------------------------------------------------------------------------
\210\ Proposed rule 206(4)-5(a).
\211\ See rule 206(4)-5(a)(1) and (2).
\212\ Instead of being subject to the rule as advisers
``unregistered in reliance on the exemption available under section
203(b)(3) of the Advisers Act,'' they will be subject to the rule as
advisers ``registered (or required to be registered)'' under the
Act. Rule 206(4)-5(a)(1) and (2).
\213\ See section 402 of the Dodd-Frank Act (defining ``foreign
private adviser''); section 403 of the Dodd-Frank Act (amending
section 203(b)(3) of the Advisers Act to strike the current language
exempting certain ``private advisers'' from registration and
inserting language exempting ``foreign private advisers'' from
registration).
Applying rule 206(4)-5 to foreign private advisers, unlike
exempt reporting advisers, does not require any amendment of the
rule specifically regarding these advisers because the rule
currently cross-references section 203(b)(3) of the Advisers Act.
---------------------------------------------------------------------------
We request comment on our proposal to make rule 206(4)-5 applicable
to exempt reporting advisers and foreign private advisers. Should
either of these types of unregistered advisers be excluded from the
rule? If so, what protections should apply instead? We are not
proposing to require advisers that will become subject to State
registration as a result of the Dodd-Frank Act to comply with the pay
to play rule.\214\ Should we?
---------------------------------------------------------------------------
\214\ For a discussion of the Dodd-Frank Act's reallocation of
responsibility for regulation of investment advisers between the
Commission and the states, see supra section II.A. of this Release.
---------------------------------------------------------------------------
Second, we propose to amend the provision of rule 206(4)-5 that
prohibits advisers from paying persons (e.g., ``solicitors'' or
``placement agents'') to solicit government entities unless such
persons are ``regulated persons'' (i.e., registered investment advisers
or broker-dealers subject to rules of a registered national securities
association, such as the Financial Industry Regulatory Authority
(``FINRA''), that restricts its members from engaging in pay to play
activities).\215\ Instead, we would permit an adviser to pay any
``regulated municipal advisor'' to solicit government entities on its
behalf. A regulated municipal advisor under the proposed rule would be
a person that is registered under section 15B of the Securities
Exchange Act and subject to pay to play rules adopted by the MSRB.\216\
---------------------------------------------------------------------------
\215\ Rule 206(4)-5(a)(2)(i). FINRA is currently the only
national securities association registered under section 19(a) of
the Exchange Act (15 U.S.C. 78s(a)).
\216\ Proposed rule 206(4)-5(a)(2), (f)(9). As provided in the
proposed rule, these pay to play rules must prohibit municipal
advisors from engaging in distribution or solicitation activities if
certain political contributions have been made. In addition, the
Commission must find that they both impose substantially equivalent
or more stringent restrictions on municipal advisors than rule
206(4)-5 imposes on investment advisers and that they are consistent
with the objectives of rule 206(4)-5.
---------------------------------------------------------------------------
The Dodd-Frank Act creates a new category of person known as a
``municipal advisor,'' which it defines to include persons that
undertake ``a solicitation of a municipal entity.'' \217\ These persons
include, among others, any third-party solicitor, including registered
investment advisers and broker-dealers, seeking business on behalf of
an investment adviser from a municipal entity, including a pension
fund.\218\ These municipal advisors are subject to MSRB rules, and we
understand that the MSRB intends to consider subjecting municipal
advisors to pay to play rules similar to its rules governing municipal
securities dealers.\219\ Broker-dealers acting as placement agents or
solicitors and investment advisers acting as solicitors of municipal
entities and obligated persons generally meet the statutory definition
of a municipal advisor and thus would be subject to MSRB rules.\220\
Our proposed amendment would, like the current rule, permit advisers to
pay persons to solicit government entities on their behalf only if such
third parties are registered with us and subject to pay to play
rules.\221\ Given the new regulatory regime applicable to municipal
advisors, including solicitors of government entities that meet the
definition of ``regulated person'' under rule 206(4)-5,\222\ broker-
dealer solicitors are expected to be subject to MSRB's pay to play
rules, rendering it unnecessary at this time for FINRA to adopt a pay
to play rule that would satisfy rule 206(4)-5(f)(9)(ii). We are
proposing, therefore, to replace references in rule 206(4)-5 to FINRA's
pay to play rules with references to MSRB rules that we find are
consistent with the objectives of rule 206(4)-5 and impose
substantially equivalent or more stringent pay to play restrictions.
---------------------------------------------------------------------------
\217\ Section 975 of the Dodd-Frank Act. In creating this new
municipal advisor category, Congress expressed its intent that
municipal advisors be permitted to solicit government clients. See
Senate Committee Report, supra note 11, at 148 (``The SEC recently
proposed new rules under the Investment Advisers Act of 1940
relating to the provision by registered investment advisers of
investment advisory services to municipal entities in which, among
other things, the SEC proposed prohibiting investment advisers from
making payments to unrelated persons for solicitation of municipal
entities for investment advisory services on behalf of investment
advisers. Rather than effectively prohibiting such third-party
solicitation for investment advisory services, [section 975] would
provide that activities of a municipal advisor, broker, dealer or
municipal securities dealer to solicit a municipal entity to engage
an unrelated investment adviser to provide investment advisory
services to a municipal entity or to engage to undertake
underwriting, financial advisory or other activities for a municipal
entity in connection with the issuance of municipal securities would
be subject to regulation by the MSRB * * *'').
\218\ See Section 975(e) of the Dodd-Frank Act (defining: (i)
``Municipal advisor,'' in relevant part, as ``a person * * * that *
* * undertakes a solicitation of a municipal entity;'' (ii)
``municipal entity,'' in relevant part, as ``any State, political
subdivision of a State, or municipal corporate instrumentality of a
State, including * * * any plan, program, or pool of assets
sponsored or established by the State, political subdivision * * *
or any agency, authority or instrumentality thereof. * * *;'' and
(iii) ``solicitation of a municipal entity or obligated person,'' in
relevant part, as ``a direct or indirect communication with a
municipal entity or obligated person made by a person, for direct or
indirect compensation, on behalf of * * * an investment adviser (as
defined in section 202 of the Investment Advisers Act of 1940) that
does not control, is not controlled by, or is not under common
control with the person undertaking such solicitation for the
purpose of obtaining or retaining an engagement by a municipal
entity or obligated person * * * of an investment adviser to provide
investment advisory services to or on behalf of a municipal
entity.'').
\219\ See MSRB, Municipal Securities Rulemaking Board Issues
Statement on Financial Reform Legislation, Press Release, July 15,
2010, available at http://www.msrb.org/News-and-Events/Press-Releases/2010/MSRB-Issues-Statement-on-Financial-Reform-Legislation.aspx (``The transition [to a majority public governing
board] will be coordinated with a rulemaking program designed to
ensure careful but prompt development of rules fulfilling the MSRB's
expanded mission. The MSRB will develop rules in the areas of fair
practice and fiduciary duties, pay to play and other conflicts of
interest, gifts, disclosures, professional qualifications,
continuing education and other areas identified by the new governing
board.''); MSRB rule G-37. MSRB rule G-37 is available on the MSRB's
Web site at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-37.aspx.
\220\ See supra note 218. While section 15B(e)(4)(C) of the
Exchange Act excludes from the definition of municipal advisor ``a
broker, dealer, or municipal securities dealer serving as an
underwriter (as defined in section 2(a)(11) of the Securities Act of
1933),'' we interpret this exclusion to apply solely to a broker,
dealer, or municipal securities dealer serving as an underwriter on
behalf of a municipal issuer in connection with the issuance of
municipal securities. Congress enacted section 975 of the Dodd-Frank
Act, which added the definition of ``municipal advisor'' to Section
15B of the Exchange Act, to subject the relationship between a
municipal advisor and a municipal entity to regulation by the MSRB.
See Senate Committee Report, supra note 11, at 148 (noting the need
to subject activities such as solicitation of a municipal entity to
engage an investment adviser to MSRB regulation). The Commission
expects to consider a proposal for a permanent municipal advisor
registration program, including requirements for the registration of
municipal advisors. See Temporary Registration of Municipal
Advisors, Exchange Act Release No. 62824 (Sept. 1, 2010) [75 FR
54465 (Sept. 8, 2010)].
\221\ See Pay to Play Release at section II.B.2.(b). We note
that a person that solicits investors to invest in investment
interests that are securities also may need to consider whether that
person is acting as a broker. See Pay to Play Release at n. 326.
\222\ See rule 206(4)-5(f)(9)(ii) (defining ``regulated person''
to include a broker-dealer that is registered with the Commission
and is a member of a national securities association registered
under section 15A of the Exchange Act (currently limited to FINRA)).
---------------------------------------------------------------------------
We are not proposing to amend the compliance date of rule 206(4)-
5's limitation on payments to third-party solicitors, which is
September 13, 2011. MSRB staff has informed our staff that the pay to
play rules it expects to consider would likely be in effect by that
date.\223\ If rule 206(4)-5 is amended as proposed, an investment
adviser subject to the rule would be prohibited from paying any third
party to solicit government entities on its behalf that is not
registered with us under Section 15B of the Securities Exchange Act and
thus not subject to the MSRB's pay to play rules.
---------------------------------------------------------------------------
\223\ If it appears that the MSRB will not be able to adopt pay
to play rules for municipal advisors by September 13, 2011 that
would meet the requirements of rule 206(4)-5, we will consider
whether to take alternative action.
---------------------------------------------------------------------------
[[Page 77072]]
We request comment on our proposal to permit investment advisers to
hire registered municipal advisors to solicit government entities on
their behalf, if those registered municipal advisors are subject to pay
to play restrictions under MSRB rules. Could our proposal result in
rule 206(4)-5's solicitation limitations applying to certain solicitors
affiliated with an investment adviser? \224\ Should we amend rule
206(4)-5 expressly to allow advisers to pay these investment adviser-
affiliated solicitors? Should we amend rule 206(4)-5 to provide that
any person that controls, is controlled by, or is under common control
with an investment adviser (and, if that person is an entity, its
personnel) would be deemed to be a ``covered associate'' of the
investment adviser if the investment adviser pays or agrees to pay such
person (or such personnel) to solicit a government entity on its
behalf?
---------------------------------------------------------------------------
\224\ See section 15B(e)(4) of the Exchange Act (defining
``municipal advisor'' to include ``a person (who is not a municipal
entity or an employee of a municipal entity) that * * * undertakes a
solicitation of a municipal entity''); section 15B(e)(9) of the
Exchange Act (defining ``solicitation of a municipal entity or
obligated person'' to mean ``a direct or indirect communication with
a municipal entity or obligated person made by a person, for direct
or indirect compensation, on behalf of * * * [an] investment adviser
* * * that does not control, is not controlled by, or is not under
common control with the person undertaking such solicitation for the
purpose of obtaining or retaining an engagement by a municipal
entity or obligated person * * * of an investment adviser to provide
investment advisory services to or on behalf of a municipal entity''
(emphasis added)).
---------------------------------------------------------------------------
Finally, we are proposing a minor amendment to rule 206(4)-5's
definition of a ``covered associate'' \225\ of an investment adviser to
clarify that a legal entity, not just a natural person, that is a
general partner or managing member of an investment adviser would meet
the definition. Under the rule as adopted, ``covered associate''
includes any owner and personnel of an adviser and political action
committees the owner, personnel, or adviser control for purposes of the
rule's restrictions. Currently, the owners of an adviser included in
the definition of ``covered associate'' are: ``[a]ny general partner,
managing member * * * or other individual with a similar status or
function.'' \226\ We are proposing to replace the word ``individual''
with the word ``person.'' Unlike the other proposed amendments to rule
206(4)-5, this proposed amendment is not related to the Dodd-Frank Act,
but instead is meant to clarify the rule and the Commission's original
intent that ``covered associate'' include legal entities as well as
natural persons, and to respond to interpretive questions our staff has
received.
---------------------------------------------------------------------------
\225\ See rule 206(4)-5(f)(2) (defining a ``covered associate''
of an investment adviser as: ``(i) Any general partner, managing
member or executive officer, or other individual with a similar
status or function; (ii) Any employee who solicits a government
entity for the investment adviser and any person who supervises,
directly or indirectly, such employee; and (iii) Any political
action committee controlled by the investment adviser or by [any
other covered associate].'').
\226\ See id.
---------------------------------------------------------------------------
2. Technical and Conforming Amendments
a. Rules 203(b)(3)-1 and 203(b)(3)-2
We intend, at the adoption of rule and form amendments to implement
provisions of the Dodd-Frank Act, to rescind rules 203(b)(3)-1 \227\
and 203(b)(3)-2,\228\ which specify how advisers ``count clients'' for
purposes of determining whether the adviser is eligible for the private
adviser exemption of section 203(b)(3) of the Advisers Act (which, as
discussed above, Congress repealed in section 403 of the Dodd-Frank
Act). In the Exemptions Release, we are proposing a new client counting
rule, rule 202(a)(30)-1, for purposes of the new foreign private
adviser exemption.\229\
---------------------------------------------------------------------------
\227\ Rule 203(b)(3)-1.
\228\ Rule 203(b)(3)-2. We adopted rule 203(b)(3)-2 in 2004 in
order to require certain hedge fund advisers to register under the
Act. See Hedge Fund Adviser Registration Release. That rule, and
certain amendments to rule 203(b)(3)-1 and other rules, were vacated
by a Federal appeals court in Goldstein, but have remained in the
Code of Federal Regulations.
\229\ See Exemptions Release at section II.C.1.
---------------------------------------------------------------------------
b. Rule 204-2
We are proposing to amend rule 204-2 under the Advisers Act, the
``books and records'' rule, to update the rule's ``grandfathering
provision'' for investment advisers that are currently exempt from
registration under the ``private adviser'' exemption, but will be
required to register when the Dodd-Frank Act's elimination of the
``private adviser'' exemption becomes effective on July 21, 2011. At
that time, these advisers would become subject to the recordkeeping
requirements of the Act, including the requirement to keep certain
records relating to performance.\230\ We propose that these advisers
would not be obligated to keep certain performance-related records so
long as they did not actually register when they were eligible for the
``private adviser'' exemption; however, to the extent that these
advisers preserved these performance-related records without being
required to do so by current rule 204-2, the proposed grandfathering
provision would require them to continue to preserve them.\231\ In
addition, we are proposing to amend rule 204-2(e)(3)(ii) to cross-
reference the new definition of ``private fund'' added to the Dodd-
Frank Act.\232\ Finally, we expect to rescind rule 204-2(l) \233\
because it was vacated by the Federal appeals court in Goldstein and
because the Dodd-Frank Act's addition of section 204(b)(2) to the
Advisers Act codifies this concept in the statute itself.\234\
---------------------------------------------------------------------------
\230\ See rule 204-2(a)(16).
\231\ See proposed amendment to rule 204-2(e)(3)(ii) (stating,
``[i]f you are an investment adviser that was, prior to July 21,
2011, exempt from registration under section 203(b)(3) of the Act
(15 U.S.C. 80b-3(b)(3)), as in effect on July 20, 2011, [this rule]
does not require you to maintain or preserve books and records that
would otherwise be required to be maintained or preserved under
[certain sections of this rule] to the extent those books and
records pertain to the performance or rate of return of such private
fund (as defined in section 202(a)(29) of the Act (15 U.S.C. 80b-
2(a)(29)), or other account you advise for any period ended prior to
July 21, 2011, provided that you were not registered with the
Commission as an investment adviser during such period, and provided
further that you continue to preserve any books and records in your
possession that pertain to the performance or rate of return of such
private fund or other account for such period.'' (emphasis added)).
Advisers to private funds that registered with the Commission based
on adoption of rule 203(b)(3)-2 in the Hedge Fund Adviser
Registration Release and then withdrew their registration based upon
the Goldstein decision would be permitted to rely on the proposed
grandfathering provision.
\232\ See rule 204-2(e)(3)(ii) (using the term private fund
without reference to a definition). We are proposing to add a
parenthetical noting that the term is defined in section 202(a)(29)
of the Advisers Act.
\233\ Rule 204-2(l) states that books and records of a private
fund are, under certain circumstances, treated as books and records
of its adviser.
\234\ Section 404 of the Dodd-Frank Act (adding section
204(b)(2) to the Advisers Act, which states, ``The records and
reports of any private fund to which an investment adviser
registered under this title provides investment advice shall be
deemed to be the records and reports of the investment adviser.'').
---------------------------------------------------------------------------
c. Rule 0-7
Rule 0-7(a)(1) under the Advisers Act, which defines ``small
entities'' under the Advisers Act for purposes of the Regulatory
Flexibility Act, cross-references section 203A(a)(2) of the Advisers
Act.\235\ The Dodd-Frank Act has renumbered section 203A(a)(2) of the
Advisers Act to 203A(a)(3)), and thus we are proposing to amend rule 0-
7(a)(1) to cross-reference section 203A(a)(3) rather than section
203A(a)(2).\236\
---------------------------------------------------------------------------
\235\ Rule 0-7(a)(1) (stating that the term ``small business''
or ``small organization'' for purposes of the Advisers Act means an
investment advisers that: ``Has assets under management, as defined
under Section 203(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)) and
reported on its annual updating amendment to Form ADV [17 CFR
279.1], of less than $25 million, or such higher amount as the
Commission may by rule deem appropriate * * *.'').
\236\ Proposed amendment to rule 0-7(a)(1).
---------------------------------------------------------------------------
[[Page 77073]]
d. Rule 222-1
We are proposing to replace the term ``principal place of
business'' in rule 222-1(b) \237\ under the Advisers Act, which
contains definitions relevant to section 222 of the Advisers Act's
provisions regarding State regulation of investment advisers, with the
term ``principal office and place of business'' to conform to the Dodd-
Frank Act's amendments to that section.\238\ We are not proposing to
modify the definition.
---------------------------------------------------------------------------
\237\ Rule 222-1(b) (defining ``principal place of business'' of
an investment adviser as ``the executive office of the investment
adviser from which the officers, partners, or managers of the
investment adviser direct, control, and coordinate the activities of
the investment adviser.'').
\238\ See section 985 of the Dodd-Frank Act (replacing the term
``principal place of business'' each time it appears--i.e., six
times--with the term ``principal office and place of business'' in
section 222 of the Advisers Act).
---------------------------------------------------------------------------
e. Rule 222-2
We are proposing technical amendments to rule 222-2 to define
``client'' for purposes of the national de minimis standard by cross-
referencing the definition of ``client'' in proposed rule 202(a)(30)-1
rather than the definition in rule 203(b)(3)-1 because we expect to
rescind rule 203(b)(3)-1.\239\ We also propose to change a cross-
reference to paragraph (b)(6) of existing rule 203(b)(3)-1 to paragraph
(b)(4) of proposed rule 202(a)(30)-1 to account for the changed
location of that particular provision. Finally, because proposed rule
202(a)(30)-1, unlike rule 203(b)(3)-1, does not include a ``special
rule'' specifying that an adviser is not required to count as a client
any person for whom the adviser provides investment advisory services
without compensation, we are proposing to include this instruction in
rule 222-2. We request comment on our proposed amendments to rule 222-
2. Should we preserve the instruction that an adviser is not required
to count as a client any person for whom the adviser provides
investment advisory services without compensation for purposes of the
national de minimis standard?
---------------------------------------------------------------------------
\239\ See supra section II.D.2.a. of this Release (discussing
rescinding rule 203(b)(3)-1); Exemptions Release at section II.C.1.
(discussing the definition of ``client'' in proposed rule
202(a)(30)-1).
---------------------------------------------------------------------------
f. Rule 202(a)(11)-1
We intend, at the adoption of rule and form amendments to implement
the Dodd-Frank Act, to rescind rule 202(a)(11)-1.\240\ Although the
rule was vacated by a Federal appeals court (and is therefore not in
effect),\241\ it has remained in the CFR.
---------------------------------------------------------------------------
\240\ Rule 202(a)(11)-1.
\241\ Financial Planning Association v. SEC, 482 F.3d 481 (D.C.
Cir. 2007).
---------------------------------------------------------------------------
III. General Request for Comment
The Commission requests comment on the rules, and rule and form
amendments proposed in this Release, suggestions for additional changes
to the existing rules and comment on other matters that might have an
effect on the proposals contained in this Release. Commenters should
provide empirical data to support their views.
IV. Cost-Benefit Analysis
The Commission is sensitive to the costs and benefits of its rules.
The new rules and rule and form amendments we are proposing would give
effect to provisions in Title IV of the Dodd-Frank Act that: (i)
Reallocate responsibility for oversight of investment advisers by
delegating generally to the states responsibility over certain mid-
sized advisers; (ii) repeal the ``private adviser exemption'' contained
in section 203(b)(3) of the Advisers Act; and (iii) provide for
reporting by advisers to certain types of private funds that are exempt
from registration. As part of these amendments, we are also proposing
amendments to the Advisers Act pay to play rule, rule 206(4)-5.
Additionally, we propose to identify the advisers that are subject to
the Dodd-Frank Act's requirements concerning certain incentive-based
compensation arrangements. Because many of our proposals would
implement or clarify provisions of the Dodd-Frank Act, they would not
create benefits and costs separate from the benefits and costs
considered by Congress in passing the Dodd-Frank Act.\242\ However,
certain of our proposals, if adopted, would generate costs and benefits
independent of those generated by the Dodd-Frank Act itself. These
costs and benefits are discussed below.
---------------------------------------------------------------------------
\242\ See Dodd-Frank Act, supra note 2; Conference Committee
Report, supra note 67; Senate Committee Report, supra note 11; supra
section I. of this Release. Proposals not generating costs and
benefits independent of those generated by the Dodd-Frank Act
include the proposed amendments to rules 0-7, 204-2, 222-1, 222-2
and our proposal to rescind rule 203(b)(3)-1.
---------------------------------------------------------------------------
A. Benefits
1. Eligibility To Register With the Commission: Section 410
Section 410 of the Dodd-Frank Act amends section 203A of the
Advisers Act to create a new group of ``mid-sized advisers'' and shifts
primary responsibility for their regulatory oversight to the State
securities authorities.\243\ It does this by prohibiting from
registering with the Commission an investment adviser that is required
to be registered and subject to examination as an investment adviser in
the State in which it maintains its principal office and place of
business and that has assets under management between $25 million and
$100 million.\244\ We are proposing rules and rule amendments that
would provide us a means of identifying advisers that must transition
to State regulation, clarify the application of new statutory
provisions, and modify certain of the exemptions we have adopted under
section 203A of the Act.
---------------------------------------------------------------------------
\243\ See supra section II.A.7. of this Release.
\244\ See supra notes 11-12 and accompanying text (discussing
section 410 of the Dodd-Frank Act, which amends Section 203A of the
Advisers Act to increase the threshold above which all investment
advisers must register with the Commission from $25 million to $100
million).
---------------------------------------------------------------------------
Transition to State Registration
We are proposing a new rule, rule 203A-5, which would require each
investment adviser registered with us on July 21, 2011 to file an
amendment to its Form ADV no later than August 20, 2011 (30 days after
the July 21, 2011 effective date of the amendments to section 203A),
and withdraw from Commission registration by October 19, 2011 (60 days
after the required filing of Form ADV), if no longer eligible.\245\ As
a consequence of section 410 of the Dodd-Frank Act, we estimate that
approximately 4,100 advisers currently registered with the Commission
will be required to withdraw their registration and register with one
or more State securities authorities.\246\ Given this significant re-
alignment of regulatory authority over numerous advisers, our proposed
rule would allow us to easily and efficiently identify the advisers
that are subject to our regulatory authority after the Dodd-Frank Act's
amendment to section 203A becomes effective, and which advisers have
switched to State registration due to the amendment to section 203A.
The proposed rule would confer this same benefit on State securities
authorities. This would promptly implement the Congressional mandate,
and accommodate the IARD processing of renewals and fees for State
registration and licensing, while allowing for an orderly transition.
It would also help minimize any potential uncertainty about the effects
of the Dodd-Frank Act on the registration status of a particular
adviser among investors and other market participants by providing a
simple, efficient means
[[Page 77074]]
of determining the adviser's post-Dodd-Frank registration status
through the IARD system as of a specific date. To the extent that rule
203A-5 would minimize uncertainty among investors and other market
participants, it could help minimize any disruption in advisory
business that such uncertainty could provoke, and investors would know
clearly whether an adviser that advises them is subject to State or
Commission registration and regulation.
---------------------------------------------------------------------------
\245\ Proposed rule 203A-5(a), (b). See supra section II.A.1. of
this Release.
\246\ See supra note 15 and accompanying text.
---------------------------------------------------------------------------
Switching Between State and Commission Registration
Rule 203A-1 currently contains two means of preventing an adviser
from having to switch frequently between State and Commission
registration as a result of changes in its assets under management or
the departure of one or more clients.\247\ We propose to amend rule
203A-1 to eliminate the $5 million buffer that permits an investment
adviser having between $25 million and $30 million of assets under
management to remain registered with the states and that does not
subject the adviser to cancellation of its Commission registration
until its assets under management fall below $25 million.\248\ We are
proposing to eliminate the current $5 million buffer because it seems
unnecessary in light of Congress's determination generally to require
most advisers having between $30 million and $100 million of assets
under management to be registered with the states.\249\ Elimination of
this portion of the rule also promotes efficiency and competition by
making the registration requirements for advisers with assets under
management between $25 million and $30 million consistent with the
requirements for advisers with assets under management between $30
million and $100 million. Moreover, we are proposing to retain the 180-
day grace period from the adviser's fiscal year end to address concerns
about advisers frequently having to register and then de-register with
the Commission as a result of changes in their eligibility to
register.\250\
---------------------------------------------------------------------------
\247\ See supra note 62-65 and accompanying text.
\248\ See supra note 66.
\249\ See supra note 67.
\250\ See proposed rule 203A-1(b); supra notes 66-68 and
accompanying text.
---------------------------------------------------------------------------
Exemptions From the Prohibition on Registration With the Commission
We are proposing amendments to three exemptions from the
prohibition on registration in rule 203A-2 to reflect developments
since their initial adoption, including the enactment of the Dodd-Frank
Act.\251\ First, we are proposing to eliminate the exemption in rule
203A-2(a) from the prohibition on Commission registration for
NRSROs.\252\ Since we adopted this exemption, Congress amended the Act
to exclude NRSROs from the Act and provided for a separate regulatory
regime for NRSROs under the Exchange Act.\253\ Only one NRSRO remains
registered as an investment adviser under the Act and reports that it
has more than $100 million of assets under management and thus would
not need to rely on the exemption.\254\ Given that NRSROs do not
currently rely on the exemption and that Congress has excluded NRSROs
from the Act, we do not believe that our proposed amendment would
generate any benefits or costs and would not impact efficiency,
competition or capital formation, separate from the benefit of
simplifying our rules by eliminating an unused exemption.
---------------------------------------------------------------------------
\251\ See proposed rule 203A-2; supra section II.A.5. of this
Release. We would also make conforming amendments to renumber rule
203A-2(b) through (f).
\252\ See supra section II.A.5.a. of this Release.
\253\ See supra notes 73-74.
\254\ Based on IARD data as of September 1, 2010.
---------------------------------------------------------------------------
Second, we are proposing to amend the exemption available to
pension consultants in rule 203A-2(b) to increase the minimum value of
plan assets from $50 million to $200 million.\255\ We had set the
threshold at $50 million of plan assets for these advisers to ensure
that a pension consultant's activities are significant enough to have
an effect on national markets.\256\ We propose to increase this
threshold to $200 million in light of Congress's determination to
increase from $25 million to $100 million the amount of ``assets under
management'' that requires advisers to register with the Commission
without regard to State regulatory requirements.\257\ This amendment
would maintain the same ratio of plan assets to the statutory assets
under management requirements currently in place, and would provide the
regulatory benefit of allowing the Commission to focus its resources on
oversight of those pension consultants that are more likely to have an
effect on national markets.
---------------------------------------------------------------------------
\255\ See proposed rule 203A-2(a); supra section II.A.5.b. of
this Release.
\256\ See supra note 78.
\257\ See supra note 79.
---------------------------------------------------------------------------
Finally, we propose to amend the multi-State adviser exemption in
rule 203A-2(e) to align the rule with the multi-State exemption
Congress built into the mid-sized adviser provision under section 410
of the Dodd-Frank Act.\258\ Under rule 203A-2(e), the prohibition on
registration with the Commission does not apply to an investment
adviser that is required to register in 30 or more states. Once
registered with the Commission, the adviser remains eligible for
Commission registration as long as it would be obligated, absent the
exemption, to register in at least 25 states.\259\ We propose to amend
rule 203A-2(e) to permit all investment advisers required to register
as an investment adviser with 15 or more states to register with the
Commission.\260\ We believe this reflects a Congressional view on the
number of states with which an adviser must be required to be
registered before the regulatory burdens associated with such
regulation warrants registration with the Commission and application of
the preemption provision.\261\ This amendment reduces the regulatory
burdens on advisers required to be registered with at least 15 states,
but less than 30, by allowing them to register with a single securities
regulator--the Commission. Additionally, the amendment promotes
efficiency and reduces the effect on competition between small and mid-
sized investment advisers by imposing a consistent multi-State
exemption standard. We also propose to eliminate the provision in the
rule that permits advisers to remain registered until the number of
states in which they must register falls below 25 states, and we are
not proposing a similar cushion for the 15-State threshold.\262\ We do
not see any significant benefit of retaining the buffer and believe it
is unnecessary as a result of our proposal to lower the number of
states from 30 to 15 and because advisers elect to rely on the
exemption.
---------------------------------------------------------------------------
\258\ See proposed rule 203A-2(d); supra section II.A.5.c. of
this Release.
\259\ See supra note 82.
\260\ See proposed rule 203A-1(d)(1).
\261\ See supra note 84.
\262\ See supra note 85-86.
---------------------------------------------------------------------------
Elimination of Safe Harbor
We are proposing to eliminate the safe harbor in rule 203A-4 from
Commission registration for an investment adviser that is registered
with a State securities authority of the State in which it has its
principal office and place of business, based on a reasonable belief
that it is prohibited from registering with the Commission because it
does not have sufficient assets under management.\263\ Advisers have
not, in our experience, asserted the availability of this safe harbor
as a defense, which protects only
[[Page 77075]]
against enforcement actions by us and not any private actions, and we
view it as unlikely that an adviser would be reasonably unaware that it
has more than $100 million of regulatory assets under management when
it is required to report its regulatory assets under management on Form
ADV.\264\ We do not believe that rescinding the safe harbor would
generate any significant benefits, other than simplifying our rules in
general and thereby marginally reducing costs of compliance, and we
believe it would have little, if any, other effect on efficiency,
competition or capital formation.
---------------------------------------------------------------------------
\263\ Rule 203A-4. See supra section II.A.6. of this Release.
\264\ See supra notes 91-92 and accompanying text.
---------------------------------------------------------------------------
Mid-Sized Advisers
The Dodd-Frank Act does not explain how to determine whether a mid-
sized adviser is ``required to be registered'' or is ``subject to
examination'' by a particular State securities authority for purposes
of section 203A(a)(2)'s prohibition on mid-sized advisers registering
with the Commission.\265\ We propose to incorporate into Form ADV an
explanation of how we construe these provisions.\266\ Our instructions
are intended to clarify the meaning of these provisions, which would
benefit advisers by promoting efficiency and competition. For example,
as a result of our proposal to identify to advisers filing on IARD the
states that do not subject advisers to examination, a mid-sized adviser
would not be required to determine whether it is subject to examination
in a particular State. Simplifying the process for mid-sized advisers
to determine whether they are required to register with us would
decrease any competitive disadvantages compared to smaller advisers.
Our proposed changes to IARD also would ensure that only mid-sized
advisers with a principal office and place of business in those states
(or mid-sized advisers that are not registered with the states where
they maintain a principal office and place of business) will register
with the Commission, which would also make the registration process
more efficient.
---------------------------------------------------------------------------
\265\ See supra note 94.
\266\ See proposed Form ADV: Instructions for Part 1A, instr.
2.b. See also supra section II.A.7. of this Release (discussing
these instructions in detail).
---------------------------------------------------------------------------
2. Exempt Reporting Advisers: Sections 407 and 408
Congress gave us broad authority to require exempt reporting
advisers to file reports as necessary or appropriate in the public
interest or for the protection of investors.\267\ We have sought
information that we believe would be useful to us to be able to
identify the advisers, their owners, and their business models and, in
addition, whether they might present sufficient concerns as to warrant
our further attention in order to protect their clients and fulfill our
regulatory responsibilities. We have also considered the broader public
interest in making this information generally available and believe
there may be benefits of providing information about their activities
to the public. We acknowledge that there may be costs associated with
providing this information to us, and that the adviser may provide some
or all of this information to private fund investors or prospective
investors, however, we believe these investors would benefit from the
proposed reporting requirements.
---------------------------------------------------------------------------
\267\ See sections 407 and 408 of the Dodd-Frank Act.
---------------------------------------------------------------------------
To meet the Dodd-Frank Act's reporting provisions for ``exempt
reporting advisers,'' we are proposing a new rule, rule 204-4, to
require exempt reporting advisers to file reports with the Commission
electronically on Form ADV.\268\ We are also proposing amendments to
Form ADV so that it could serve the dual purpose of both an SEC
reporting form for exempt advisers and, as it is used today, a
registration form for both State and SEC-registered firms.\269\ In
addition to requiring that exempt reporting advisers use Form ADV,
proposed rule 204-4 would require these advisers to submit reports
through the IARD and to pay a filing fee.\270\
---------------------------------------------------------------------------
\268\ Proposed rule 204-4(a). See supra section II.B. of this
Release.
\269\ See supra section II.B.1. of this Release.
\270\ Proposed rule 204-4(b), (d).
---------------------------------------------------------------------------
We believe that using Form ADV and IARD for exempt reporting
adviser reports would yield several benefits. For instance, using Form
ADV and IARD would create efficiencies that benefit both us and filers
by taking advantage of an established and proven adviser filing system,
while avoiding the expense and delay of developing a new form and
filing system. Additionally, the IARD contains many time-saving
features, like the ability to pre-populate prior responses and drop-
down boxes for common responses. In addition, because exempt reporting
advisers may be required to register on Form ADV with one or more State
securities authorities, use of the existing form and filing system
(which is shared with the states) should reduce regulatory burdens for
them because they can satisfy multiple filing obligations through a
uniform form.\271\ Similarly, regulatory burdens would be diminished
for an exempt reporting adviser that later finds it can no longer rely
on an exemption and would be required to register with us because the
adviser would simply file an amendment to its current Form ADV to apply
for Commission registration.\272\ Finally, certain items in Form ADV
Part 1 are also linked to Form BD, which would create efficiencies if
the exempt reporting adviser ever applies for broker-dealer
registration.
---------------------------------------------------------------------------
\271\ See supra note 126-127 and accompanying text.
\272\ See proposed General Instruction 14 (providing procedural
guidance to advisers that no longer meet the definition of exempt
reporting adviser). See also supra note 128.
---------------------------------------------------------------------------
Requiring that exempt reporting advisers file their reports through
the IARD would also benefit clients, prospective clients, and members
of the public who could readily access the information, without cost,
through the Commission's Web site on the Investment Adviser Public
Disclosure (IAPD) system. Investors would have access to some
information that may have been previously unavailable or not easily
attainable, such as whether a prospective exempt reporting adviser has
certain disciplinary events and whether its affiliates present
conflicts of interest or broader access to other financial services. As
a result, investors would be in a better position to make informed
decisions. As a secondary benefit, the easy availability of information
about these advisers and their advisory affiliates may discourage
advisers from engaging in certain practices (such as maintaining client
assets with a related person custodian) or hiring certain persons (such
as those with disciplinary history). Investors' access to information
may also facilitate greater competition among advisers, which may in
turn benefit clients.
Electronic reporting by exempt reporting advisers of certain Items
within Form ADV would give us better access to information about these
advisers to administer our regulatory programs and to identify advisers
whose activities suggest a need for closer scrutiny. We can easily use
the IARD to generate reports on the industry, its characteristics and
trends. These reports would help us anticipate regulatory problems,
allocate and reallocate our resources, and more fully evaluate and
anticipate the implications of various regulatory actions we may
consider taking, which should increase both the efficiency and
effectiveness of our programs and thus increase investor protection. In
addition, requiring
[[Page 77076]]
exempt reporting advisers to complete Section 7.B of Schedule D for
each private fund they manage should result in many of the same
benefits that this information produces with respect to registered
advisers that we address in the discussion of the proposed amendments
to Form ADV below.
We are also proposing to amend rule 204-1 under the Advisers Act,
which addresses when and how advisers must amend their Form ADV, to
require that exempt reporting advisers file updating amendments to
reports filed on Form ADV.\273\ Proposed rule 204-1(a) would require an
exempt reporting adviser, like a registered adviser, to amend its
reports on Form ADV: (i) At least annually, within 90 days of the end
of the adviser's fiscal year; and (ii) more frequently, if required by
the instructions to Form ADV. Consequently, we are proposing to amend
General Instruction 4 to Form ADV to require an exempt reporting
adviser to update Items 1 (identification information), 3 (Form of
Organization), or 11 (disciplinary information) promptly if they become
inaccurate in any way, and to update Item 10 (Control Persons) if it
becomes materially inaccurate.\274\
---------------------------------------------------------------------------
\273\ Proposed rule 204-1. See supra section II.B.3. of this
Release.
\274\ Registered advisers are subject to the same updating
requirements with respect to these Items. See General Instruction 4
to Form ADV.
---------------------------------------------------------------------------
Requiring advisers to amend their reports on Form ADV at least
annually, and more frequently if identification or disciplinary
information becomes inaccurate in any way, would assure that we have
access to updated information such as knowing when an exempt reporting
adviser has added or no longer has a private fund client, which will
provide us with the information necessary to assess whether they might
present sufficient concerns to warrant our further inquiry. Updated
information would also benefit clients, prospective clients, and other
members of the public that could use this information in evaluating,
for example, whether to make an investment in a venture capital fund
managed by an exempt reporting adviser.
To accommodate their use by exempt reporting advisers, we also are
proposing technical amendments to Form ADV-H, the form advisers use to
request a hardship exemption from electronic filing,\275\ and Form ADV-
NR, used to appoint the Secretary of the Commission as an agent for
service of process for certain non-resident advisers.\276\ Proposed
rule 204-4(e) and the proposed amendments to Form ADV-H would benefit
exempt reporting advisers by allowing them to avoid non-compliance with
reporting requirements based purely on unanticipated technical
difficulties. The proposed amendments to Form ADV-NR would benefit
investors by allowing us to obtain appropriate consent to permit the
Commission and other parties to bring actions against non-resident
partners or agents for violations of the Federal securities laws.
---------------------------------------------------------------------------
\275\ Proposed rule 204-4(e) would allow exempt reporting
advisers having unanticipated technical difficulties that prevent
submission of a filing to the IARD systems to request a temporary
hardship exemption from electronic filing requirements.
\276\ See proposed amended Form ADV-H, proposed amended Form
ADV-NR, and proposed General Instruction 18. The amendments to Form
ADV-H and Form ADV-NR would reflect that exempt reporting advisers
use the forms in the same way and for the same purpose as they are
currently used by registered investment advisers.
---------------------------------------------------------------------------
3. Form ADV Amendments
As discussed above, we are proposing to require advisers to provide
us on Form ADV additional information about (1) private funds they
advise, (2) their advisory business and conflicts of interest, and (3)
their non-advisory activities and financial industry affiliations.\277\
We are also proposing certain additional changes intended to improve
our ability to assess compliance risks and to identify the advisers
that are covered by section 956 of the Dodd-Frank Act addressing
certain incentive-based compensation arrangements.
---------------------------------------------------------------------------
\277\ See supra section II.C. of this Release.
---------------------------------------------------------------------------
Private Fund Reporting Requirements
The private fund reporting requirements we are proposing would
provide us with information designed to help us better understand
private fund investment activities and the scope and potential impact
of those activities on investors and our markets. The information would
assist us in identifying particular practices that may harm investors
and would allow us to conduct targeted examinations of private fund
advisers based on these practices or other criteria. In addition the
proposed items are designed to improve our ability to assess risk,
identify funds with service provider arrangements that raise a ``red
flag,'' identify firms for examination, and allow us to more
efficiently conduct examinations. For instance, it would be relevant to
us to know that a private fund is using a service provider that we are
separately investigating for alleged misconduct. We propose to ask
about both the number and the types of investors in the fund to get a
better idea of the investors the fund is intended to serve and to get a
sense of the extent to which investors may themselves be in a position
to evaluate the adviser. We would ask about the size of the fund,
including both its gross and net assets, to better understand the scope
of its operations and the extent of leverage it employs. Responses to
the service provider questions would, for example, allow us to identify
those funds that do not make use of independent service providers,
which may indicate a higher level of risk, and provide other key
information regarding the identity and role of these private fund
gatekeepers. Each particular item of information may not itself
indicate an elevated risk of a compliance failure, but is designed to
serve as an input to the risk metrics by which our staff identifies
potential risk and allocates examination resources. The staff conducts
similar analyses today, but with fewer inputs.
Form ADV information that private fund advisers would report to us
also would benefit private fund investors in evaluating potential
managers. As amended, Form ADV would require private fund advisers to
disclose information about their business, affiliates and owners,
gatekeepers, and disciplinary history. This would create a publicly
accessible foundation of basic information that could aid investors, to
the extent they were not otherwise timely given the information, in
conducting due diligence and could further help investors and other
industry participants protect against fraud. For example, using the
IARD data, auditors would be able to compare their list of funds they
audit with those whose advisers report them as auditor. Investors (and
their consultants) would be able to compare representations made on
Schedule D with those made in private offering documents or other
material provided to prospective investors.
Private fund reporting would benefit investors and market
participants by providing us and other policy makers with better data.
Better data would enhance our ability to form and frame regulatory
policies regarding the private fund industry and its advisers, and to
evaluate the effect of our policies and programs on this sector,
including for the protection of private fund investors. Today we
frequently have to rely on data from other sources, when available.
Private fund reporting would provide us with important information
about this rapidly growing segment of the U.S. financial system.
[[Page 77077]]
Other Proposed Amendments to Form ADV
Other amendments we are proposing today to Form ADV would refine or
expand existing questions, which would give us a more complete picture
of an adviser's practices, help us better understand each adviser's
operations, business and services, and provide us with more information
to determine advisers' risk profiles and prepare for examinations. The
amendments would provide us with critical information to identify
practices that may harm clients, which would assist us in identifying
candidates for risk-targeted examinations, detecting data or patterns
that suggest further inquiry may be warranted about a particular issue,
and distinguishing additional conflicts of interest that advisers may
face. For example, the additional information we propose to require
about related persons would allow us to link disparate pieces of
information that we have access to concerning an adviser and its
affiliates to identify whether those relationships present conflicts of
interest that create higher risks for advisory clients. Another example
is the proposed switch from ranges to approximate numbers of employees
and assets by client type. Although these changes would refine data we
already receive, it would provide significant benefits in developing
risk-based profiles of advisers. Our proposal to expand the list of the
types of advisory activities an adviser might engage in and to include
a list of the types of investments about which they provide advice
would help us better understand the operations of advisers.
Additionally, our proposal to require advisers to report whether they
have $1 billion or more in assets would help us to identify the
advisers that are covered by section 956 of the Dodd-Frank Act
addressing certain incentive-based compensation arrangements. Overall,
the information proposed to be collected on Form ADV is designed to
improve our risk-assessment capabilities and help us best allocate our
examination resources.
Further, advisory clients and prospective clients would also
benefit from these proposed amendments. The additional information that
registered advisers would report to us would be publicly available,
which would aid investors in evaluating potential managers and
understanding their practices. For example, requiring an adviser to
indicate whether it or any of its control persons is a public reporting
company under the Exchange Act would provide a signal, not only to us,
but to clients and to prospective clients, that additional public
information is available about the adviser and/or its control persons.
Requiring an adviser to report whether it has $1 billion or more of
assets would help inform the adviser, its clients and the public
whether or not the adviser is subject to section 956 of the Dodd-Frank
Act and any rules or guidelines thereunder. The additional information
about the adviser's related persons would assist clients to compare
business practices, strategies, and conflicts of a number of advisers,
which may help them to select the most appropriate adviser for them.
Clients may also benefit indirectly because advisers may be
incentivized to implement stronger controls and practices, particularly
related to any conflicts of interest or business practices that may
result in additional risks because of enhanced client awareness. Third
parties would also be able to access the new information reported in
filings of the amended form, which would allow academics, businesses,
and others to access additional information about registered investment
advisers and exempt reporting advisers, which they can use to study the
industry.
We anticipate that the proposed amendments to the Form ADV
instructions would assist investment advisers in determining their
regulatory assets under management and whether they are eligible to
register with us, which may result in cost savings for some advisers
because they may more readily be able to make this determination.\278\
Eliminating the choices we have given advisers in the Form ADV
instructions for calculating assets under management would, for
example, provide for a uniform method of determining assets under
management for purposes of the form and the new exemptions from
registration under the Advisers Act, which we expect would promote
competition, would result in advisers' greater certainty in choosing to
rely on an exemption from registration, and would result in consistent
reporting across the industry.\279\ Our proposed amendments to the
instructions relating to calculation of assets under management would
also clarify how an adviser would determine the amount of private fund
assets it has under management, as there are currently no specific
instructions on this point. We expect this may provide advisers with
greater certainty in their calculation of regulatory assets under
management and would provide greater certainty in determining their
eligibility for the exemptions from registration available to certain
private fund advisers.\280\
---------------------------------------------------------------------------
\278\ See section II.A.3.
\279\ See id. See also Exemptions Release at section II.C.
(discussing exemption for foreign private advisers).
\280\ See Exemptions Release at sections II.B.2. and II.C.5.
---------------------------------------------------------------------------
4. Amendments to Pay to Play Rule
We are proposing two amendments to rule 206(4)-5 that we believe
are appropriate as a result of the enactment of the Dodd-Frank Act, and
one minor amendment to clarify the rule.\281\ First, we propose to
amend the rule to make it continue to apply to all private advisers,
including exempt reporting advisers and foreign private advisers.\282\
We are proposing this amendment to prevent the narrowing of the
application of the rule as a result of the amendments to the Act made
by the Dodd-Frank Act.\283\ We do not believe that this amendment would
create any benefits (or costs) beyond those created by the rule as
originally adopted,\284\ but rather would merely assure that the rule
continues to apply to the same advisers as we intended when we adopted
the rule.\285\
---------------------------------------------------------------------------
\281\ See supra section II.D.1. of this Release.
\282\ Proposed rule 206(4)-5(a). See supra section II.B. of this
Release (discussing the definitions of exempt reporting advisers and
foreign private advisers).
\283\ See supra section II.D.1. of this Release.
\284\ See section IV of the Pay to Play Release.
\285\ Rule 206(4)-5 currently applies to ``private advisers''
exempt from registration with the Commission under section 203(b)(3)
of the Advisers Act. As discussed in section II.B. of this Release,
the Dodd-Frank Act has eliminated the ``private adviser'' exemption
from registration with the Commission in section 203(b)(3), but has
created new exemptions for exempt reporting advisers and foreign
private advisers. Advisers that qualify for these new exemptions
generally are subsets of the advisers that qualify for the existing
section 203(b)(3) ``private adviser'' exemption.
---------------------------------------------------------------------------
Second, we propose to amend the provision of rule 206(4)-5 that
prohibits advisers from paying persons (e.g., ``solicitors'' or
``placement agents'') to solicit government entities unless such
persons are ``regulated persons'' (i.e., registered investment advisers
or broker-dealers subject to rules of a registered national securities
association, such as FINRA, that restrict its members from engaging in
pay to play activities).\286\ Instead, the proposed amendments would
permit an adviser to pay any ``regulated municipal advisor'' to solicit
government entities on its behalf. A regulated municipal advisor under
the proposed rule would be a municipal advisor that is registered under
section 15B of the Exchange Act and subject to pay to play rules
adopted
[[Page 77078]]
by the MSRB.\287\ We understand that the MSRB intends to consider
subjecting municipal advisors to pay to play rules similar to its rules
governing municipal securities dealers. Broker-dealers acting as
placement agents or solicitors and investment advisers acting as
solicitors of government entities meet the statutory definition of a
municipal advisor and thus would be subject to MSRB rules. Our proposed
amendment would, like the current rule, permit advisers to pay persons
to solicit government entities on their behalf only if such third
parties are registered with us and subject to pay to play rules of
their own.\288\ Given the new regulatory regime applicable to municipal
advisors, including solicitors of municipal entities that meet the
definition of ``regulated person'' under rule 206(4)-5, broker-dealer
solicitors are expected to be subject to MSRB's pay to play rules,
rendering it unnecessary at this time for FINRA to adopt a pay to play
rule that would satisfy rule 206(4)-5(f)(9)(ii). We are proposing,
therefore, to replace references in rule 206(4)-5 to FINRA's pay to
play rules with references to MSRB rules that we find are consistent
with the objectives of rule 206(4)-5 and impose substantially
equivalent or more stringent pay to play restrictions. To the extent
that our proposed amendment would eliminate the need to subject certain
solicitors to multiple pay to play rules, it would reduce the
regulatory burdens on such placement agents.
---------------------------------------------------------------------------
\286\ Rule 206(4)-5(a)(2)(i). FINRA is currently the only
national securities association registered under section 19(a) of
the Exchange Act (15 U.S.C. 78s(b)).
\287\ Proposed rule 206(4)-5(a)(2), (f)(9). These pay to play
rules must prohibit municipal advisors from engaging in distribution
or solicitation activities if certain political contributions have
been made. In addition, the Commission must find that they both
impose substantially equivalent or more stringent restrictions on
municipal advisors than rule 206(4)-5 imposes on investment advisers
and that they are consistent with the objectives of rule 206(4)-5.
\288\ Pay To Play Release at section II.B.2.(b).
---------------------------------------------------------------------------
In addition, due to the fact that the definition of a municipal
advisor includes certain registered investment advisers and broker
dealers--the two categories of regulated persons that an adviser may
currently use as placement agents under rule 206(4)-5--our amendment
may increase the number of placement agents that an adviser potentially
could hire.\289\ This could benefit advisers by increasing competition
in the market for placement agent services and reducing the cost of
such services. It could also benefit those placement agents that are
not ``regulated persons'' under rule 206(4)-5, but may meet the
municipal advisor definition, by allowing advisers to hire them.
---------------------------------------------------------------------------
\289\ Our current ``regulated person'' definition does not
include, for example, advisers prohibited from registering with the
Commission under section 203A of the Advisers Act (15 U.S.C. 80b-
3A), such as State-registered advisers, or advisers unregistered in
reliance on an exemption other than section 203(b)(3) of the Act.
(15 U.S.C. 80b-3(b)(3)). The definition of ``municipal advisor''
does not exclude these advisers. See section 975 of the Dodd-Frank
Act.
We adopted the third-party solicitor ban to prevent advisers
from circumventing the rule through third parties. See section
II.B.2.(b) of the Pay To Play Release. Given the Dodd-Frank Act's
creation of the ``municipal advisor'' category, and given that it
requires these persons to register with the Commission and subjects
them to MSRB rulemaking authority, we believe that expanding the
current ``regulated person'' exception to the third party solicitor
ban to include registered municipal advisors subject to pay to play
rules would not undermine the ban's purpose. By potentially allowing
advisers to choose from a broader set of potential third-party
solicitors, we believe our proposed amendments may promote
efficiency and competition in the market for advisory services to
the extent third-party solicitors that are not regulated persons
participate.
---------------------------------------------------------------------------
Finally, we are proposing a minor amendment to rule 206(4)-5's
definition of a ``covered associate'' \290\ of an investment adviser to
specify that a legal entity, not just a natural person, that is a
general partner or managing member of an investment adviser would meet
the definition.\291\ Because the minor amendment would not change the
meaning of the rule, we do not believe that it would generate any
additional benefits (or costs).
---------------------------------------------------------------------------
\290\ See rule 206(4)-5(f)(2) (defining a ``covered associate''
of an investment adviser as: ``(i) Any general partner, managing
member or executive officer, or other individual with a similar
status or function; (ii) Any employee who solicits a government
entity for the investment adviser and any person who supervises,
directly or indirectly, such employee; and (iii) Any political
action committee controlled by the investment adviser or by [any
other covered associate].'').
\291\ See proposed rule 206(4)-5(f)(2); supra section II.D.1. of
this Release.
---------------------------------------------------------------------------
B. Costs
1. Eligibility To Register With the Commission: Section 410
Transition to State Registration
Proposed Rule 203A-5 would impose one-time costs on investment
advisers registered with us by requiring them to file an amendment to
Form ADV, and on advisers that are no longer eligible to remain
registered with us by requiring them to file Form ADV-W to withdraw
from Commission registration.\292\ According to IARD data,
approximately 11,850 investment advisers are registered with us and
would be required to file an amended Form ADV,\293\ and we estimate
that approximately 4,100 of those advisers will be required to withdraw
their registration and register with one or more State securities
authorities.\294\ We believe that the proposed rule would have little
impact on competition among advisers registered with us because they
would all be subject to these requirements, but the rule could have a
limited impact on competition between SEC-registered advisers who are
subject to the rule and State-registered advisers who are not. We also
believe that the rule would have little, if any, effect on capital
formation.
---------------------------------------------------------------------------
\292\ See proposed rule 203A-5; supra section II.A.1. of this
Release.
\293\ Based on IARD data as of September 1, 2010, 11,867
investment advisers are registered with the Commission. We have
rounded this number to 11,850 for purposes of our analysis.
\294\ According to data from the IARD as of September 1, 2010,
4,136 Commission-registered advisers, which we are rounding to 4,100
for our analysis, either: (i) Had assets under management of between
$25 million and $100 million and did not indicate on Form ADV Part
1A that they are relying on an exemption from the prohibition on
Commission registration; or (ii) were permitted to register with us
because they rely on the registration of an SEC-registered affiliate
that has assets under management between $25 million and $100
million and are not relying on an exemption.
---------------------------------------------------------------------------
For purposes of calculating the currently approved Paperwork
Reduction Act (``PRA'') burden for Form ADV, we estimated that an
annual updating amendment would take each adviser approximately 6 hours
per amendment,\295\ and we estimate the one-time transition amendment
would have similar burden. In addition, for purposes of the increased
PRA burden for Form ADV, we estimate that the proposed amendments to
Part 1A of Form ADV would take each adviser approximately 4.5 hours, on
average, to complete.\296\ As a result, we estimate a total average
time burden of 10.5 hours for each respondent completing the amendment
to Form ADV required by proposed rule 203A-5 (excluding private fund
information which is addressed below).\297\ We estimate that each
adviser would incur average costs of approximately $2,646,\298\ for a
total aggregate of $31,355,100.\299\ In addition, of these 11,850
registered advisers, we estimate that 3,500 advise one or more private
funds and would have to complete the private fund reporting
[[Page 77079]]
requirements we are proposing today.\300\ We expect this would take
33,350 hours,\301\ in the aggregate, for a total cost of
$8,404,200.\302\ As a result, the total estimated costs associated with
filing amended Form ADV as required by proposed rule 203A-5 would be
$39,759,300.\303\
---------------------------------------------------------------------------
\295\ See infra section V.B.2.a.3. of this Release.
\296\ See infra sections V.B.1.a. and V.B.2.a.3. of this
Release.
\297\ 6 hours (Form ADV amendment) + 4.5 hours (new Form ADV
items) = 10.5 hours.
\298\ We expect that the performance of this function would most
likely be equally allocated between a senior compliance examiner and
a compliance manager. Data from the Securities Industry Financial
Markets Association's Management & Professional Earnings in the
Securities Industry 2009 (``SIFMA Management and Earnings Report''),
modified to account for an 1,800-hour work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead, suggest that costs for a senior compliance examiner and a
compliance manager are $210 and $294 per hour, respectively. [5.25
hours x $210 = $1,102.50] + [5.25 hours x $294 = $1,543.50] =
$2,646.
\299\ 11,850 advisers x $2,646 = $31,355,100.
\300\ See infra note 400.
\301\ See infra note 403.
\302\ [16,675 hours x $210 = $3,501,750] + [16,675 hours x $294
= $4,902,450] = $8,404,200. As noted above, we expect that the
performance of this function will most likely be equally allocated
between a senior compliance examiner and a compliance manager. See
supra note 298.
\303\ $31,355,100 + $8,404,200 = $39,759,300.
---------------------------------------------------------------------------
For the estimated 4,100 advisers that will be required to withdraw
their registrations, we estimate that the average burden for each
respondent is 0.25 hours for filing a partial withdrawal on Form ADV-
W.\304\ An adviser would likely use compliance clerks to prepare the
filings and review the prepared Form ADV-W.\305\ We estimate that each
adviser would incur average costs of approximately $14.75 \306\ to
comply with the Form ADV-W filing requirements, for a total one-time
cost of $60,475.\307\ As a result, proposed rule 203A-5 would result in
a total one-time cost of $39,819,775.\308\
---------------------------------------------------------------------------
\304\ Form ADV-W is designed to accommodate the different types
of withdrawals an investment adviser may file. An investment adviser
ceasing operations would complete the entire form to withdraw from
all jurisdictions in which it is registered (full withdrawal), while
an adviser withdrawing from some, but not all, of the jurisdictions
in which it is registered would omit certain items that we do not
need from an adviser continuing in business as a State-registered
adviser. We expect that advisers that would be required to file Form
ADV-W if proposed rule 203A-5 is adopted would file only a partial
withdrawal because switching to State registration only requires a
partial withdrawal. Compliance with the requirement to complete Form
ADV-W imposes an average burden of 0.25 hours for an adviser filing
for partial withdrawal.
\305\ We have assumed for purposes of the current approved PRA
burden for rule 203-2 and Form ADV-W that advisers would use
clerical staff to file for a partial withdrawal. Data from the
Securities Industry Financial Markets Association's Office Salaries
in the Securities Industry 2009 (``SIFMA Office Salaries Report'')
modified to account for an 1,800-hour work-year and multiplied by
2.93 to account for bonuses, firm size, employee benefits and
overhead, suggest that the hourly rate for a compliance clerk is
$59.
\306\ 0.25 hours x $59 (hourly wage for clerk) = $14.75 (total
cost for Form ADV-W filing).
\307\ $14.75 x 4,100 = $60,475.
\308\ $39,759,300 (total cost for Form ADV filing) + $60,475
(total cost for Form ADV-W filing) = $39,819,775 (total cost for
proposed rule 203A-5).
---------------------------------------------------------------------------
Switching Between State and Commission Registration
The proposed amendment to rule 203A-1 may impose costs on advisers
by eliminating the $5 million buffer in current rule 203A-1(a), which
permits but does not require an adviser to register with the Commission
if the adviser has between $25 million and $30 million of assets under
management.\309\ Specifically, the proposed amendment may require
advisers with between $25 million and $30 million in assets under
management that are still eligible for registration with the Commission
despite the Dodd-Frank Act's amendments to section 203A of the Advisers
Act to switch their registration between the Commission and the states
when they otherwise would not do so if the rule continued to include
the buffer.\310\ As of September 1, 2010, approximately 530 advisers
registered with the Commission had between $25 million and $30 million
of assets under management.\311\ Because the Dodd-Frank Act has amended
section 203A to prohibit most of these advisers from registering with
the Commission,\312\ we believe that all of these advisers could see
increased costs as a result of our proposed amendment.\313\ These costs
include those associated with withdrawing their registration with the
Commission and registering with the states, including filing a notice
of withdrawal on Form ADV-W in accordance with rule 203-2 under the
Advisers Act. We have estimated for purposes of our current approved
hour burden under the PRA for rule 203-2 and Form ADV that a partial
withdrawal imposes an average burden of approximately 0.25 hours for an
adviser, and the filing (and costs associated with the filing) by these
530 advisers are included in our discussion above of the Form ADV-W
filing requirement under rule 203A-5.\314\ These advisers also would
incur the costs of State registration and of compliance with State laws
and regulations, which we expect would vary widely depending on the
number of, and which, states with which each adviser is required to
register. For example, individual State registration fees range from
approximately $60 to $400 annually and some states require advisers to
submit documentation in addition to Form ADV.\315\ We believe these
amendments would have little, if any, effect on capital formation.
---------------------------------------------------------------------------
\309\ See proposed rule 203A-1; supra section II.A.4. of this
Release.
\310\ See supra section II.A.4. of this Release. Under the Dodd-
Frank Act, a mid-sized adviser is not prohibited from registering
with the Commission if: (i) The adviser is not required to be
registered as an investment adviser with the securities commissioner
(or any agency or office performing like functions) of the State in
which it maintains its principal office and place of business; (ii)
if registered, the adviser would not be subject to examination as an
investment adviser by that securities commissioner; or (iii) the
adviser is required to register in 15 or more states. See section
410 of the Dodd-Frank Act; supra section II.A. of this Release.
\311\ Based on IARD data as of September 1, 2010.
\312\ See supra section II.A. of this Release (discussing new
section 203A(a)(2) of the Advisers Act, which prohibits certain mid-
sized advisers from registering with the Commission).
\313\ For purposes of this analysis, we assume that all of these
advisers would not remain eligible to register with the Commission
because they would be required to be registered and subject to
examination by securities authorities in the states where they
maintain their respective principal offices and places of business.
See Section 203A(a)(2); supra section II.A.7.b. of this Release
(discussing the fact that we are writing a letter to each State
securities commissioner (or official with similar authority) to
request that each advise us whether investment advisers registered
in the State would be subject to examination as an investment
adviser by that State's securities commissioner (or agency or office
with similar authority)). See also NASAA Report at 7.
\314\ See supra notes 304-308 and accompanying text addressing
the costs of filing Form ADV-W for advisers that will be required to
withdraw their registrations.
\315\ See, e.g., Ohio Rev. Code Sec. 1707.17(B)(3) (2010) ($100
registration fee); Ark. Code Sec. 23-42-304(a)(3) (2010) ($300
registration fee); Colorado Division of Securities Fee Schedule ($60
registration fee), available at http://www.dora.State.co.us/securities/feeschedule.htm; Illinois Secretary of State, Securities
Fees ($400 registration fee), available at http://www.sos.state.il.us/departments/securities/investment_advisers/fees.html; Texas State Securities Board Check Sheet for a Sole
Proprietor Corporation LLC or Partnership Applying for Registration
as an Investment Adviser (requiring copies of adviser's
organizational documents, balance sheet, fee schedule, advisory
contract, and brochure or disclosure document delivered to clients),
available at http://www.ssb.state.tx.us/Dealer_And_Investment_Adviser_Registration/Check_Sheet_For_a_Sole_Proprieter_Corporation_LLC_or_Partnership_Applying_For_Registration_as_an_Investment_Adviser.php; NASAA Report at 7 (among other things,
states review registrants' disclosure history, financial status,
business practices, and provisions in client contracts).
---------------------------------------------------------------------------
Exemptions From the Prohibition on Registration With the Commission
Amending the exemption from the prohibition on registration
available to pension consultants in rule 203A-2(b) to increase the
minimum value of plan assets from $50 million to $200 million \316\ may
impose costs on some of the approximately 350 advisers that currently
rely on the exemption.\317\
[[Page 77080]]
These costs, which include those associated with withdrawing their
registration with the Commission and registering with the states, if
required, would have a negative impact on competition for the advisers
that no longer qualify for the exemption and potentially must register
as an adviser with more than one State securities authority. We
estimate that 50 of the 350 advisers relying on the exemption would
have to file a notice of withdrawal on Form ADV-W in accordance with
rule 203-2 under the Advisers Act and withdraw their registration based
on the proposed amendment.\318\ We have estimated that a partial
withdrawal imposes an average burden of approximately 0.25 hours for an
adviser.\319\ Thus, we estimate that the proposed amendment to rule
203A-2(b) associated with filing Form ADV-W would generate a burden of
12.5 hours \320\ at a cost of $738.\321\ These advisers will incur the
costs of State registration, which we expect will vary widely depending
on the number of, and which, states with which an adviser is required
to register.\322\ We believe the amendment would have little, if any,
effect on capital formation.
---------------------------------------------------------------------------
\316\ See proposed rule 203A-2(a). See also supra section
II.A.5.b. of this Release.
\317\ Based on IARD data as of September 1, 2010, 353 SEC-
registered advisers, which we rounded to 350, indicated that they
rely on the exemption for pension consultants by marking Item
2.A.(6) on Form ADV Part 1A. These advisers do not report the amount
of plan assets for which they provide investment advice, so we are
unable to determine how many have between $50 million and $200
million of plan assets and may have to register with the State
securities authorities as a result of the proposed amendment. It is
also difficult to determine whether such advisers would be
prohibited from registering with the Commission because they are
required to register with and are subject to examination by the
State securities authority where they maintain a principal office
and place of business under the Dodd-Frank Act.
\318\ Based on IARD data as of September 1, 2010, approximately
225 pension consultants reported assets under management of less
than $100 million, and 202 of those advisers reported assets under
management of less than $25 million. We believe that most pension
consultants relying on the exemption provide advice regarding a
large amount of plan assets, so we expect the number of advisers
affected by the proposed amendment to be one quarter of the advisers
with less than $25 million of assets under management. We expect
that advisers that would be required to file Form ADV-W if our
proposed amendment to rule 203A-2(b) is adopted would file only a
partial withdrawal because they would be registering with the
states. See supra note 304. Compliance with the requirement to
complete Form ADV-W imposes an average burden of approximately 0.25
hours for an adviser filing for partial withdrawal. See id.
\319\ See supra note 304.
\320\ 50 responses on Form ADV-W x 0.25 hours = 12.5 hours.
\321\ 12.5 hours x $59 = $738.
\322\ See, e.g., supra note 315.
---------------------------------------------------------------------------
As discussed above, the proposed amendment to the multi-State
adviser exemption in rule 203A-2(e) would reduce costs for advisers in
the aggregate because more advisers would be permitted to register with
one securities regulator--the Commission--rather than being required to
register with multiple States.\323\ Advisers relying on the exemption,
however, would incur costs of complying with the Advisers Act and our
rules, and would incur the costs associated with keeping records
sufficient to demonstrate that they would be required to register with
15 or more states. We estimate that, in addition to the approximately
40 advisers that rely on the exemption currently, approximately 110
would rely on the exemption if amended as proposed.\324\ For purposes
of the PRA, we have estimated that these advisers would incur an
average one-time initial burden of approximately 8 hours, and an
average ongoing burden of approximately 8 hours per year, to keep
records sufficient to demonstrate that they meet the 15-State
threshold.\325\ We further estimate that a senior operations manager
would maintain the records at an hourly rate of $311, resulting in
average initial and annual recordkeeping costs associated with our
proposed amendments to rule 203A-2(e) of $2,488 per adviser,\326\ and
total increased costs of approximately $273,680 per year.\327\ Advisers
newly relying on the proposed amended exemption would also incur costs
associated with completing and filing Form ADV for purposes of
registration with the Commission. For purposes of the increase in our
PRA burden for Form ADV, we have estimated that advisers newly
registering with the Commission would incur a burden of approximately
13.58 hours per year,\328\ resulting in costs of approximately $3,422
per adviser \329\ and total increased costs of approximately $376,420
per year.\330\ Additionally, we estimate that 40 of the newly
registering advisers would use outside legal services, and 50 would use
outside compliance consulting services, to assist them in preparing
their Part 2 brochures, for a total cost of $176,000, and $250,000,
respectively, resulting in a total non-labor cost among the newly
registering advisers of $426,000.\331\ If adopted, the proposal could
also impact competition between advisers who rely on the exemption and
are subject to our full regulatory program, including examinations and
our rules, and State-registered advisers who do not rely on the
exemption. We believe these amendments would have little, if any,
effect on capital formation.
---------------------------------------------------------------------------
\323\ See proposed rule 203A-2(d); supra section II.A.5.c. of
this Release.
\324\ Based on IARD data as of September 1, 2010, of the
approximately 11,850 SEC-registered advisers, 40 checked Item
2.A.(9) of Part 1A of Form ADV to indicate their basis for SEC
registration under the multi-State advisers rule. Of the advisers
that have less than $100 million of assets under management, 94
currently file notice filings with 15 or more states. However, State
notice filing requirements for SEC-registered advisers may differ
from registration requirements because Form ADV does not distinguish
between states where the registration is mandatory and where
registration is voluntary. In addition, we estimate that 15 advisers
currently registered with the states that are registered with 15 or
more states could rely on the proposed exemption and register with
us. Thus, we estimate that approximately 150 advisers will rely on
the proposed exemption (40 currently relying on it + estimated 95
eligible based on IARD data + 15 advisers required to be registered
in 15 or more states that are not registered with us today).
\325\ These estimates are based on an estimate that each year an
investment adviser would spend approximately 0.5 hours creating a
record of its determination whether it must register as an
investment adviser with each of the 15 states required to rely on
the exemption, and approximately 0.5 hours to maintain the record,
for a total of 8 hours. See infra note 383 and accompanying text.
\326\ 8 hours x $311 = $2,488. The $311 compensation rate used
is the rate for a senior operations manager in the SIFMA Management
and Earnings Report, modified by Commission staff to account for an
1,800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
\327\ 110 new advisers relying on the exemption x $2,488 =
$273,680.
\328\ See infra note 399 and accompanying text.
\329\ We expect that the performance of this function would most
likely be equally allocated between a senior compliance examiner at
$210 per hour and a compliance manager at $294 per hour. See infra
note 338. [6.79 hours x $210 = $1,425.90] + [6.79 hours x $294 =
$1,996.26] = $3,422.
\330\ 110 advisers relying on the exemption x $3,422 = $376,420.
\331\ The currently approved burden associated with Form ADV
already accounts for similar estimated costs to be incurred by
current registrants. See infra notes 420-421 and accompanying text.
---------------------------------------------------------------------------
Mid-Sized Advisers
As discussed above, the Dodd-Frank Act does not explain how to
determine whether a mid-sized adviser is ``required to be registered''
or is ``subject to examination'' by a particular State securities
authority for purposes of section 203A(a)(2)'s prohibition on mid-sized
advisers registering with the Commission, and we propose to incorporate
into Form ADV an explanation of how we construe these provisions.\332\
We do not, however, believe that they would generate costs independent
of any costs associated with Congress' enactment of section 203A(a)(2),
and would have little, if any, effect on capital formation.
---------------------------------------------------------------------------
\332\ See supra notes 265-266 and accompanying text.
---------------------------------------------------------------------------
2. Exempt Reporting Advisers: Sections 407 and 408
While we believe that our proposed approach to implementing the
Dodd-Frank Act's reporting provisions applicable to exempt reporting
advisers would minimize costs inherent in such reporting, we
acknowledge that it would impose some costs on these advisers.\333\
Although not significant, these costs would include paying a filing fee
to FINRA to support the IARD. We anticipate that filing fees for exempt
reporting advisers would be the same as those for registered investment
advisers,
[[Page 77081]]
which currently range from $40 to $200, based on the amount of assets
an adviser has under management.\334\ In order to estimate the costs
associated with paying filing fees, we will assume for purposes of this
cost-benefit analysis that exempt reporting advisers will pay a fee of
$200 per report filed on Form ADV. We estimate that approximately 2,000
advisers would qualify as exempt reporting advisers pursuant to
sections 407 and 408 of the Dodd-Frank Act and would have to file Form
ADV on the IARD,\335\ which would result in total annual costs
consisting of filing fees of approximately $400,000.\336\
---------------------------------------------------------------------------
\333\ See proposed rules 204-1 and 204-4; proposed Form ADV,
Part 1A; supra section II.B. of this Release.
\334\ See supra note 122 and accompanying text.
\335\ See infra note 422. While this is an estimate of the total
number of advisers that may file reports rather than register with
the Commission, a number of these advisers may choose to register
with the Commission rather than file reports. We cannot determine ex
ante the number of these advisers that will choose to register
rather than report. Therefore, in order to avoid under-estimating
the costs of our proposals, we are using the total number of
potential exempt reporting advisers in our estimates.
\336\ 2,000 exempt reporting advisers x $200 per year =
$400,000. Advisers pay for initial Form ADV submissions and for
annual amendments; there is no charge for an interim amendment.
---------------------------------------------------------------------------
In addition to filing fees, our proposals would result in internal
costs to exempt reporting advisers associated with collecting,
reviewing, reporting, and updating a limited subset of Form ADV items
in Part 1A, as we propose to amend it, including Items 1, 2.C., 3, 6,
7, 10, 11 and corresponding schedules, but exempt reporting advisers
would not be required to complete the remainder of Part 1A or Part 2.
The costs of completing these items would vary from one adviser to the
next, depending in large part on the number of private funds these
advisers manage. We believe the information required by these items
should be readily available to any adviser, particularly the
identifying data and control person information required by Items 1, 3,
and 10. The check-the-box style of most of these items, as well as some
of the features of the IARD system (such as drop-down boxes for common
responses) should also keep the average completion time for these
advisers to a minimum. For purposes of the PRA, we estimate that exempt
reporting advisers, in the aggregate, would spend 14,000 hours to
prepare and submit their initial reports on Form ADV.\337\ Based on
this estimate, we expect that exempt reporting advisers would incur
costs of approximately $3,528,000 to prepare and submit their initial
report on Form ADV.\338\ Additionally, for PRA purposes, we estimate
that exempt reporting advisers in the aggregate would spend 2,200 hours
per year on amendments to their filings.\339\ Based on this estimate,
we expect that exempt reporting advisers would incur costs of
approximately $554,400 to prepare and submit annual amendments to their
reports on Form ADV.\340\
---------------------------------------------------------------------------
\337\ See infra note 425; infra section V. of this Release.
\338\ We expect that the performance of this function would most
likely be equally allocated between a senior compliance examiner and
a compliance manager, or persons performing similar functions. Data
from the SIFMA Management and Earnings Report, modified to account
for an 1,800-hour work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead, suggest that
costs for these positions are $210 and $294 per hour, respectively.
[7,000 hours x $210 = $1,470,000] + [7,000 hours x $294 = 2,058,000]
= $3,528,000. For an exempt reporting adviser that does not already
have a senior compliance examiner or a compliance manager, we expect
that a person performing a similar function would have similar
hourly costs.
\339\ See infra note 430.
\340\ [1,100 hours x $210 = $231,000] + [1,100 hours x $294 =
323,400] = $554,400.
---------------------------------------------------------------------------
Completing and filing Form ADV-H and Form ADV-NR would also impose
costs on exempt reporting advisers. For purposes of the PRA, we
estimate that approximately 2 exempt reporting advisers would file Form
ADV-H annually and that it would impose an average burden per response
of 1 hour on exempt reporting advisers.\341\ Thus, proposed rule 204-4
would result in an increase in the total hour burden associated with
Form ADV-H of 2 hours.\342\ We further estimate that for each hour
required by the Form, professional staff time would comprise 0.625
hours, and clerical staff time would comprise 0.375 hours. The
Commission staff estimates the hourly wage for compliance professionals
to be $294 per hour,\343\ and the hourly wage for general clerks to be
$52 per hour.\344\ Accordingly, we estimate the average cost per
response imposed on exempt reporting advisers by proposed rule 204-4
and amended Form ADV-H would be $203,\345\ for a total annual cost of
$406.\346\ With regard to Form ADV-NR, we estimate that exempt
reporting advisers would file Form ADV-NR at the same annual rate (0.17
percent) as advisers registered with us.\347\ Thus, we estimate that
the amendments would increase the total annual hour burden associated
with Form ADV-NR by 1 hour.\348\ We further estimate that for each hour
required by the Form, compliance clerk time comprises 0.75 hours and
general clerk time comprises 0.25 hours.\349\ Therefore, we estimate
that the proposed amendments to Form ADV-NR would impose approximately
$57 in total additional annual costs for advisers.\350\
---------------------------------------------------------------------------
\341\ See infra section V.F. of this Release.
\342\ 2 responses x 1 hour = 2 hours.
\343\ Data from the SIFMA Management and Earnings Report,
modified to account for an 1,800-hour work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead, suggest that the cost for a Compliance Manager is
approximately $294 per hour.
\344\ Data from the SIFMA Office Salaries Report, modified to
account for an 1,800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead,
suggest that the cost for a general clerk is approximately $52 per
hour.
\345\ (0.625 hours x $294) + (0.375 hours x $52) = approximately
$203.
\346\ $203 per response x 2 responses annually = $406.
\347\ See infra note 450.
\348\ 0.17% (rate of filing) x (9,150 estimated registered
investment advisers + 2,000 estimated exempt reporting advisers) x 1
hour per ADV-NR filing = 19.
\349\ Data from the SIFMA Office Salaries Report, modified to
account for an 1,800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead,
suggest that the cost for a general clerk is approximately $52 per
hour and cost for a compliance clerk is approximately $59 per hour.
\350\ 1 hour x ((0.75 hours x $59) + (0.25 hours x $52)) =
approximately $57.
---------------------------------------------------------------------------
If adopted, our proposed reporting requirement would also result in
other costs for exempt reporting advisers. For example, some of the
information these advisers would report (and that we would make
publicly available), such as the identification of owners of the
adviser or disciplinary information, could impose costs on the advisers
and, in some cases their supervised persons or owners, including the
potential loss of business to competitors, as this information, today,
is not typically made available to others. In addition, there may be
other costs associated with the reporting requirements, including the
possibility that the proposed disclosure requirements could influence
business or other decisions by exempt reporting advisers, such as
whether to form additional private funds or discourage entry into
management of funds all together.
3. Form ADV Amendments
The costs of completing these new and amended items would vary
among advisers. We believe that the information required by these
items, however, should be readily available to any adviser. The check-
the-box style of most of these items, as well as some of the features
of the IARD system (such as drop-down boxes for common responses)
should also keep costs down by reducing the average completion time.
One-time monetary costs we expect to be borne by current
registrants to complete the proposed amendments to
[[Page 77082]]
Form ADV in connection with the transition filing are discussed above,
but that discussion does not take into account costs we expect to be
borne by newly registering advisers.\351\ For purposes of the PRA, we
estimate that 650 advisers will register with us within the next year
as a result of normal annual growth of our population of registered
advisers \352\ and would spend, on average, 4.5 hours to respond to the
new and amended questions we are proposing today, other than the
private fund reporting requirements.\353\ We expect the aggregate cost
associated with this process would be $737,100.\354\ In our PRA
analysis, we also project that 750 new advisers would register with us
as a result of the Dodd-Frank Act's elimination of the private adviser
exemption, and this group of advisers would be required to complete and
submit to us the entire form.\355\ We expect these newly registering
advisers would spend, in the aggregate, 30,555 hours to complete the
form (Part 1 except for the private fund reporting requirements, and
Part 2) as well as to periodically amend the form, prepare brochure
supplements and deliver codes of ethics to clients,\356\ for a total
cost of $7,699,860.\357\ In addition, of these 1,400 newly registering
advisers,\358\ we estimate that 950 advise one or more private funds
and would have to complete the private fund reporting requirements we
are proposing today.\359\ We expect this would take 4,750 hours,\360\
in the aggregate, for a total cost of $1,197,000.\361\ The total
estimated costs associated with our amendments for newly registering
advisers, therefore, are $9,633,960.\362\
---------------------------------------------------------------------------
\351\ See supra section IV.B.1. of this release.
\352\ See infra note 376 and accompanying text.
\353\ See infra section V.B.1.a. of this Release. We are
calculating costs only of the increased burden because we have
previously assessed the costs of the other items of Form ADV for
registered advisers and for new advisers attributed to annual
growth. The amendments we are proposing today would neither increase
the burden associated with the other items on Form ADV, nor would
they increase the external costs associated with certain Part 2
requirements.
\354\ We expect that the performance of this function would most
likely be equally allocated between a Senior Compliance Examiner and
a Compliance Manager. Data from the SIFMA Management and Earnings
Report, modified to account for an 1,800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead, suggest that costs for these positions are
$210 and $294 per hour, respectively. 650 advisers x 4.5 hours =
2,925 hours. [1,462.5 hours x $210 = $307,125] + [1,462.5 hours x
$294 = $429,975] = $737,100.
\355\ See infra note 396.
\356\ 750 advisers x 40.74 hours per adviser to complete entire
form (except private fund reporting requirements) = 30,555 hours.
See infra note 388.
\357\ [15,277.5 hours x $210 = $3,208,275] + [15,277.5 hours x
$294 = $4,491,585] = $7,699,860. As noted above, we expect that the
performance of this function will most likely be equally allocated
between a senior compliance examiner and a compliance manager. See
supra note 354.
\358\ 650 advisers expected to register with us within the next
year + 750 advisers expected to register with us as a result of the
elimination of the private adviser exemption = 1,400.
\359\ See infra text preceding note 405.
\360\ See infra notes 407 and 408.
\361\ [2,375 hours x $210 = $498,750] + [2,375 hours x $294 =
$698,250] = $1,197,000. As noted above, we expect that the
performance of this function will most likely be equally allocated
between a senior compliance examiner and a compliance manager. See
supra note 354.
\362\ $737,100 + $7,699,860 + $1,197,000 = $9,633,960.
---------------------------------------------------------------------------
Additionally, we estimate that a quarter (or 188) of the 750 new
registered advisers no longer able to rely on the private adviser
exemption would use outside legal services, and half (or 375) would use
outside compliance consulting services, to assist them in preparing
their Part 2 brochures, for a total cost of $827,200, and $1,875,000,
respectively, resulting in a total non-labor cost among all newly
registering advisers of $2,702,200.\363\
---------------------------------------------------------------------------
\363\ The currently approved burden associated with Form ADV
already accounts for similar estimated costs to be incurred by
current registrants, and it already accounts for a percentage of
annual growth in our population of registered advisers. See also
infra text following note 421.
---------------------------------------------------------------------------
If adopted, our proposed amendments to Form ADV would also result
in other costs. For instance, our proposed changes to the instructions
on calculating regulatory assets under management, and proposed rule
203A-3(d), would result in some advisers reporting greater assets under
management than they do today, and would preclude some advisers from
excluding certain assets from their calculation in order to remain
below the new asset threshold for registration with the Commission. The
impact of these changes may result in a limited number of State-
registered advisers that report assets under management of less than
$30 million under the current Form ADV reporting requirements to
register with us if under the proposed revised instructions they would
report $100 million or more in assets under management.\364\
---------------------------------------------------------------------------
\364\ A registered investment adviser that reports more than $30
million in assets under management under the current instructions to
Item 5 of Form ADV would be required to register with the
Commission. These advisers would not have additional costs
associated with registration as they would already be incurring
those costs.
---------------------------------------------------------------------------
We have also proposed to require advisers to private funds to use
fair value of private fund assets for determining regulatory assets
under management.\365\ We understand that many, but not all, private
funds value assets based on their fair value in accordance with U.S.
generally accepted accounting principles (GAAP) or other international
accounting standards.\366\ The advisers to private funds that do not
use fair value methodologies would likely incur costs to comply with
this proposed requirement. These costs would vary based on factors such
as the nature of the asset, the number of positions that do not have a
market value, and whether the adviser has the ability to value such
assets internally or would rely on a third party for valuation
services. We do not believe, however, that these costs would be
significant. We understand that private fund advisers, including those
that may not use fair value methodologies for reporting purposes,
perform administrative services, including valuing assets, internally
as a matter of business practice.\367\ Commission staff estimates that
such an adviser would incur $1,224 in internal costs to conform its
internal valuations to a fair value standard.\368\ In the event a fund
does not have an internal capability for valuing specific illiquid
assets, we expect that it could obtain pricing or valuation services
from an outside administrator or other service provider. Staff
estimates that the cost of such a service would range from $250 to
$75,000 annually.\369\ We request
[[Page 77083]]
comment on these estimates. Do advisers that do not use fair value
methodologies for reporting purposes have the ability to fair value
private fund assets internally? If not, what would be the costs to
retain a third party valuation service? Are there certain types of
advisers (e.g., advisers to real estate private funds) that would
experience special difficulties in performing fair value analyses? If
so, why?
---------------------------------------------------------------------------
\365\ See proposed Form ADV: Instructions for Part 1A, inst.
5.b.(4).
\366\ See supra note 56.
\367\ For example, a hedge fund adviser may value fund assets
for purposes of allowing new investments in the fund or redemptions
by existing investors, which may be permitted on a regular basis
after an initial lock-up period. An adviser to private equity funds
may obtain valuation of portfolio companies in which the fund
invests in connection with financing obtained by those companies.
Advisers to private funds also may value portfolio companies each
time the fund makes (or considers making) a follow-on investment in
the company. Private fund advisers could use these valuations as a
basis for complying with the fair valuation requirement we propose
with respect to private fund assets.
\368\ This estimate is based upon the following calculation: 8
hours x $153/hour = $1,224. The hourly wage is based on data for a
fund senior accountant from the SIFMA Management and Earnings
Report, modified by Commission staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
\369\ These estimates are based on conversations with providers
of valuation services. We understand that the cost of valuation for
illiquid fixed income securities generally ranges from $1.00 and
$5.00 per security, depending on the difficulty of valuation, and is
performed for clients on weekly or monthly basis. Appraisals of
privately placed equity securities may cost from $3,000 to $5,000
(with updates to such values at much lower prices). As proposed, an
adviser only has to calculate regulatory assets under management for
purposes of reporting on Form ADV annually. For purposes of this
cost benefit analysis, we are estimating the range of costs for (i)
a private fund that holds 50 illiquid fixed income securities at a
cost of $5.00 to price and (ii) a private fund that holds privately
placed securities of 15 issuers that each cost $5,000 to value. We
believe that costs for funds that hold both fixed-income and
privately placed equity securities would fall within the maximum of
our estimated range. We note that funds that have significant
positions in illiquid securities are likely to have the in-house
capacity to value those securities or already subscribe to a third
party service to value them. We note that many private funds are
likely to have many fewer fixed income illiquid securities in their
portfolios, some or all of which may cost less than $5.00 to value.
Finally, we note that obtaining valuation services for a small
number of fixed income positions on an annual basis may result in a
higher cost for each security or require a subscription to the
valuation service for those that do not already purchase such
services. The staff's estimate is based on the following
calculations: (50 x $5.00 = $250; 15 x $5,000 = $75,000).
---------------------------------------------------------------------------
Requiring advisers to report whether they have $1 billion or more
in assets also may have costs for advisers that are not publicly traded
or otherwise do not publicly disclose the amount of their own assets as
it would be easy to identify the very largest advisers in terms of
assets. These proposals may provide limited efficiency improvements as
a result of the uniformity in calculating and reporting managed assets,
and there may also be, as discussed below, competitive effects of these
changes and other proposed amendments to Form ADV. We believe these
proposals would have little, if any, effect on capital formation.
In addition, some of the proposed amendments also could impose
costs including potential competitive effects with other advisers as
certain information we are proposing to be disclosed may not typically
be provided to others. This would be the case, for example, for
advisers that currently disclose only to certain clients and
prospective clients, or only upon request, such information as census
data about the private funds and the amount of private fund assets that
the adviser manages, information about the State registrations of the
adviser's employees, the types of investments about which the adviser
provides advice, and the service providers to each private fund that
the adviser manages. This could create benefits as well as costs. While
exempt reporting advisers may be subject to a lower regulatory burden,
investors may have greater confidence in advisers that provide more
fulsome disclosure and are subject to our oversight.
4. Amendments to Pay to Play Rule
Our proposal to permit an adviser to pay any municipal advisor that
is registered with the Commission under section 15B of the Exchange Act
\370\ and subject to pay to play rules adopted by the MSRB to solicit
government entities on its behalf may result in limited additional
costs to comply with rule 206(4)-5.\371\ Specifically, advisers that
have created compliance programs in anticipation of rule 206(4)-5's
compliance date may have to make adjustments to those programs to
account for the fact that our proposed amendment would permit them to
hire placement agents that are registered municipal advisors.\372\ But,
as explained above, our proposed amendments would allow them greater
latitude in hiring placement agents.
---------------------------------------------------------------------------
\370\ 15 U.S.C. 78o-4.
\371\ See proposed rule 206(4)-5(a)(2), (f)(9). As discussed in
section II.D.1. of this Release, we believe that our proposed
amendment to rule 206(4)-5 to make it apply to exempt reporting
advisers and foreign private advisers and our proposed technical
amendment to the definition of ``covered associate'' would not
generate new costs.
\372\ See section III.B of the Pay to Play Release (requiring
advisers to comply with the rule's prohibition on making payments to
third parties to solicit government entities for investment advisory
services on September 13, 2011).
---------------------------------------------------------------------------
C. Request for Comment
The Commission requests comments on all aspects of the
cost-benefit analysis, including the accuracy of the potential costs
and benefits identified and assessed in this release, as well as any
other costs or benefits that may result from the proposals.
We encourage commenters to identify, discuss, analyze, and
supply relevant data regarding these or additional costs and benefits.
V. Paperwork Reduction Act Analysis
Certain provisions of our proposal contain ``collection of
information'' requirements within the meaning of the PRA, and we are
submitting the proposed collections of information to the Office of
Management and Budget (``OMB'') for review in accordance with 44 U.S.C.
3507 and 5 CFR 1320.11. The titles for the collections of information
we are proposing or proposing to amend are: (i) ``Form ADV''; (ii)
``Rule 203-2 and Form ADV-W under the Investment Advisers Act of
1940;'' (iii) ``Rule 204-2 under the Investment Advisers Act of 1940;''
(iv) ``Exemption for Certain Multi-State Investment Advisers (Rule
203A-2(e));'' (v) ``Rule 203A-5;'' (vi) ``Form ADV-H;'' \373\ and (vii)
``Rule 0-2 and Form ADV-NR under the Investment Advisers Act of 1940.''
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number.
---------------------------------------------------------------------------
\373\ The current title for the collection of information on
Form ADV-H is ``Rule 203-3 and Form ADV-H under the Investment
Advisers Act of 1940'' because currently only registered advisers
file Form ADV-H under rule 203-3. However, because we are proposing
to amend Form ADV-H to allow exempt reporting advisers to apply for
a temporary hardship exemption on Form ADV-H under rule 204-4, we
are proposing to re-title the collection of information simply
``Form ADV-H.''
---------------------------------------------------------------------------
While our proposed rules and rule and form amendments would impose
new collection of information burdens for certain advisers and change
existing burdens on advisers under our rules, the Dodd-Frank Act also
will impact our total burden estimates for certain of our rules,
principally by changing the numbers of advisers subject to these rules.
Specifically, we estimate the Dodd-Frank Act's amendments to section
203A to reallocate regulatory responsibility over numerous registered
advisers to the states will result in about 4,100 registered advisers
switching from Commission to State registration.\374\ At the same time,
we estimate that the Dodd-Frank Act's elimination of the private
adviser exemption in section 203(b)(3) of the Advisers Act will result
in approximately 750 additional private fund advisers registering with
the Commission.\375\ Based on IARD data as of September 1, 2010, we
estimate that approximately 11,850 advisers are currently registered
with the Commission. We further estimate that approximately 650
additional advisers register with the Commission each year.\376\
Therefore, for purposes of
[[Page 77084]]
calculating the burdens of our proposed rules and amendments under the
PRA, we estimate that the number of advisers registering with the
Commission after the Dodd-Frank Act's amendments to sections 203A and
203(b)(3) become effective will be approximately 9,150.\377\
---------------------------------------------------------------------------
\374\ See supra section II.A. of this Release (discussing the
Dodd-Frank Act's amendments to section 203A). Based on IARD data as
of September 1, 2010, we estimate that approximately 4,050 will
switch registration because they have assets under management of
less than $100 million. We also estimate that approximately 50
additional advisers will switch to State registration because they
are relying on the registration of an affiliated adviser with the
same principal office and place of business that will be switching
to State registration.
\375\ See Exemptions Release at section I. (discussing
elimination of the private adviser exemption in section 203(b)(3)).
\376\ Over the past several years, approximately 1,000 new
advisers have registered with us annually. Due to the Dodd-Frank
Act's reallocation of regulatory responsibility for advisers with
assets under management of less than $100 million, we estimate that
about 650 new advisers will register with us annually based on
reducing the current growth rates by the gross reduction in the
number of advisers due to the Dodd-Frank Act. (4,100 (SEC advisers
withdrawing)/11,850 (total SEC advisers)) x 1000 (number of new
advisers each year) = 0.35 x 1000 = 350 (number of additional new
advisers registering with the states, not the SEC). 1000-350 = 650.
\377\ 11,850 (total SEC advisers)-4,100 (SEC advisers
withdrawing) + 750 (private advisers registering with the SEC) + 650
(new SEC advisers each year) = 9,150.
---------------------------------------------------------------------------
A. Rule 203A-2(e)
Rule 203A-2(e) exempts certain multi-State investment advisers from
section 203A's prohibition on registration with the Commission. We are
proposing to renumber and amend rule 203A-2(e) to permit investment
advisers required to register as an investment adviser with 15 or more
states, instead of 30 or more states under the current rule, to
register with the Commission.\378\ An investment adviser relying on
this exemption would be required to maintain in an easily accessible
place a record of the states in which the investment adviser has
determined it would, but for the exemption, be required to
register.\379\ We have submitted this collection of information to OMB
for review.
---------------------------------------------------------------------------
\378\ See proposed rule 203A-2(d). Under rule 203A-2(e) an
adviser, once registered with the Commission, is not required to
withdraw its registration as long as it would be required to
register with at least 25 states.
\379\ See proposed rule 203A-2(d)(3). An investment adviser
relying on this exemption also would continue to be required to: (i)
Include a representation on Schedule D of Form ADV that the
investment adviser has reviewed applicable law and concluded that it
must register as an investment adviser with 15 or more states; and
(ii) undertake on Schedule D to withdraw from registration with the
Commission if the adviser indicates on an annual updating amendment
to Form ADV that the investment adviser would be required by the
laws of fewer than 15 states to register as an investment adviser
with the State. See proposed rule 203A-2(d)(2). The proposed
increase in the PRA burden for Form ADV reflects these requirements.
See infra section V.B. of this Release.
---------------------------------------------------------------------------
Respondents to this collection of information would be investment
advisers who are required to register in 15 or more states absent the
exemption from the prohibition on Commission registration. This
collection of information is mandatory for those advisers relying on
the exemption provided by rule 203A-2(e) (proposed rule 203A-2(d)). The
records kept by investment advisers in compliance with the rule would
be necessary for the Commission staff to use in its examination and
oversight program, and the information in these records generally would
be kept confidential.\380\
---------------------------------------------------------------------------
\380\ See section 210(b) of the Advisers Act.
---------------------------------------------------------------------------
As of September 1, 2010, there were approximately 40 advisers
relying on the exemption under rule 203A-2(e).\381\ Although it is
difficult to estimate the number of advisers that would rely on the
exemption if amended as proposed because such reliance is entirely
voluntary, we estimate that approximately 150 advisers would rely on
the exemption.\382\ These advisers would incur an average one-time
initial burden of approximately 8 hours, and an average ongoing burden
of approximately 8 hours per year, to keep records sufficient to
demonstrate that they meet the 15-State threshold. These estimates are
based on an estimate that each year an investment adviser would spend
approximately 0.5 hours creating a record of its determination whether
it must register as an investment adviser with each of the 15 states
required to rely on the exemption, and approximately 0.5 hours to
maintain these records.\383\
---------------------------------------------------------------------------
\381\ Based on IARD data as of September 1, 2010, of the
approximately 11,850 SEC-registered advisers, 40 checked Item
2.A.(9) of Part 1A of Form ADV to indicate their basis for SEC
registration under the multi-State advisers rule.
\382\ Based on IARD data as of September 1, 2010, 94 of the
advisers that have less than $100 million of assets under management
currently file notice filings with 15 or more states. This number
may overestimate the number of advisers required to be registered
with 15 or more states, and therefore eligible for the proposed
multi-State exemption, because notice filing requirements may differ
from registration requirements. In addition, we are unable to
determine the number of advisers currently registered with the
states that are registered with 15 or more states that may rely on
the proposed exemption and register with us. We expect this number
to be small based on the scope of business of an adviser that has
less than $25 million in assets under management and because section
222(d) of the Advisers Act provides a de minimis exemption for
limited State operations without registration. For purposes of this
analysis, we estimate the number is 15. As a result, we estimate
that approximately 150 advisers would rely on the proposed exemption
(40 currently relying on it + estimated 95 eligible based on IARD
data + 15 advisers required to be registered in 15 or more states
that are not registered with us today).
\383\ 0.5 hours x 15 states = 7.5 hours + 0.5 hours = 8 hours.
---------------------------------------------------------------------------
B. Form ADV
Form ADV (OMB Control No. 3235-0049) is the two-part investment
adviser registration form. Part 1 of Form ADV contains information
designed for use by Commission staff, and Part 2 is the client
brochure. We use the information to determine eligibility for
registration with us and to manage our regulatory and examination
programs. Clients use certain of the information to determine whether
to hire or retain an adviser. Rule 203-1 requires every person applying
for investment adviser registration with the Commission to file Form
ADV. Rule 204-1 requires each registered adviser to file amendments to
Form ADV at least annually, and requires advisers to submit electronic
filings through the IARD. These collections of information are found at
17 CFR 275.203-1, 275.204-1, and 279.1 and are mandatory, although the
paperwork burdens associated with rules 203-1 and 204-1 are included in
the approved annual burden associated with Form ADV and thus do not
entail separate collections of information. Responses are not kept
confidential. The respondents to this information collection are
investment advisers registered or applying for registration with us,
and as discussed below, would include exempt reporting advisers.
The current total annual burden for all advisers completing,
amending, and filing Form ADV (Part 1 and Part 2) with the Commission,
approved recently in connection with amendments we adopted to Part
2,\384\ is 268,457 hours.\385\ This burden is based on an average total
collection of information burden of 36.24 hours per adviser for the
first year that an adviser completes Form ADV. The currently approved
burden also includes a total annual cost burden of $22,775,400, which
includes costs associated with outside legal assistance and outside
consulting services that vary based on the size of the adviser.\386\
---------------------------------------------------------------------------
\384\ See section VI of Part 2 Release, supra note 46 at nn. 341
and 342 and accompanying text. This estimate includes the annual
burden associated with advisers' obligations to deliver to clients
copies of their codes of ethics upon request.
\385\ The approved burden is comprised of 11,658 advisers
preparing an initial filing of Form ADV at 36.24 hours, which is
amortized over a three-year period (the estimated period that
advisers are expected to use Form ADV) for an annual burden of
152,909 hours. The burden also includes two amendments to Form ADV
annually, one annual amendment and one other than annual amendment,
for an annual burden of 87,435 hours; an annual burden of 11,658
hours to account for new brochure supplements that advisers are
required to prepare; and 16,455 hours attributable to the obligation
to deliver to clients codes of ethics upon request.
\386\ For outside legal services, ($4,400 x 535 medium advisers)
+ ($3,200 x 2,370 small advisers)) + ($10,400 x 36 large advisers) =
$ 10,312,400. For compliance consulting services, ($3,000 x 2,371
small advisers) + ($5,000 x 1,070 medium advisers) = $12,463,000.
$10,312,400+$12,463,000 = $22,775,400. See Part 2 Release, supra
note 46, for a discussion of these estimates.
---------------------------------------------------------------------------
As discussed above, in order to give effect to provisions in Title
IV of the Dodd-Frank Act, we are proposing amendments to Part 1A of
Form ADV to reflect the new statutory threshold for registration with
the Commission and to restructure it to accommodate filings by exempt
reporting advisers. Additionally, to enhance our ability to oversee
investment advisers, we are proposing amendments to Part 1A of Form ADV
to require advisers to provide us additional
[[Page 77085]]
information regarding: (i) Private funds they advise; (ii) their
advisory business and business practices that may present significant
conflicts of interest; and (iii) advisers' non-advisory activities and
their financial industry affiliations.\387\ We are also proposing
certain additional changes intended to improve our ability to assess
compliance risks and to enable us to identify the advisers that are
covered by section 956 of the Dodd-Frank Act addressing certain
incentive-based compensation arrangements.
---------------------------------------------------------------------------
\387\ See supra section II.C of this Release. In addition, we
are proposing several clarifying or minor amendments based on
frequently asked questions we receive from advisers as well as in
our experience administering the form.
---------------------------------------------------------------------------
We expect that an increase in the information requested in Form ADV
Part 1A as a result of these amendments would increase the currently
approved collection of information associated with Form ADV. In
addition, the annual burden also would increase as a result of an
increase in the number of respondents attributable to new investment
adviser registrations and the proposed use of the form for reporting by
exempt reporting advisers. We discuss below, in three sub-sections, the
estimated revised collection of information requirements for Form ADV:
First, we address the change to the collection as a result of our
proposed amendments to Part 1A of Form ADV excluding those related to
private fund reporting for registered advisers; second, we discuss the
proposed amendments related to private fund reporting for registered
advisers; and third, we address the proposed amendments to Part 1A of
Form ADV for its use as a reporting form by exempt reporting advisers.
1. Changes in Average Burden Estimates and New Burden Estimates
a. Estimated Change in Burden Related to Proposed Part 1A Amendments
(Not Including Private Fund Reporting)
We are proposing amendments to many Items in Part 1A, some that are
merely technical changes or very simple in nature, and others that
would require more of an adviser's time to respond. The paperwork
burdens of filing an amended Form ADV, Part 1A would, however, vary
among advisers, depending on factors such as the size of the adviser,
the complexity of its operations, and the number or extent of its
affiliations. Although burdens would vary among advisers, we believe
that the proposed revisions to Part 1A would impose few additional
burdens on advisers in collecting information as advisers should have
ready access to all the information necessary to respond to the
proposed items in their normal course of operations. We also are
working with FINRA, as our IARD contractor, to implement measures
intended to minimize the burden for advisers filing proposed amended
Form ADV on IARD (e.g., pre-populating fields and drop-down boxes for
common responses). We anticipate, moreover, that the responses to many
of the questions are unlikely to change from year to year, minimizing
the ongoing reporting burden associated with these questions.
In large part, the amendments we propose to Form ADV, Part 1A,
including those to account for the statutory changes in the threshold
for SEC registration, primarily refine or expand existing questions or
request information advisers already have for compliance purposes. For
instance, some of the proposed changes to Item 5 would require advisers
to provide numerical responses to certain questions about their
employees. An adviser would likely already have this information in
order to respond to those questions today by checking boxes that
correspond to a range of numbers. Likewise, the proposed amendments to
Item 8 require advisers to expand on information they provide in
response to existing Item 8, such as whether the broker-dealers that
advisers recommend or have discretion to select for client transactions
are related persons of the adviser. Other questions expand upon
existing requirements to elicit information advisers would already have
available for compliance purposes, such as whether the soft dollar
benefits they currently report receiving under Item 8 qualify for the
safe harbor under section 28(e) of the Exchange Act for eligible
research or brokerage services. As amended, Item 2 would require an
adviser to report to us its basis for registration or reporting, as
already determined for compliance purposes. Other proposed amendments
to Items 5, 6 and 7 expand existing lists of information advisers
already provide to us on Form ADV, such as types of advisory activities
the advisers perform and other types of business engaged in by advisers
and their related persons. We believe several of the new questions we
propose would merely require advisers to provide readily available or
easily accessible information, such as Chief Compliance Officer contact
information and whether the adviser has $1 billion or more in assets in
Item 1, form of organization in Item 3, or types of investments about
which they provided advice during the fiscal year for which they are
reporting in Item 5.
We anticipate other proposed questions may take longer for advisers
to complete, even with readily available information, such as
calculating regulatory assets under management according to our revised
instruction. Other proposed new items may present greater burdens for
some advisers, but not others, depending on the nature and complexity
of their businesses, such as the proposed requirement to provide a list
of the SEC file numbers of investment companies they advise, or
providing expanded information about related person financial industry
affiliates.
We estimate these proposed amendments to Part 1A of Form ADV would
take each adviser approximately 4.5 hours, on average, to complete. We
have based this estimate, in part, by comparing the relative complexity
and availability of the information elicited by the proposed items and
the nature of the response required (i.e., checking a box as opposed to
providing a narrative response) to the current form and its approved
burden. As a result, we estimate the average total collection of
information burden would increase to 40.74 hours per adviser for the
first year that an adviser completes Form ADV (Part 1 and Part 2).\388\
---------------------------------------------------------------------------
\388\ Current approved per adviser total (36.24) + estimated per
adviser increase (4.5) = 40.74.
---------------------------------------------------------------------------
b. New Estimated Burden Related to Proposed Private Fund Reporting
Requirements
The amendments that we propose to Item 7.B. and Section 7.B. of
Schedule D to collect new data on private funds managed by advisers
would provide us with basic census data on private funds and would
permit us to conduct a more robust risk assessment of private fund
advisers for purposes of targeting our examinations. The information
would include fund data such as basic organizational, operational, and
investment characteristics of the fund; the amount of assets held by
the fund; and the fund's service providers or gatekeepers. We believe
much of the information we are proposing to be reported to us should be
readily available to private fund advisers because, among other things,
it is information that private fund investors commonly seek in their
due diligence questionnaires or it is information that would often be
included in a private placement memorandum offering fund shares.
Although we understand that the information we are proposing to
require
[[Page 77086]]
for private funds typically would be readily available to advisers to
these funds, we expect that these amendments could require advisers,
particularly those with many private funds, to be subject to a
significantly increased paperwork burden. We are proposing certain
measures to minimize the increase in burden associated with this
proposed reporting requirement. We propose to permit a sub-adviser to
exclude private funds for which an adviser is reporting on another
Schedule D, and would permit an adviser sponsoring a master-feeder
arrangement to submit a single Schedule D for the master fund and all
of the feeder funds that would otherwise be submitting substantially
identical data.\389\ We also propose to permit an adviser with a
principal office and place of business outside the United States to
omit a Schedule D for a private fund that is not organized in the
United States and that does not have any investors who are ``United
States persons.'' \390\ And as discussed above, we are working with
FINRA to implement measures intended to minimize the burden for
advisers filing proposed amended Form ADV, such as the ability to
automatically populate private fund service provider information
provided for other funds advised by the same adviser. Finally, we note
that as proposed, Item 7.B. would no longer require advisers to report
the funds that their related persons advise on Schedule D, which we
expect would decrease the burden on private fund advisers. Taking into
account, as discussed above, the scope of the information we propose to
request and our understanding that much of the information is readily
available, as well as the technology upgrades we expect to be
incorporated into the IARD, we estimate advisers to private funds would
each spend, on average, one hour per private fund to complete these
questions.
---------------------------------------------------------------------------
\389\ See supra notes 153-154 and accompanying text.
\390\ See supra note 155 and accompanying text.
---------------------------------------------------------------------------
c. New Estimated Burden Related to Proposed Exempt Reporting Adviser
Reporting Requirements
Exempt reporting advisers would be required to complete a limited
number of items in Part 1A of Form ADV (consisting of Items 1, 2.C., 3,
6, 7, 10, 11 and corresponding schedules), and are not required to
complete Part 2. We believe the information required by these items
should be readily available to any adviser, particularly the
identifying data and control person information required by Items 1, 3,
and 10. The check-the-box style of most of these items, as well as some
of the features of the IARD system (such as drop-down boxes for common
responses) should also keep the average completion time for these
advisers to a minimum. Moreover, in our staff's experience, the types
of advisers that would meet the criteria for exempt reporting advisers
are unlikely to have significantly large numbers of affiliations, nor
do we expect them to have to report disciplinary events at a greater
rate than currently registered advisers.\391\ We estimate that these
items, other than Item 7.B., would take each exempt reporting adviser
approximately two hours to complete. We anticipate that, like
registered advisers, exempt reporting advisers would each spend an
additional hour per private fund to complete Item 7.B. and Schedule
7.B.
---------------------------------------------------------------------------
\391\ As of September 1, 2010, approximately 13% of SEC-
registered investment advisers reported a disclosure in Item 11 of
Form ADV.
---------------------------------------------------------------------------
2. Annual Burden Estimates
a. Estimated Annual Burden Applicable to All Registered Investment
Advisers
i. Estimated Initial Hour Burden (Not Including Burden Applicable to
Private Funds)
As a result of the transition filing discussed above,\392\ we
expect the total number of registered adviser respondents to this
collection of information would be 9,150.\393\ Approximately 11,850
investment advisers are currently registered with the Commission.\394\
We expect 4,100 will withdraw from registration.\395\ We expect about
750 advisers who currently rely on the private adviser exemption to
apply for registration with us, and we estimate that approximately 650
new advisers will register with us each year beginning in 2011.\396\
---------------------------------------------------------------------------
\392\ See supra section IV.B.1. of this Release.
\393\ See supra note 377.
\394\ Based on IARD data as of September 1, 2010.
\395\ See supra section IV.B.1. of this Release.
\396\ (4,100 (SEC advisers expected to withdraw from
registration)/11,850 (total SEC advisers)) x 1000 (average number of
new advisers registered with the Commission each year) = 0.35 x 1000
= 350 (number of additional new advisers registering with the
states, not the SEC). 1000 - 350 = 650. See also infra note 422.
---------------------------------------------------------------------------
The estimated total annual burden applicable to these advisers,
including new registrants, but excluding private fund reporting
requirements, is 372,771 hours.\397\ We believe that most of the
paperwork burden would be incurred in advisers' initial submission of
the new and amended items of Form ADV Part 1A, and that over time this
burden would decrease substantially because the paperwork burden will
be limited to updating information. Amortizing this total burden
imposed by Form ADV over a three-year period to reflect the anticipated
period of time that advisers would use the revised Form would result in
an average burden of an estimated 124,257 hours per year,\398\ or 13.58
hours per year for each new applicant \399\ and for each adviser
currently registered with the Commission that would re-file through the
IARD.
---------------------------------------------------------------------------
\397\ 40.74 per-adviser burden x 9,150 = 372,771 hours.
\398\ 372,771/3 = 124,257.
\399\ 124,257/9,150 = 13.58.
---------------------------------------------------------------------------
ii. Estimated Initial Hour Burden Applicable to All Registered Advisers
to Private Funds
The amount of time each of the registered advisers to private funds
would incur to complete Item 7.B. and Section 7.B. of Schedule D would
vary depending on the number of funds the advisers manage. Of the 9,150
advisers currently registered with us, approximately 3,500 indicate
that they are advisers to private funds.\400\ Due to the assets under
management these advisers report on Form ADV,\401\ and considering that
today these advisers either do not qualify for the private adviser
exemption or choose not to rely on it, we expect these advisers to
remain registered with us. Based on Form ADV filings by these advisers,
we estimate that 50% of these advisers, or 1,800, currently advise an
average of 3 private funds each; 45%, or 1,550 advisers, currently
advise an average of 10 private funds each, and the remaining 5%, or
150 advisers, manage an average of 83 private funds each.\402\ As we
discussed above, we estimate that private fund advisers would spend, on
average, one hour per private fund to complete Item 7.B. and Section
7.B. of Schedule D. As a result, the private fund reporting
requirements that would be applicable to registered investment advisers
would add 33,350 hours to the overall annual
[[Page 77087]]
burden applicable to registered advisers.\403\
---------------------------------------------------------------------------
\400\ 3,500 advisers indicate by reporting a fund in Schedule D,
Section 7.B. that they, or a related person, advise private funds or
investment related funds. Based on IARD data as of September 1,
2010.
\401\ Approximately 71% of the advisers to private funds or
investment related funds report assets under management over $100
million.
\402\ Based on IARD data as of September 1, 2010. Form ADV
currently asks for an adviser to report about investment-related
partnerships and limited liability companies advised by the adviser
and its related persons. As a result, the data we have obtained from
IARD over-estimates the average number of funds as a result of
reporting of the same fund multiple times by affiliated registered
advisers.
\403\ (1,800 advisers x 3 hours (3 funds x 1 hour per fund)) +
(1,550 advisers x 10 hours (10 funds x 1 hour per fund)) + (150
advisers x 83 hours x 1 hour per fund)) = 5,400 + 15,500 + 12,450 =
33,350.
---------------------------------------------------------------------------
In addition to the registered advisers that advise private funds
today, we estimate that about 200 of the 650 new advisers that will
register with us annually will manage private funds,\404\ and an
estimated 750 new private fund advisers will register with us that
previously relied on the private adviser exemption. We believe that
these 950 advisers that would be required to register will generally be
similar to the 50% of our current registrants that advise, on average,
3 private funds, but believe that some portion of them may advise a
greater number of funds, as the estimated 750 currently exempt private
advisers rely on the private adviser exemption, which permits up to 14
private fund clients.\405\ In addition, with respect to the 650 new
registrants we estimate annually, the elimination of the private
adviser exemption will require them, unless they are eligible for
another exemption, to register even if they have only a single private
fund client. To account for the addition of these two groups of
advisers to the registrant pool, but taking into account the
demographics of our current registrant pool (with 50% having on average
3 private fund clients), we estimate that each registered private fund
adviser, on average, will advise five private funds.\406\ Accordingly,
private fund reporting requirements attributable to the estimated 750
new registrants because of the elimination of the private adviser
exemption would add 3,750 hours to the overall annual burden applicable
to registered advisers.\407\ We also estimate that private fund
reporting requirements applicable to new registered investment advisers
would add 1,000 hours to the overall annual burden applicable to
registered advisers.\408\
---------------------------------------------------------------------------
\404\ About 30% of current registrants report that they advise
one or more private funds. (3,500 advisers to private funds/11,850
registered advisers). Applying the same proportion to new
registrants results in approximately 200 additional advisers to
private funds each year. (650 x .30 = 195).
\405\ Section 203(b)(3).
\406\ Approximately 65% of advisers that reported a fund in
Schedule D, Section 7.B. listed five or fewer funds and 72% of
advisers that registered since September 1, 2009 and reported a fund
reported five or fewer private funds. The average number of private
funds reported is about five funds for the new registrants in the
past year.
\407\ 750 newly registering advisers x 5 private funds on
average x 1 hour/private fund = 3,750.
\408\ 200 new advisers x 5 private funds on average x 1 hour/
private fund = 1,000.
---------------------------------------------------------------------------
The total annual burden related to private fund reporting that is
applicable to registered advisers would be 38,100 hours.\409\ We
believe that most of the paperwork burden would be incurred in
connection with advisers' initial submission of private fund data, and
that over time this burden would decrease substantially because the
paperwork burden will be limited to updating information. Amortizing
this total burden imposed by Form ADV over a three-year period, as we
did above with respect to the initial filing or re-filing of the rest
of the form, would result in an average burden of an estimated 12,700
hours per year,\410\ or 2.85 hours per year for each new private fund
adviser \411\ and for each private fund adviser currently registered
with the Commission.
---------------------------------------------------------------------------
\409\ 33,350 for existing registered advisers + 3,750 for no
longer exempt advisers + 1,000 for estimated new registrants due to
growth = 38,100.
\410\ 38,100/3 = 12,700.
\411\ 12,700/[3,500 + 200 + 750] = 2.85.
---------------------------------------------------------------------------
iii. Estimated Annual Burden Associated With Amendments, New Brochure
Supplements and Delivery Obligations
The current approved collection of information burden for Form ADV
has three additional elements: (1) The annual burden associated with
annual and other amendments to Form ADV, (2) the annual burden
associated with creating new Part 2 brochure supplements for advisory
employees throughout the year, and (3) the annual burden associated
with delivering codes of ethics to clients as a result of the offer of
such codes contained in the brochure. Although we do not anticipate
that our proposed amendments to Form ADV would affect the per adviser
burden imposed by these three elements, the Dodd-Frank Act's amendments
to sections 203A and 203(b)(3) will change our estimates of the number
of advisers subject to them, which will result in a change to the total
annual burden associated with these elements of the collection of
information for Form ADV.\412\
---------------------------------------------------------------------------
\412\ We anticipate that the clarification we are proposing to
make to the brochure supplement (Part 2B) would not affect this cost
burden estimate. See note 205 and accompanying text for a discussion
of this proposed clarifying amendment.
---------------------------------------------------------------------------
We continue to estimate that, on average, each adviser filing Form
ADV through the IARD will likely amend its form two times during the
year.\413\ We estimate, based on IARD data, that advisers, on average,
make one interim updating amendment (at an estimated 0.5 hours per
amendment) and one annual updating amendment (at an estimated 6 hours
per amendment) each year. We also expect advisers, on average, to
continue to incur one hour annually to prepare new brochure supplements
as required by Part 2 of the form,\414\ and to continue to spend 1.3
hours annually to meet obligations to deliver codes of ethics to
clients.\415\ These obligations would add 80,520 hours annually to the
collection of information. These 80,520 hours consist of 59,475 hours
attributable to amendments,\416\ 9,150 hours attributable to the
creation of new brochure supplements,\417\ and 11,895 hours for
delivery of codes of ethics.\418\
---------------------------------------------------------------------------
\413\ Based on IARD system data regarding the number of filings
of Form ADV amendments.
\414\ See section VI of Part 2 Release, supra note 46.
\415\ Id.
\416\ (9,150 advisers x .5 hours/other than annual amendment) +
(9,150 advisers x 6 hours/annual amendment) = 59,475.
\417\ 9,150 advisers x 1 hour = 9,150.
\418\ 9,150 advisers x 1.3 hours = 11,895.
---------------------------------------------------------------------------
iv. Estimated Annual Cost Burden
The current approved collection of information burden for Form ADV
has a one-time initial cost for outside legal and compliance consulting
fees in connection with the initial preparation of Part 2 of Form ADV.
Although we do not anticipate that our proposed amendments to Form ADV
would affect the per adviser cost burden estimates, the Dodd-Frank
Act's amendments to sections 203A and 203(b)(3) of the Adviser's Act
will result in a significant change to our estimates of the number of
advisers subject to these costs. The current approved collection is
based on an estimate that 2,941 advisers will elect to obtain outside
legal assistance and 3,441 advisers will elect to obtain outside
consulting services, for a total cost among all respondents of
$22,775,400 for a one-time initial cost to draft the new narrative
brochure.
By the time the amendments to Form ADV that we are proposing today
would become effective, substantially all SEC-registered advisers will
have completed their initial filing of the narrative brochure required
by our recent amendments to Part 2 of Form ADV and will have already
incurred these estimated one-time costs.\419\ As a result, the only
respondents that we expect would incur legal and consulting costs for
the initial drafting of Part 2 of Form ADV, subsequent to the effective
date of the amendments to Part 2, would consist of the estimated 650
new advisers that we expect to register annually and the estimated 750
advisers that will have to register as a result of
[[Page 77088]]
the elimination of the private adviser exemption.
---------------------------------------------------------------------------
\419\ See section V. of Part 2 Release, supra note 46.
---------------------------------------------------------------------------
The current approved burden estimates that the initial per adviser
cost for legal services related to preparation of Part 2 of Form ADV
would be $3,200 for small advisers, $4,400 for medium-sized advisers,
and $10,400 for larger advisers.\420\ The current approved burden also
contains an initial per adviser cost for compliance consulting services
related to initial preparation of the amended Form ADV that ranges from
$3,000 for smaller advisers to $5,000 for medium-sized advisers.\421\
We estimate that the 750 new registered advisers no longer able to rely
on the private adviser exemption will be medium-sized. The current
approved burden anticipates that a quarter of medium-sized advisers
would seek the help of outside legal services and half would seek the
help of compliance consulting services. Accordingly, we estimate that
188 of these advisers would use outside legal services, for a total
cost burden of $827,200, and 375 advisers would use outside compliance
consulting services, for a total cost burden of $1,875,000, resulting
in a total cost burden among all respondents of $2,702,000.
---------------------------------------------------------------------------
\420\ For purposes of this estimate, we categorize small
advisers as advisers with 10 or fewer employees, medium advisers as
having between 11 and 1,000 employees, and large advisers as those
with 1,000 or more employees. See Part 2 Release, supra note 46, at
nn. 301 and 324.
\421\ Id. at n. 325.
---------------------------------------------------------------------------
b. Estimated Annual Burden Applicable to Exempt Reporting Advisers
i. Estimated Initial Hour Burden
Based on publications, reports, and general information publicly
available from trade organizations, financial research companies, and
news organizations as well as safe harbor filings with the SEC, we
expect approximately 2,000 investment advisers will qualify for an
exemption from registration, but will be required to submit reports to
us on Form ADV.\422\ The paperwork burden applicable to these new
exempt reporting advisers would consist of the burden attributable to
completing a limited number of items in Part 1A as well as the burden
attributable to the private fund reporting requirements of Item 7.B.
and Section 7.B. of Schedule D. We estimated the burden to complete the
subset of items in Part 1A applicable to exempt reporting advisers,
above, to be two hours, which would result in an annual burden of
approximately 4,000 hours.
---------------------------------------------------------------------------
\422\ This estimate was collectively derived from various
sources including the National Venture Capital Association's
Yearbook 2010 (http://www.nvca.org), First Research reports (http://www.firstresearch.com), Preqin reports (http://www.preqin.com),
Bloomberg (http://www.bloomberg.com), the Managed Funds Association
(http://www.managedfunds.org), PerTrac data (http://www.pertrac.com), and Form D data. Specific data relevant to the
number or types of advisers that would be exempt reporting advisers
was not available, but the information located did inform the staff
to the probable number of exempt reporting advisers.
---------------------------------------------------------------------------
As discussed above, we estimate the private fund reporting
requirements of the form to be one hour per private fund. We assume
that each exempt reporting adviser currently relies on the private
adviser exemption and, therefore, has 14 or fewer private fund clients.
Based on reporting by registered advisers to private funds and industry
publications and reports, we expect each of these advisers, on average,
advises five private funds.\423\ Accordingly, we would attribute an
additional 10,000 burden hours to exempt reporting advisers' private
fund reporting requirements.\424\
---------------------------------------------------------------------------
\423\ Id. Based upon the reported general number of private
funds and the estimated number of advisers to these private funds,
it is estimated that each adviser advises five private funds on
average. (approximately 10,000 private funds/estimated 2,000
advisers = 5 private funds per adviser.
\424\ 2,000 exempt reporting advisers x 5 private funds/adviser
x 1 hour/private fund = 10,000. See Id. for 5 funds estimate.
---------------------------------------------------------------------------
The estimated total annual hour burden applicable to exempt
reporting advisers is 14,000 hours.\425\ We believe that most of the
paperwork burden would be incurred in advisers' initial submission of
private fund data, and that over time this burden would decrease
substantially because the paperwork burden would be limited to updating
information. Amortizing this total burden imposed by Form ADV over a
three-year period, as we did above with respect to the initial filing
for registered advisers, would result in an average burden of an
estimated 4,667 hours per year,\426\ or 2.33 hours per year, on
average, for each exempt reporting adviser.\427\
---------------------------------------------------------------------------
\425\ 4,000 + 10,000 = 14,000.
\426\ 14,000/3 = 4,667.
\427\ 4,667/2,000 = 2.33.
---------------------------------------------------------------------------
ii. Estimated Annual Burden Associated With Amendments
In addition to the burdens associated with initial completion and
filing of the portion of the form that exempt reporting advisers would
be required to prepare, we estimate that, on average, each exempt
reporting adviser would prepare an annual updating amendment and 20% of
these advisers would file an interim updating amendment.\428\ With
respect to an exempt reporting adviser's annual updating amendment of
Form ADV, we expect that advisers would not have to spend a significant
amount of time entering responses into the electronic version of the
form to file their annual updating amendments because IARD will
automatically pre-populate their prior responses. Based on this
consideration, we estimate that the average exempt reporting adviser
will spend 1 hour per year completing its annual updating amendment to
Form ADV. This estimate is based on our estimate for registered
advisers, but it is 85% shorter because exempt reporting advisers would
be required to complete and update only a limited number of items in
the form, not including Part 2. The other amendment that we estimate
20% of the exempt reporting advisers would file is an interim updating
amendment to Items 1, 3, 10 or 11 of Form ADV,\429\ and we estimate
that this amendment would require 0.5 hours per amendment. We
therefore, estimate that the total paperwork burden on exempt reporting
advisers of amendments to Form ADV would be 2,200 hours per year.\430\
---------------------------------------------------------------------------
\428\ Approximately 20% of advisers with a fiscal year end of
December that filed an other-than-amendment changed Item 1 or 11
between April 1, 2009 and December 31, 2009 (period between annual
amendment filing time).
\429\ See General Instruction 4 to Form ADV.
\430\ [(2,000 advisers x .20) x 0.5 hours] = 200 hours per year
for interim amendments. 2,000 advisers x 1 hour = 2,000 hours per
year for annual amendments. 200 + 2,000 = 2,200 hours. Exempt
reporting advisers would not incur any burden to prepare new
brochure supplements, however, as is required of registered
advisers; nor would they be required to meet obligations to deliver
codes of ethics to clients, as is also required of registered
advisers. Similarly, we have not prepared an estimated annual cost
burden to be incurred by exempt reporting advisers because the cost
burden attributed to registered advisers is associated with Part 2
obligations to which exempt reporting advisers are not subject.
---------------------------------------------------------------------------
3. Total Revised Burdens
The revised total annual collection of information burden for
registered advisers to file and complete the revised Form ADV (Parts 1
and 2), including the initial burden for both existing and anticipated
new registrants, including private fund advisers, plus the burden
associated with amendments to the form, preparing brochure supplements
and delivering codes of ethics to clients is estimated to be
approximately 217,477 hours per year.\431\ This burden represents an
decrease of 50,980 hours
[[Page 77089]]
from the current approved burden.\432\ This decrease is attributable
primarily to the 4,100 advisers that we expect to withdraw from SEC
registration.
---------------------------------------------------------------------------
\431\ 124,257 hours per year attributable to initial preparation
of Form ADV + 12,700 hours per year attributable to initial private
fund reporting requirements + 59,475 hours per year for amendments
to Form ADV + 9,150 hours per year for brochure supplements for new
employees + 11,895 hours per year to meet code of ethics delivery
obligations = 217,477 hours.
\432\ Current approved burden of 268,457 hours--revised burden
217,477 hours = 50,980 decrease in hours.
---------------------------------------------------------------------------
Registered investment advisers are also expected to incur an annual
cost burden of $2,702,000, a reduction from the current approved cost
burden of $22,775,400. The decrease in annual cost burden is attributed
to the nature of the costs, which are one-time initial costs to draft
the narrative brochure. As the transition to the narrative brochure
will have substantially been completed, the on-going costs arise from
new registrants.
The total annual collection of information burden for exempt
reporting advisers to file and complete the required Items of Part 1A
of Form ADV, including the burden associated with amendments to the
form, would be 6,867 hours.\433\
---------------------------------------------------------------------------
\433\ 4,667 hours per year attributable to initial preparation
of Form ADV + 2,200 hours per year for amendments = 6,867 hours.
---------------------------------------------------------------------------
We estimate that, if the amendments to Form ADV are adopted, the
total annual hour burden for the form would decrease by 44,113 hours to
224,344.\434\ The resulting blended average per adviser amortized
burden for Form ADV would be 20.12 hours,\435\ which would consist of
an average annual amortized burden of 23.77 hours for the estimated
9,150 registered advisers and 3.43 hours for the estimated 2,000 exempt
reporting advisers.\436\
---------------------------------------------------------------------------
\434\ 217,477 + 6,867 = 224,344.
\435\ 224,344/11,150 = 20.12.
\436\ Registered advisers (217,477/9,150 = 23.77), exempt
reporting advisers (6,867/2,000 = 3.43).
---------------------------------------------------------------------------
C. Rule 203A-5
Proposed rule 203A-5 would require each investment adviser
registered with us on July 21, 2011 to file an amendment to its Form
ADV no later than August 20, 2011, and withdraw from Commission
registration by October 19, 2011, if no longer eligible.\437\ The
amendment to Form ADV would, among other things, require each adviser
to declare whether it remains eligible for Commission
registration.\438\ The likely respondents to this information
collection are all investment advisers registered with the Commission
on July 21, 2011, and the investment advisers that withdraw their
registration. Compliance with this collection of information is
mandatory, and the information collected on Form ADV and Form ADV-W is
not kept confidential. We have submitted this collection of information
to OMB for review.
---------------------------------------------------------------------------
\437\ Proposed rule 203A-5(a), (b). See supra section II.A.1. of
this Release.
\438\ See supra section II.A.2. of this Release.
---------------------------------------------------------------------------
We estimate that there would be approximately 11,850 respondents to
this collection of information filing an amendment to Form ADV \439\
and 4,100 respondents filing Form ADV-W.\440\ Each respondent would
respond once. For purposes of the collection of information burden for
Form ADV, we estimate that the amendment would take each adviser
approximately 6 hours per amendment, on average,\441\ and that the
proposed amendments to Part 1A of Form ADV would take each adviser
approximately 4.5 hours, on average, to complete.\442\ We also estimate
the average burden for each respondent to be 0.25 hours for filing Form
ADV-W.\443\
---------------------------------------------------------------------------
\439\ Based on IARD data as of September 1, 2010, 11,867
investment advisers are registered with the Commission. We have
rounded this number to 11,850 for purposes of our analysis.
\440\ See supra note 294.
\441\ We anticipate that the hour burden for the refiling of
Form ADV for purposes of rule 203A-5 would be the same as an
adviser's annual amendment filing, which has an approved burden of 6
hours.
\442\ See supra sections V.B.1.a., V.B.2.a.3. of this Release.
\443\ See supra note 304.
---------------------------------------------------------------------------
We estimate that the burdens associated with the Form ADV amendment
required by rule 203A-5 would be more like an annual amendment with
respect to the burden to complete than an other-than-annual amendment,
as a result of our proposed changes to Part 1A. Consequently, we
estimate the total one-time burden for completing the Form ADV
amendments to be 124,425 hours,\444\ and for completing Form ADV-W to
be 1,025 hours,\445\ for a total one-time burden of 125,450 hours.\446\
---------------------------------------------------------------------------
\444\ [6 hours (annual amendment) + 4.5 hours (new items)] x
11,850 = 124,425.
\445\ 0.25 hours x 4,100 = 1,025.
\446\ 124,425 + 1,025 = 125,450.
---------------------------------------------------------------------------
D. Form ADV-NR
We are proposing minor amendments to Form ADV-NR (OMB Control No.
3235-0238), the form used to appoint the Secretary of the Commission as
an agent for service of process for certain non-resident advisers.\447\
Non-resident general partners or managing agents of SEC-registered
investment advisers must make a one-time filing of Form ADV-NR with the
Commission. Form ADV-NR requires these non-resident general partners or
managing agents to furnish us with a written irrevocable consent and
power of attorney that designates the Commission as an agent for
service of process, and that stipulates and agrees that any civil suit
or action against such person may be commenced by service of process on
the Commission. The amendments we are proposing reflect that exempt
reporting advisers would be filing reports on IARD, and that they would
use Form ADV-NR in the same way and for the same purpose as it is
currently used by registered investment advisers. The collection of
information is necessary for us to obtain appropriate consent to permit
the Commission and other parties to bring actions against non-resident
partners or agents for violations of the Federal securities laws. This
collection of information is found at 17 CFR 279.4. The collection of
information is mandatory, and the information provided in response to
the collection is not kept confidential. The currently approved
collection of information in Form ADV-NR is 18 hours.
---------------------------------------------------------------------------
\447\ See proposed amended Form ADV-NR; proposed General
Instruction 18.
---------------------------------------------------------------------------
We estimate that approximately 9,150 \448\ investment advisers will
be registered with the Commission and that approximately 2,000 \449\
exempt reporting advisers would file reports with the Commission, and
that these advisers would file Form ADV-NR at the same annual rate
(0.17 percent) as advisers registered with us.\450\ Accordingly, we
estimate that as a result of the amendments to Form ADV-NR and the
change in the number of filers after the effectiveness of the Dodd-
Frank Act the annual aggregate information collection burden for Form
ADV-NR would be 19 hours, an increase of 1 hour over the currently
approved burden.\451\
---------------------------------------------------------------------------
\448\ See supra note 377 and accompanying text.
\449\ See supra note 422 and accompanying text.
\450\ From September 1, 2009 through September 1, 2010, 20 Form
ADV-NRs were filed with us for an annual rate for all SEC-registered
advisers of 0.17%. (20 Form ADV-NR filings/11,850 advisers
registered as of Sept. 1, 2010)
\451\ 0.17% (rate of filing) x (9,150 estimated registered
investment advisers + 2,000 estimated exempt reporting advisers) x 1
hour per ADV-NR filing = 19.
---------------------------------------------------------------------------
E. Rule 203-2 and Form ADV-W
We are proposing amendments to rule 203A-2(b), the exemption from
the prohibition on registration for certain pension consultants. The
proposed amendments would raise the amount of plan assets that an
adviser must consult on from $50 to $200 million annually.\452\ If we
adopt the proposed amendment to rule 203A-2(b), an investment adviser
would have to be a pension consultant with respect to assets of plans
having an aggregate value of $200 million or more to be able to
[[Page 77090]]
register with the Commission. Those pension consultants providing
consulting services to plans of less than $200 million would be
required to file a notice of withdrawal of their registration in
accordance with rule 203-2 on Form ADV-W (OMB Control No. 3235-0313).
The collection of information on Form ADV-W is mandatory and is not
kept confidential. The currently approved collection of information for
Form ADV-W is 500 hours for 1,000 responses.
---------------------------------------------------------------------------
\452\ See proposed rule 203A-2(a)(1).
---------------------------------------------------------------------------
Based on IARD data as of September 1, 2010, there are 353 advisers
relying on the pension consultant exemption from registration. We
estimate that approximately 15%, or 50, of the current advisers relying
on this exemption from the prohibition on registration would no longer
be eligible to rely on the exemption if adopted as proposed. This
estimate is based on our understanding that a typical pension
consultant would have plan assets far in excess of the proposed higher
threshold, in light of the fact that most pension plans contain a
significant amount of assets.
The estimated 50 advisers no longer eligible to rely on the
exemption, however, would have to file a notice of withdrawal on Form
ADV-W in accordance with rule 203-2 under the Advisers Act and withdraw
their registration based on the proposed amendment to rule 203A-
2(b).\453\ In addition, as noted above, we estimate that approximately
4,100 advisers also will have to withdraw their Commission registration
as a result of the Dodd-Frank Act. Because these advisers are
registered today, we further anticipate that these advisers will be
switching from SEC to State registration, and as a result will be
filing a ``partial'' Form ADV-W. We have estimated for purposes of our
current approved burden under the PRA for rule 203-2 and Form ADV-W,
that a partial withdrawal imposes an average burden of approximately
0.25 hours for an adviser.\454\ Thus, we estimate that the proposed
amendment to rule 203A-2(b) associated with filing Form ADV-W would
generate a burden of 1,038 additional hours \455\ in addition to the
approved burden of 500 hours for a total of 1,538 hours.
---------------------------------------------------------------------------
\453\ See supra note 318 (discussing the fact that advisers
filing Form ADV-W due to our proposed amendment to rule 203A-2(b)
would likely file partial withdrawals).
\454\ See supra note 304.
\455\ (4,100 + 50) responses on Form ADV-W x 0.25 hours = 1,038
hours.
---------------------------------------------------------------------------
F. Form ADV-H
Proposed rule 204-4(e) would provide a temporary hardship exemption
for an exempt reporting adviser having unanticipated technical
difficulties that prevent submission of a filing to the IARD
system.\456\ Currently, rule 203-3(a) provides a similar temporary
hardship exemption for registered advisers that file an application on
Form ADV-H (OMB Control No. 3235-0538).\457\ Like rule 203-3(a),
proposed rule 204-4(e) would require advisers relying on the temporary
hardship exemption to file an application on Form ADV-H in paper format
no later than one business day after the filing that is the subject of
the Form ADV-H was due, and submit the filing on Form ADV in electronic
format with IARD no later than seven business days after the filing was
due.\458\ If rule 204-4 is adopted as proposed, respondents to the
collection of information on Form ADV-H would be exempt reporting
advisers, in addition to registered advisers, who are currently
respondents to this collection of information. The collection of
information on Form ADV-H is mandatory for registered advisers relying
on a temporary hardship exemption and would be mandatory for exempt
reporting advisers relying on a temporary hardship exemption if rule
204-4 is adopted as proposed. The information collected on Form ADV-H
is not kept confidential.
---------------------------------------------------------------------------
\456\ Proposed rule 204-4(e).
\457\ Rule 203-3(a); 17 CFR 279.3 (Form ADV-H). See supra note
125 and accompanying text.
\458\ Proposed rule 204-4(e).
---------------------------------------------------------------------------
To estimate the currently approved total burden associated with
Form ADV-H, we estimated that registered advisers file approximately 11
responses to Form ADV-H per year, which, given the estimated 11,850
advisers currently registered with the Commission, means that
approximately 1 response is filed per 1,000 advisers.\459\ We further
estimated that the average burden per response is approximately 1 hour.
Therefore the total approved burden for Form ADV-H is approximately 11
hours per year.\460\ Based on the proportion of annual responses to the
number of registered advisers, we estimate that exempt reporting
advisers would file approximately 2 responses to Form ADV-H annually if
rule 204-4 is adopted.\461\ We also estimate that Form ADV-H would
impose the same average burden per response of 1 hour on exempt
reporting advisers. Thus, proposed rule 204-4 would result in an
increase in the total hour burden associated with Form ADV-H of 2
hours.\462\ However, as discussed above, the number of registered
advisers will decrease due to the Dodd-Frank Act's amendments to
sections 203A and 203(b)(3) from 11,850 to 9,150.\463\ Given the
reduction in registered advisers, we estimate that Form ADV-H will
receive 9 annual responses from registered advisers, for a total annual
burden for registered advisers of 9 hours.\464\ Thus, if rule 204-4 is
adopted as proposed, the total burden associated with Form ADV-H would
continue to be 11 hours.\465\
---------------------------------------------------------------------------
\459\ 11,850 registered advisers / 11 responses = approximately
1 response per 1,000 registered advisers)
\460\ 11 responses x 1 hour = 11 hours.
\461\ We estimate that approximately 2,000 exempt reporting
advisers would file reports on Form ADV in accordance with proposed
rule 204-4. Thus, we estimate 2 responses to Form ADV-H in
accordance with proposed rule 204-4 (2,000 exempt reporting advisers
x 1 response per 1000 advisers = 2 responses).
\462\ 2 responses x 1 hour = 2 hours.
\463\ See supra note 377.
\464\ 9,150 registered advisers x 1 response per 1,000 advisers
= 9 responses. 9 responses x 1 hour = 9 hours.
\465\ 9 hours for registered advisers + 2 hours for exempt
reporting advisers = 11 hours.
---------------------------------------------------------------------------
G. Rule 204-2
Rule 204-2 (OMB Control No. 3235-0278) requires investment advisers
registered, or required to be registered under section 203 of the Act,
to keep certain books and records relating to their advisory
business.\466\ The collection of information under rule 204-2 is
necessary for the Commission staff to use in its examination and
oversight program, and the information is generally kept
confidential.\467\ The collection of information is mandatory.
---------------------------------------------------------------------------
\466\ Rule 204-2.
\467\ See section 210(b) of the Advisers Act.
---------------------------------------------------------------------------
We are proposing to amend rule 204-2 to update the rule's
``grandfathering provision'' for investment advisers that are currently
exempt from registration under the ``private adviser'' exemption, but
will be required to register when the Dodd-Frank Act's elimination of
the ``private adviser'' exemption becomes effective on July 21,
2011.\468\ Under the proposed amended grandfathering provision, an
adviser that was exempt from registration under section 203(b)(3) of
the Advisers Act prior to July 21, 2011 would not be required to
maintain
[[Page 77091]]
certain books and records concerning performance or rate of return of a
private fund or other account for any period prior to July 21, 2011,
provided the adviser was not registered with the Commission.\469\ Most,
if not all, advisers likely gather the records and documents necessary
to support the calculation of performance or rate of return as those
records or documents are produced or at the time a calculation is made.
Thus, we do not believe that the proposed amendment to the
grandfathering provision would reduce our current approved average
annual hourly burden per adviser under rule 204-2.
---------------------------------------------------------------------------
\468\ See proposed rule 204-2(e)(3)(ii); supra section II.D.2.b
of this Release. In addition, we are proposing to amend rule 204-
2(e)(3)(ii) to cross-reference the new definition of ``private
fund'' added to the Advisers Act by the Dodd-Frank Act where that
term is used in rule 204-2. However, this proposed amendment is
technical, and would not increase or decrease the collection burden
on advisers. We also intend to rescind rule 204-2(l) because that
section was vacated by the Federal appeals court in Goldstein.
\469\ Proposed rule 204-2(e)(3)(ii). Rule 204-2 requires
registered advisers to make and keep books and records necessary to
support the calculation of the performance or rate of return of any
or all managed accounts or securities recommendations in any notice,
circular, advertisement, newspaper article, investment letter,
bulletin or other communication that the investment adviser
circulates or distributes, directly or indirectly, to 10 or more
persons. Rule 204-2(a)(16). It requires that advisers maintain and
preserve these records in an easily accessible place for a period of
not less than five years from the end of the fiscal year during
which the last entry was made on such records, the first two years
in an appropriate office of the investment adviser. Rule 204-
2(e)(1). Our proposed grandfathering provision would assure that
advisers newly subject to the rule due to elimination of the
``private adviser'' exemption in existing section 203(b)(3) do not
face a retroactively-imposed recordkeeping requirement. However, the
proposed grandfathering provision would require these advisers to
continue to preserve any books and records in their possession that
pertain to the performance or rate of return of a private fund or
other account for the two and five year periods.
---------------------------------------------------------------------------
Although we do not anticipate that our proposed amendments to rule
204-2 would affect the per adviser burden imposed by the rule, the
Dodd-Frank Act's amendments to sections 203A and 203(b)(3) will change
our estimates of the total annual burden associated with the rule.\470\
The current approved burden for rule 204-2 is based on an estimate of
11,607 registered advisers subject to rule 204-2 and an estimated
average burden of 181.45 burden hours each year per adviser, for a
total of 2,106,046 hours.\471\ We estimate that the Dodd-Frank Act will
reduce the number of registered advisers to 9,150.\472\ Thus, we
estimate that the total burden under rule 204-2 will be 1,660,268,\473\
a reduction of 445,778 hours.\474\
---------------------------------------------------------------------------
\470\ Exempt reporting advisers are not subject to rule 204-2,
and therefore there is no offsetting increase in the number of
advisers subject to the rule.
\471\ In the Pay to Play Release, we estimated that the average
burden for advisers imposed by rule 204-2 to be 181.45 hours. See
section V.A. of the Pay to Play Release.
\472\ See supra note 377 and accompanying text.
\473\ 9,150 registered advisers x 181.45 hours = approximately
1,660,268.
\474\ 2,106,046 hours - 1,660,268 hours = 445,778 hours.
---------------------------------------------------------------------------
The reduction in the number of advisers subject to the rule will
also reduce the total non-labor cost burden of the rule. The current
approved non-labor cost burden associated with rule 204-2 is
$14,581,509, or an average of approximately $1,256 per adviser.\475\
Due to the reduction in the number of advisers subject to rule 204-2,
we estimate that the new total non-labor cost burden will be
$11,492,400,\476\ a reduction of $3,089,109. \477\
---------------------------------------------------------------------------
\475\ $14,581,509 / 11,607 advisers = approximately $1,256.
\476\ 9,150 x $1,256 = $11,492,400.
\477\ $14,581,509 - $11,492,400 = $3,089,109.
---------------------------------------------------------------------------
H. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to: (i) Evaluate whether the proposed amendments to the
collection of information are necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collection of information; (iii)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (iv) determine whether
there are ways to minimize the burden of the collection of information
on those who are to respond, including through the use of automated
collection techniques or other forms of information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Room 10102,
New Executive Office Building, Washington, DC 20503, and also should
send a copy of their comments to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090 with reference to File No. S7-36-10. Requests for materials
submitted to OMB by the Commission with regard to this collection of
information should be in writing, refer to File No. S7-36-10, and be
submitted to the Securities and Exchange Commission, Office of Investor
Education and Advocacy, 100 F Street, NE., Washington, DC 20549-0213.
OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this Release. A
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days after publication of this release.
VI. Initial Regulatory Flexibility Analysis
The Commission has prepared the following Initial Regulatory
Flexibility Analysis (``IRFA'') regarding our proposed rules and rule
amendments to give effect to the Dodd-Frank Act's amendments to the
Advisers Act in accordance with section 3(a) of the Regulatory
Flexibility Act.\478\ It relates to proposed new rules 203A-5 and 204-
4, proposed amendments to rules 0-7, 203A-1, 203A-2, 203A-3, 203A-4,
204-1, 204-2, 206(4)5, 222-1, 222-2, and proposed amendments to Form
ADV, Form ADV-NR and Form ADV-H under the Advisers Act.
---------------------------------------------------------------------------
\478\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------
A. Need for the New Rules and Rule Amendments
The proposed new rules and rule amendments are necessary to give
effect to provisions of the Dodd-Frank Act which, among other things,
amend certain provisions of the Advisers Act, and to respond to a
number of other changes to the Advisers Act made by the Dodd-Frank Act,
including the Commission's pay to play rule. In addition, in light of
our increased responsibility for oversight of private fund advisers, we
are proposing to require advisers to those funds to provide us with
additional information about the operation of those funds, which would
permit us to provide better oversight of these advisers by focusing our
examination and enforcement resources on those advisers to private
funds that appear to present greater compliance risks. We also are
proposing to require all registered advisers to provide us with
additional information on their operations to allow us to more
efficiently allocate our examination resources, to better prepare for
on-site examinations, and to provide us with a better understanding of
the investment advisory industry to assist our evaluation of the
implications of policy choices we must make in administering the
Advisers Act.
B. Objectives and Legal Basis
The primary objective of the proposed new rules and rule amendments
is to give effect to provisions of Title IV of the Dodd-Frank Act that:
(i) Reallocate responsibility for oversight of investment advisers by
delegating generally to the states responsibility over certain mid-
sized advisers; (ii) repeal the ``private adviser exemption'' contained
in section 203(b)(3) of the
[[Page 77092]]
Advisers Act; and (iii) provide for reporting from advisers to certain
types of private funds that are exempt from registration.\479\ Proposed
new rule 203A-5 and amendments to rules 203A-1, 203A-2, 203A-3, and
203A-4 are intended to provide us a means of identifying advisers that
must transition to State regulation, clarify the application of the new
statutory provisions under the Dodd-Frank Act, and extend certain of
the exemptions we have adopted under section 203A of the Act to mid-
sized advisers. Proposed new rule 204-4 and amendments to rule 204-1
are intended to require exempt reporting advisers to submit, and to
periodically update, reports to us by completing several items on Form
ADV. The proposed amendments to rule 204-2 are intended to account for
the Dodd-Frank Act's elimination of the ``private adviser'' exemption
under section 203(b)(3) of the Advisers Act and its addition of a
definition of ``private fund'' to the Advisers Act.\480\ The proposed
amendments to Form ADV would permit the form to serve as a reporting,
as well as a registration, form and to specify the seven items exempt
reporting advisers must complete. The proposed amendments to Form ADV
would also provide additional information on the operations of
registered investment advisers. The proposed amendments to Forms ADV-NR
and ADV-H would revise the forms for use by exempt reporting advisers.
Additionally, we are proposing amendments to the Advisers Act pay to
play rule, rule 206(4)-5.\481\
---------------------------------------------------------------------------
\479\ See supra section I of this Release.
\480\ See supra section II.D.2.b. We also intend to rescind
section 204-2(l), which was vacated by the Federal appeals court in
Goldstein.
\481\ See proposed rule 206(4)-5; supra section II.D.1. of this
Release.
---------------------------------------------------------------------------
The Commission is proposing new rule 203A-5 and amendments to rules
203A-1, 203A-2, 203A-3, and 203A-4 under the Advisers Act pursuant to
the authority set forth in sections 203A(c), and 211(a) of the
Investment Advisers Act of 1940 [15 U.S.C. 80b-3A(c) and 80b-11(a)];
new rule 204-4 and amendments to rules 204-1 and 204-2 pursuant to the
authority set forth in sections 204 and 211(a) of the Advisers Act [15
U.S.C. 80b-4 and 80b-11(a)]; amendments to rule 206(4)-5 pursuant to
authority set forth in sections 206(4) and 211(a) of the Advisers Act
[15 U.S.C. 80b-6(4) and 80b-11(a)]; amendments to rules 0-7, 222-1, and
222-2 pursuant to authority set forth in section 211(a) of the Advisers
Act [15 U.S.C. 80b-11(a)]; and to amend Form ADV under section 19(a) of
the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and
28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and
78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15
U.S.C. 77sss(a)], section 38(a) of the Investment Company Act of 1940
[15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, and 211(a) of the
Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)]; Form ADV-NR under section 19(a) of the Securities Act of 1933
[15 U.S.C. 77s(a)], section 23(a) of the Securities Exchange Act of
1934 [15 U.S.C. 78w(a)], section 319(a) of the Trust Indenture Act of
1939 [15 U.S.C. 77sss(a)], section 38(a) of the Investment Company Act
of 1940 [15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, and 211(a)
of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4,
and 80b-11(a)]; and Form ADV-H pursuant to the authority set forth in
sections 203(c)(1), 204, and 211(a) of the Advisers Act [15 U.S.C. 80b-
3(c)(1), 80b-4, 80b-11(a)]. Section 203A(c) gives us authority to
permit registration with the Commission of any person or class of
persons to which the application of section 203A(a) would be unfair, a
burden on interstate commerce, or otherwise inconsistent with the
purposes of section 203A. Section 206(4) gives us authority to
prescribe means reasonably designed to prevent fraudulent, deceptive,
or manipulative acts or practices. Section 211 gives us authority to
classify, by rule, persons and matters within our jurisdiction and to
prescribe different requirements for different classes of persons, as
necessary or appropriate to the exercise of our authority under the
Act. Section 204 gives us authority to prescribe, by rule, such records
and reports that an adviser must make, keep for prescribed periods, or
disseminate, as necessary or appropriate in the public interest or for
the protection of investors.
C. Small Entities Subject to Rules and Rule Amendments
In developing these proposals, we have considered their potential
impact on small entities that would be subject to the proposed rule and
form amendments. The proposed rule and form amendments would affect all
advisers registered with the Commission and exempt reporting advisers,
including small entities. Under Commission rules, for the purposes of
the Advisers Act and the Regulatory Flexibility Act, an investment
adviser generally is a small entity if it: (i) Has assets under
management having a total value of less than $25 million; (ii) did not
have total assets of $5 million or more on the last day of its most
recent fiscal year; and (iii) does not control, is not controlled by,
and is not under common control with another investment adviser that
has assets under management of $25 million or more, or any person
(other than a natural person) that had total assets of $5 million or
more on the last day of its most recent fiscal year.\482\
---------------------------------------------------------------------------
\482\ Rule 0-7(a) [17 CFR 275.0-7(a)].
---------------------------------------------------------------------------
Our rule and form amendments would not affect most advisers that
are small entities (``small advisers'') because they are generally
registered with one or more State securities authorities and not with
us. Under section 203A of the Advisers Act, most small advisers are
prohibited from registering with the Commission and are regulated by
State regulators.\483\ We estimate that as of September 1, 2010,
approximately 620 advisers that were small entities were registered
with the Commission.\484\ Because these advisers are registered, they
would be subject to proposed new rule 203A-5 and amendments to rules 0-
7, 204-2, 203A-1, 203A-2, 203A-3, and 203A-4, and Forms ADV and ADV-NR.
In addition, we estimate that due to the Dodd-Frank Act's elimination
of the ``private adviser'' exemption in section 203(b)(3), an
additional 2 advisers that are small entities will become subject to
these rules.\485\ Further, as a result of our proposed amendments to
rule 203A-2, we estimate that 15 additional multi-State advisers would
register with us and be subject to these rules,\486\ and 21 pension
consultants that are small entity advisers would be required to
withdraw from registration with us and would no longer be subject to
these rules.\487\ We
[[Page 77093]]
estimate that 6 exempt reporting advisers that are small entities would
be subject to proposed rule 204-4, and the proposed amendments to rule
204-1, Form ADV, Form ADV-NR and Form ADV-H to give effect to the Dodd-
Frank Act's reporting requirements by exempt reporting advisers.\488\
We also estimate that 6 exempt reporting advisers that are small
entities would be subject to the proposed amendments to rule 206(4)-5.
Finally, all investment advisers, whether they are small entities or
not, would be subject to the proposed technical amendments to rules
222-1 and 222-2. The small entities subject to these amendments include
approximately 6 exempt reporting advisers and approximately 14,700
State-registered advisers.\489\
---------------------------------------------------------------------------
\483\ See supra section II.A.7.a.
\484\ Based on IARD data as of September 1, 2010.
\485\ We believe that the only small entities that would become
subject to registration as a result of the elimination of the
private adviser exemption in section 203(b)(3) would be advisers to
private funds that maintain their principal office and place of
business in Wyoming. Based on IARD data as of September 1, 2010, we
estimate that 36 SEC-registered small entity advisers are required
to be registered with us because they have a principal office and
place of business in Wyoming, which is 0.3% of all SEC-registered
advisers (36 / 11,850 SEC-registered advisers = approximately 0.3%).
We estimate that a similar proportion of the approximately 750
advisers to private funds that will register with the Commission due
to the elimination of the private adviser exemption in section
203(b)(3) would be small Wyoming-based advisers. As a result, we
estimate that approximately 2 small entity advisers to private funds
will register with the Commission (750 private fund advisers x 0.3%
= approximately 2).
\486\ See supra note 324.
\487\ Based on IARD data as of September 1, 2010, 142 of the
advisers that would be considered small entities rely on the pension
consultant exemption from registration. We estimate that
approximately 15%, or 21, of these advisers would no longer be
eligible to rely on the exemption if adopted as proposed. This ratio
is consistent with our estimate for the PRA burden. See supra
section V.E. of this Release.
\488\ The only small entity exempt reporting advisers that would
be subject to the proposed rule and proposed amendments would be
exempt reporting advisers that maintain their principal office and
place of business in Wyoming. As discussed supra in note 98 and
accompanying and preceding text, the current practical effect of
section 203A(a)(1) is to prohibit U.S. advisers with less than $25
million in assets under management from registering with the
Commission unless they maintain their principal office or place of
business in Wyoming. Proposed new rule 204-4 requires an adviser
relying on an exemption under new sections 203(l) or (m) of the
Advisers Act to complete and file reports on Form ADV. See proposed
rule 204-4; supra section II.B.1. of this Release. The exemptions
from registration in sections 203(l) and (m) apply to advisers
solely to venture capital funds and advisers solely to private funds
with less than $150 million in assets under management,
respectively. Small Wyoming-based advisers to venture capital funds
or private funds may be required to register with the Commission but
for the exemptions in section 203(l) or (m). Thus, these advisers
would be subject to proposed rule 204-4 and the proposed amendments
to rule 204-1, Form ADV, and Form ADV-H to give effect to the Dodd-
Frank Act's mandate for reporting by exempt reporting advisers.
Assuming that the proportion of registered Wyoming-based small
advisers to registered advisers is similar to the proportion of
small Wyoming-based exempt reporting advisers to exempt reporting
advisers generally, we estimate that approximately 6 exempt
reporting advisers that are small entities would be subject to
proposed rule 204-4 and the proposed amendments to rule 204-1, Form
ADV, and Form ADV-H (2,000 exempt reporting advisers x 0.3% = 6
small Wyoming-based exempt reporting advisers).
\489\ Based on IARD data as of July 1, 2010, we estimate that
there were approximately 14,700 State-registered advisers. Because
section 203A currently precludes most advisers with less than $25
million in assets under management from registering with the
Commission, we assume that nearly all of the 14,700 State-registered
advisers are small entities. Therefore, 14,700 small entities
(registered with the states as of July 1, 2010) + 21 small entities
(registering with the states due to the proposed amendment to the
pension consultant exemption in rule 203A-2(b))--2 small entities
(registering due to elimination of the private adviser exemption in
section 203(b)(3))--15 small entities (de-registering with the
states and registering with the Commission due to the proposed
amendment to the multi-State adviser exemption in rule 203A-2(e)) =
approximately 14,704 State-registered advisers that are small
entities.
---------------------------------------------------------------------------
D. Reporting, Recordkeeping and Other Compliance Requirements
The proposed rules and rule and form amendments would impose
certain reporting, recordkeeping, and compliance requirements on
advisers, including small advisers. The proposals would require all of
the small advisers registered with us to file an amended Form ADV,
would require some to file Form ADV-W, and would require some to file
reports as exempt reporting advisers. The amendments also would cause
the adviser to be subject to the existing recordkeeping and compliance
requirements for SEC-registered advisers. These requirements and the
burdens on small advisers are discussed below.\490\
---------------------------------------------------------------------------
\490\ Supra sections I through II of this Release, describe
these requirements in more detail.
---------------------------------------------------------------------------
Transition to State Registration
Proposed rule 203A-5 would impose costs on all investment advisers,
including small advisers, by requiring each investment adviser
registered with us to file an amendment to its Form ADV no later than
August 20, 2011 (30 days after the July 21, 2011 effective date of the
amendments to section 203A), and withdraw from Commission registration
by October 19, 2011 (60 days after the required filing of Form ADV), if
no longer eligible.\491\ We estimate that all of the 620 small advisers
currently registered with the Commission would file Form ADV, but none
would withdraw registration because the Dodd-Frank Act does not change
the eligibility requirements for small advisers registered with us
because they rely on one or more of the exemptions from the prohibition
on registration.\492\
---------------------------------------------------------------------------
\491\ Proposed rule 203A-5(a), (b). See supra section II.A.1. of
this Release.
\492\ See section 410 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Switching Between State and Commission Registration
The proposed amendments to rule 203A-1 would eliminate the $5
million buffer in current rule 203A-1(a), which permits but does not
require an adviser to register with the Commission if the adviser has
between $25 million and $30 million of assets under management.\493\ By
definition, a small adviser under the Advisers Act has less than $25
million in assets under management, so elimination of this rule should
have no impact on small advisers.\494\
---------------------------------------------------------------------------
\493\ See proposed rule 203A-1; supra section II.A.4. of this
Release.
\494\ See rule 0-7(a)(1).
---------------------------------------------------------------------------
Exemptions From the Prohibition on Registration with the Commission
The amendments we are proposing to two of the three exemptions from
the prohibition on registration in rule 203A-2 would cause small
advisers to be subject to new reporting, recordkeeping, and other
compliance requirements.\495\ The proposed amendment to the exemption
from the prohibition on registration available to pension consultants
in rule 203A-2(b) would increase the minimum value of plan assets from
$50 million to $200 million.\496\ We estimate that this may cause
approximately 21 small adviser pension consultants to be required to
withdraw from registration with us by filing Form ADV-W and thus no
longer be subject to Commission rules.\497\ These advisers would likely
need to register with one or more states, and comply with the states'
recordkeeping and other regulatory requirements. This would have a
negative impact on competition for these advisers compared to pension
consultants with more than $200 million of plan assets that would
remain registered with the Commission.
---------------------------------------------------------------------------
\495\ See proposed rule 203A-2; supra section II.A.5. of this
Release. The proposed elimination of the exemption from the
prohibition on Commission registration for NRSROs in rule 203A-2(a)
would not affect small advisers because based on IARD data as of
September 1, 2010 only one NRSRO remains registered under the Act
and it reports that it has more than $100 million of assets under
management. Therefore, it would neither be a small adviser nor rely
on the exemption.
\496\ We also propose to renumber the rule as rule 203A-2(a).
See proposed rule 203A-2(a); supra section II.A.5.b. of this
Release.
\497\ See supra notes 318-321 and accompanying text; supra note
487 and accompanying text.
---------------------------------------------------------------------------
The proposed amendment to the multi-State adviser exemption in rule
203A-2(e) would permit investment advisers required to register as an
investment adviser with 15 or more states, instead of 30 or more states
under the current rule, to register with the Commission.\498\ An
investment adviser relying on this exemption would continue to report
certain information on Form ADV \499\ and maintain a record of the
states in which the investment adviser has determined it would, but for
the exemption, be required to register. This would promote efficiency
and
[[Page 77094]]
competition by making the standards for the multi-State exemption
consistent for small and mid-sized advisers. We estimate that, in
addition to the approximately 23 small advisers that rely on the
exemption currently, approximately 15 would begin relying on the
exemption if amended as proposed.\500\ Advisers newly relying on the
proposed amended exemption would incur costs associated with completing
and filing Form ADV for purposes of registration with the Commission,
and all of the advisers relying on the exemption will incur the costs
associated with keeping records sufficient to demonstrate that they
would be required to register with 15 or more states.\501\ In addition,
these advisers will incur costs of complying with the Advisers Act and
our rules, but they may see an absolute reduction in compliance costs
by registering with the Commission instead of 15 or more states.\502\
---------------------------------------------------------------------------
\498\ We also propose to renumber the rule as rule 203A-2(d).
See proposed rule 203A-2(d); supra section II.A.5.c. of this
Release.
\499\ Advisers would be required to: (i) Include a
representation on Schedule D of Form ADV that the investment adviser
has concluded that it must register as an investment adviser with 15
or more states; and (ii) undertake to withdraw from registration
with the Commission if the adviser indicates on an annual updating
amendment to Form ADV that the investment adviser would be required
by the laws of fewer than 15 states to register as an investment
adviser with those states. See proposed rule 203A-2(d)(2).
\500\ See supra note 324.
\501\ See supra notes 325-327 and accompanying text.
\502\ See supra note 323 and accompanying text.
---------------------------------------------------------------------------
Elimination of Safe Harbor
The proposed elimination of rule 203A-4, which provides a safe
harbor from Commission registration for an investment adviser based on
a reasonable belief that it is prohibited from registering with the
Commission because it does not have at least $30 million of assets
under management, would not create new requirements for small
advisers.\503\ These advisers would not have at least $30 million of
assets under management, and advisers have not, in our experience,
asserted the availability of this safe harbor.
---------------------------------------------------------------------------
\503\ Rule 203A-4. See supra section II.A.6. of this Release.
---------------------------------------------------------------------------
Mid-Sized Advisers
Our proposal to incorporate into Form ADV an explanation of how we
construe the determination of whether a mid-sized adviser is ``required
to be registered'' or is ``subject to examination'' by a particular
State securities authority for purposes of section 203A(a)(2)'s
prohibition on mid-sized advisers from registering with the Commission
would not create new reporting requirements for small advisers.\504\
The mid-sized adviser requirements would only apply to advisers with
assets under management between $25 million and $100 million and would
therefore not apply to small advisers.
---------------------------------------------------------------------------
\504\ See proposed Form ADV: Instructions for Part 1A, instr.
2.b.; supra section II.A.7. of this Release.
---------------------------------------------------------------------------
Exempt Reporting Advisers
Proposed rule 204-4 and the proposed amendments to rules 204-1,
Form ADV, and Form ADV-H to require exempt reporting advisers to file
reports with the Commission electronically on Form ADV would impose
reporting requirements on an estimated 6 small advisers.\505\ As
discussed above, we estimate that completing and filing Form ADV will
cost $1,764 for each exempt reporting adviser.\506\ In addition, small
exempt reporting advisers would be required to pay an estimated filing
fee of $200 annually,\507\ for a total of $1,200 for the estimated 6
small exempt reporting advisers.\508\ Finally, under rule 204-4 exempt
reporting advisers that seek a temporary hardship exemption from
electronic filing would be required to complete and file Form ADV-
H.\509\ To the extent that either of the estimated two small exempt
reporting advisers file Form ADV-H, we have estimated that it would
require 1 burden hour at a total cost of $204.\510\
---------------------------------------------------------------------------
\505\ See supra note 488.
\506\ See supra note 338 and accompanying text. $3,528,000/2,000
= $1,764.
\507\ See supra section IV.B.2. of this Release (discussing the
potential filing fee).
\508\ $200 x 6 small exempt reporting advisers = $1,200.
\509\ Proposed rule 204-4(e).
\510\ See supra section IV.B.2. of this Release.
---------------------------------------------------------------------------
Amendments to Form ADV
Proposed amendments to Form ADV would require registered advisers
to report different or additional information than what is currently
required. Approximately 620 small advisers currently registered with
us, and two advisers currently relying on the private adviser exemption
that we expect will register with us, would be subject to these
requirements.\511\ We expect these 620 advisers would spend, on
average, 4.5 hours to respond to the new and amended questions we are
proposing today, other than the private fund reporting
requirements.\512\ We expect the aggregate cost associated with this
process would be $703,080.\513\ The two anticipated newly registering
advisers would spend, in the aggregate, about 82 hours total to
complete the form (Part 1 except for the private fund reporting
requirements, and Part 2) as well as to amend the form periodically, to
prepare brochure supplements, and to deliver codes of ethics to
clients,\514\ for a total cost of $20,664.\515\ In addition, of these
approximately 620 registered advisers, we estimate that 200 advise one
or more private funds and would have to complete the private fund
reporting requirements we are proposing today.\516\ We expect this will
take 600 hours,\517\ in the aggregate, for a total cost of
$151,200.\518\ The total estimated labor costs associated with our
amendments that we expect will be borne by small advisers, therefore,
are $874,944. Additionally, we estimate that one of the newly
registering advisers would use outside legal services to assist them in
preparing their Part 2 brochure, for a total non-labor cost of
$3,200.\519\
---------------------------------------------------------------------------
\511\ See supra notes 484-485 and accompanying text.
\512\ See supra text preceding note 388. We are calculating
costs only of the increased burden because we have previously
assessed the costs of the other items of Form ADV for registered
advisers and for new advisers attributed to annual growth. The
amendments we are proposing today would increase neither the burden
associated with these items on Form ADV, nor the external costs
associated with certain Part 2 requirements.
\513\ We expect that the performance of this function will most
likely be equally allocated between a senior compliance examiner and
a compliance manager. Data from the SIFMA Management and Earnings
Report, modified to account for an 1,800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead, suggest that costs for these positions are
$210 and $294 per hour, respectively. 620 advisers x 4.5 hours =
2,790 hours. [1,395 hours x $210 = $292,950] + [1,395 hours x $294 =
$410,130] = $703,080.
\514\ 2 advisers x 40.74 hours per adviser to complete the
entire form (except private fund reporting requirements) = 81.48
hours.
\515\ [41 hours x $210 = $8,610] + [41 hours x $294 = $12,054] =
$20,664. As noted above, we expect that the performance of this
function will most likely be equally allocated between a senior
compliance examiner and a compliance manager. See supra note 354.
\516\ See supra note 404.
\517\ We expect these advisers are likely to advise 3 funds
each. See text accompanying note 405. We estimated above that
private fund reporting would take an adviser approximately 1 hour
per fund to complete. 200 advisers x 3 hours = 600 hours.
\518\ [300 hours x $210 = $63,000] + [300 hours x $294 =
$88,200] = $151,200. As noted above, we expect that the performance
of this function will most likely be equally allocated between a
senior compliance examiner and a compliance manager. See supra note
354.
\519\ The currently approved burden associated with Form ADV
already accounts for similar estimated costs to be incurred by
current registrants. The non-labor costs for Form ADV are based on
an estimate that 50% of small advisers will retain either legal
services (at $3,200) or compliance consulting services (at $3,000)
to assist in the preparation of Form ADV. See supra note 420 and
accompanying text.
---------------------------------------------------------------------------
Amendments to Pay to Play Rule
Our proposed amendment to rule 206(4)-5 to make it apply to exempt
reporting advisers and foreign private advisers would not create new
reporting, recordkeeping, or other compliance requirements on these
advisers.\520\ Rather, we are proposing this amendment to ensure that
the rule
[[Page 77095]]
continues to apply to these advisers and to prevent the unintended
narrowing of the rule.\521\ Our proposed amendment to permit an adviser
to pay any registered municipal advisor subject to a pay to play rule
adopted by MSRB to solicit government entities on its behalf may create
new recordkeeping and compliance requirements on investment advisers
that are small entities subject to the rule to the extent that they
have to verify and document that placement agents that they hire to
solicit government entities are indeed registered municipal
advisors.\522\ Finally, our technical amendment to rule 206(4)-5's
definition of a ``covered associate'' \523\ of an investment adviser to
clarify that a legal entity, not just a natural person, that is a
general partner or managing member of an investment adviser would meet
the definition, would not create any new reporting, recordkeeping, or
other compliance requirements.\524\
---------------------------------------------------------------------------
\520\ See supra section II.D.1 of this Release (discussing these
amendments).
\521\ See id.
\522\ See id.
\523\ See id.
\524\ See id.
---------------------------------------------------------------------------
Other Amendments
Our proposed amendments to rule 204-2's grandfathering provision
are meant to ensure that private fund advisers that are required to
register as a result of the Dodd-Frank Act's elimination of the private
fund exemption in section 203(b)(3) would not face a retroactive
recordkeeping requirement.\525\ Our proposed technical amendment to
rule 204-2(e)(3)(ii) would add a cross-reference to the new definition
of a private fund in section 202(a)(29) of the Advisers Act.\526\ These
amendments would not create reporting, recordkeeping, and other
compliance requirements for small entities independent of the
reporting, recordkeeping, and other compliance requirements imposed by
current rule 204-2.\527\
---------------------------------------------------------------------------
\525\ See supra note 231 and accompanying text.
\526\ See supra section II.D.2.b of this Release.
\527\ The Dodd-Frank Act's removal of the private adviser
exemption in section 203(b)(3) may require additional small advisers
to register with the Commission. Therefore these small entities
would become subject to rule 204-2 with its reporting,
recordkeeping, and other compliance burdens. However, subjecting
these entities to rule 204-2 is a function of the Dodd-Frank Act's
removal of the private adviser exemption in section 203(b)(3), not
our proposed amendments to rule 204-2.
---------------------------------------------------------------------------
We do not believe that our proposed technical amendments to rules
0-7, 222-1, and 222-2 would impose reporting, recordkeeping, and other
compliance requirements on small advisers.
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe that there are no proposed rules that duplicate,
overlap, or conflict with the proposed rules and rule and form
amendments.
F. Significant Alternatives
The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small entities. In
connection with the proposed rule amendments, the Commission considered
the following alternatives: (i) The establishment of differing
compliance or reporting requirements or timetables that take into
account the resources available to small entities; (ii) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the rules for such small entities; (iii)
the use of performance rather than design standards; and (iv) an
exemption from coverage of the rules, or any part thereof, for such
small entities.
Regarding the first and fourth alternatives, we do not believe that
differing compliance or reporting requirements or an exemption from
coverage of the new rules or rule amendments, or any part thereof, for
small entities, would be appropriate or consistent with investor
protection or with Congress's mandate in the Dodd-Frank Act, to the
extent the new rule or amendment is being proposed due to a
Congressional mandate. Because the protections of the Advisers Act are
intended to apply equally to clients of both large and small advisory
firms, it would be inconsistent with the purposes of the Act to specify
different requirements for small entities under the proposed rules and
amendments unless expressly required to do so by Congress.
Regarding the second alternative, proposed rule 203A-5 would enable
small advisers to easily and efficiently identify whether they are
subject to our regulatory authority after the Dodd-Frank Act's
amendment to section 203A becomes effective, and would also help
minimize any potential uncertainty about the effects of the Dodd-Frank
Act on their registration status by providing a simple, efficient means
of determining their post-Dodd-Frank registration status as of a
specific date. The proposed amendments to rule 203A-1 eliminate the $5
million buffer because it seems unnecessary in light of Congress's
determination to require many (although not all) advisers having
between $30 million and $100 million of assets under management to be
registered with the states,\528\ and makes the registration
requirements for advisers with assets under management between $25
million and $30 million uniform with the requirements for advisers with
assets under management between $30 million and $100 million. Our
proposal to amend the multi-State adviser exemption in rule 203A-2(e)
also would consolidate and simplify compliance for small advisers by
aligning the rule with the multi-State exemption Congress built into
the mid-sized adviser provision under section 410 of the Dodd-Frank Act
and by requiring one standard for advisers relying on the
exemption.\529\ This amendment also would reduce the compliance burdens
on advisers required to be registered with at least 15 states, but less
than 30, by allowing them to register with a single securities
regulator--the Commission. Furthermore, our proposal to use an existing
form, Form ADV, and an existing filing system, IARD, for reporting and
registration purposes will clarify and simplify the processes of
registering and/or reporting for small entities because: (i) All of the
information collection requirements for both registration and reporting
would be consolidated in a single form; (ii) a small exempt reporting
adviser would be able to use the same form and filing system both for
reporting and for purposes of registering with one or more State
securities authorities; and (iii) a small exempt reporting adviser may
find that it can no longer rely on an exemption from registration with
the Commission and would be able to register simply by filing an
amendment to its current Form ADV to apply for registration.\530\
---------------------------------------------------------------------------
\528\ See supra note 67.
\529\ See proposed rule 203A-2(d); supra section IV.A.1. of this
Release. Under rule 203A-2(e), the prohibition on registration with
the Commission does not apply to an investment adviser that is
required to register with 30 or more states. Once registered with
the Commission, the adviser remains eligible for Commission
registration as long as it would be obligated, absent the exemption,
to register with at least 25 states. We propose to amend rule 203A-
2(e) to permit all investment advisers required to register as an
investment adviser with 15 or more states to register with the
Commission.
\530\ See supra section II.C. of this Release.
---------------------------------------------------------------------------
Regarding the third alternative, we do not consider using
performance rather than design standards to be consistent with our
statutory mandate of investor protection or with Congress's mandate in
the Dodd-Frank Act.
G. Solicitation of Comments
We encourage written comments on matters discussed in this IRFA. In
[[Page 77096]]
particular, the Commission seeks comment on:
The number of small entities subject to the proposed rules
and rule and form amendments; and
Whether the effect of the proposed rules and rule and form
amendments on small entities would be economically significant.
Commenters are asked to describe the nature of any effect and provide
empirical data supporting the extent of the effect.
VII. Effects on Competition, Efficiency and Capital Formation
The Commission is proposing to adopt certain new rules and to amend
others pursuant to its authority under section 204(a) of the Advisers
Act,\531\ and sections 23(a) and 28(e)(2) of the Exchange Act.\532\
Section 204(a) of the Advisers Act and section 28(e)(2) of the Exchange
Act require the Commission, when engaging in rulemaking under the
authority provided in those sections, to consider whether the rule is
``necessary or appropriate in the public interest or for the protection
of investors.'' \533\ Section 202(c) of the Advisers Act requires the
Commission, when engaging in rulemaking that requires it to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, ``in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.'' \534\ Section 3(f) of the Exchange Act requires the
Commission, when engaging in rulemaking that requires it to consider or
determine whether an action is necessary or appropriate in the public
interest to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.\535\ Section 23(a) of the Exchange Act requires the
Commission, in adopting rules under the Exchange Act, to consider the
impact that any new rule would have on competition, and prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\536\
---------------------------------------------------------------------------
\531\ 15 U.S.C. 80b-4(a).
\532\ 15 U.S.C. 78w(a) and 78bb(e)(2).
\533\ 15 U.S.C. 80b-4(a) and 78bb(e)(2).
\534\ 15 U.S.C. 80b-2(c).
\535\ 15 U.S.C. 78c(f).
\536\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
The Commission is proposing to adopt rule 204-4 and to amend rules
204-1 and 204-2 and Forms ADV, ADV-NR, and ADV-H.\537\ The proposed new
rule and rule and form amendments are designed to give effect to
provisions of Title IV of the Dodd-Frank Act.\538\ We are proposing new
rule 204-4 to require exempt reporting advisers to file reports with
the Commission electronically on Form ADV.\539\ We are also proposing
amendments to Form ADV to improve our risk-assessment capabilities and
so that it can serve the dual purpose of both an SEC reporting form for
exempt reporting advisers and, as it is used today, a registration form
for both State and SEC-registered firms.\540\ In addition to requiring
that exempt reporting advisers use Form ADV, proposed rule 204-4 would
require these advisers to submit reports through the IARD and to pay a
filing fee.\541\ We are also proposing to amend rule 204-1, which
addresses when and how advisers must amend their Form ADV, to add a
requirement that exempt reporting advisers file updating amendments to
reports filed on Form ADV.\542\
---------------------------------------------------------------------------
\537\ In contrast, we are proposing new rule 203A-5 and
amendments to rules 203A-1, 203A-2, 203A-3, and 203A-4 pursuant to
our authority set forth in sections 203A(c) and 211(a), amendments
to rules 0-7, 222-1, and 222-2 pursuant to our authority set forth
in section 211(a), and amendments to rule 206(4)-5 pursuant to our
authority set forth in sections 206(4) and 211(a). For a discussion
of the effects of this proposed new rule and rule amendments on
competition, efficiency, and capital formation, see supra sections
IV., V., and VI. of this Release.
\538\ For a discussion of the overall objectives of our
proposals, see supra section I of this Release.
\539\ Proposed rule 204-4. See supra section II.B.1. of this
Release.
\540\ See supra sections II.B. and II.C. of this Release.
\541\ Proposed rule 204-4(b). Proposed rule 204-4(e) would also
allow exempt reporting advisers having unanticipated technical
difficulties that prevent submission of a filing to the IARD system
to request a temporary hardship exemption from electronic filing
requirements by filing Form ADV-H. We are also proposing technical
amendments to Form ADV-H for this purpose.
\542\ See proposed rule 204-1; supra section II.B.3. of this
Release.
---------------------------------------------------------------------------
A. Proposed Exempt Reporting Adviser Reporting Requirements
The Dodd-Frank Act provides that the Commission shall require
reporting by exempt reporting advisers, but it does not indicate the
information we should collect or the filing method by which it should
be collected. Our choices, in proposing rule 204-4 to require these
advisers to complete a sub-set of items contained in Form ADV and to
file through the IARD, and in proposing to amend rule 204-1 to impose
periodic updating requirements of those filings, would impose costs on
exempt reporting advisers,\543\ but would also create efficiencies that
benefit both us and filers by taking advantage of an established and
proven adviser filing system and avoiding the expense and delay of
developing a new form and filing system. Additionally, we believe this
proposal may create efficiencies to the extent exempt reporting
advisers may be required to register on Form ADV with one or more State
securities authorities because they would be using the existing form
and filing system that is also used by the states, which should reduce
regulatory burdens.\544\ Similarly, regulatory burdens would be
diminished for an exempt reporting adviser that later finds it can no
longer rely on an exemption and would be required to register with us
because the adviser would simply file an amendment to its current Form
ADV to apply for Commission registration.\545\
---------------------------------------------------------------------------
\543\ For a discussion of the costs of the reporting obligations
we are proposing to apply to exempt reporting advisers, see section
IV.B.2, of this Release.
\544\ See supra section IV.A.2. of this Release.
\545\ See proposed General Instruction 14 (providing procedural
guidance to advisers that no longer meet the definition of exempt
reporting adviser). See also supra note 128 and accompanying text.
Certain items in Form ADV Part 1 are also linked to Form B-D, which
would create efficiencies if the exempt reporting adviser ever
applies for broker-dealer registration.
---------------------------------------------------------------------------
Using Form ADV and IARD would also enable investors to access
information on our Web site that may have previously been unavailable
or not easily attainable, such as whether a prospective exempt
reporting adviser has reported disciplinary events and whether its
relationships with affiliates present conflicts of interest or
potential efficiencies. Public access to this information, which may
previously have been undisclosed, may promote competition to the extent
that it would allow private fund investors to make informed decisions
about these advisers, avoiding the burdens and costs associated with
selling private funds to switch advisers at a later date, and thereby
potentially creating efficiency gains in the marketplace and improving
allocation of client assets among investment advisers. The availability
of disciplinary information, in particular, about these advisers and
their supervised persons may also enhance competition if, for example,
firms and personnel with better disciplinary records outcompete those
with worse records. Alternatively, the choices that we have made about
the information these advisers would report (and that we would make
publicly available), such as the identification of owners of the
adviser or disciplinary information, could impose costs on advisers,
including the potential loss of business to competitors (who may or may
not report to us or be registered with us), as
[[Page 77097]]
this information may not typically be made available to others.
Access to the information we propose to require exempt reporting
advisers to report may also increase clients' and prospective clients'
trust in investment advisers, which may encourage them to seek
professional investment advice and encourage them to invest their
financial assets. This may enhance capital formation by making more
funds available for investment and enhancing the allocation of capital
generally. On the other hand, to the extent that the information we
propose to collect and the filing method by which we propose to collect
it imposes costs on exempt reporting advisers that are then passed on
to clients, this may deter clients from seeking professional investment
advice and investing their financial assets. This may result in
inefficiencies in the market for advisory services and hinder capital
formation.
B. Proposed Risk-Assessment Amendments to Form ADV
The amendments to Form ADV we are proposing today are designed to
improve advisers' disclosure of their business practices (particularly,
those relating to advising private funds), non-advisory activities and
financial industry affiliations, and other conflicts of interest.
Private fund reporting, in particular, would benefit private fund
investors and other market participants and would provide us and other
policy makers with better data. Better data would enhance our ability
to form and frame regulatory policies regarding the private fund
industry and fund advisers, and to evaluate the effect of our policies
and programs on this sector. Private fund reporting would provide us
with important information about this rapidly growing segment of the
U.S. financial system. Additionally, data about which advisers have $1
billion or more of assets would enable us to identify the advisers that
are covered by section 956 of the Dodd-Frank Act addressing certain
incentive-based compensation arrangements.
As acknowledged above with respect to exempt reporting advisers,
there may also be competitive impacts between registered investment
advisers as a result of the collection of the proposed additional
information on Form ADV. For instance, information regarding the amount
of assets under management by specific types of clients could be used
by competitors when marketing their own advisory services. Another
example includes the information concerning private funds that we
propose to require registered and exempt reporting advisers to submit
on Form ADV, which could assist private fund investors in assessing
investment choices or screen funds based on certain parameters such as
the identification of certain fund service providers or gatekeepers.
Similarly, this information could be used by other financial service
providers (such as banks or broker-dealers) that do not provide similar
information publicly. Increased competition among investment advisers
(both exempt reporting and registered) and other financial service
providers may result in capital being allocated more efficiently,
benefiting clients and certain advisers.
Better disclosure may increase clients' and prospective clients'
trust in investment advisers, which may encourage them to seek
professional investment advice and encourage them to invest their
financial assets. This also may enhance capital formation by making
more funds available for investment and enhancing the allocation of
capital generally. On the other hand, if the rule amendments increase
costs for investment advisers and these cost increases are passed on to
clients, this may deter clients from seeking professional investment
advice and investing their financial assets. This may result in
inefficiencies in the market for advisory services and hinder capital
formation.
C. Other Proposed Amendments
Finally, we are proposing to amend rule 204-2 to cross-reference
the new definition of private fund and add a grandfathering provision
relieving firms that were exempt from registration prior to the
effectiveness of the Dodd-Frank Act's elimination of the ``private
adviser'' exemption from certain recordkeeping obligations applicable
to registered advisers.\546\ We also are amending Forms ADV-NR and Form
ADV-H to provide for their use by exempt reporting advisers. The
proposed amendments to rule 204-2, Form ADV-NR, and Form ADV-H are
technical in nature. We do not anticipate that they would have any
bearing on efficiency, competition, or capital formation.
---------------------------------------------------------------------------
\546\ See proposed rule 204-2; supra section II.D.2.b of this
Release. We also intend to rescind rule 204-2(l) because that
section was vacated by the Federal appeals court in Goldstein.
---------------------------------------------------------------------------
D. Request for Comment
The Commission requests comment whether the proposed rule and rule
amendments would, if adopted, promote efficiency, competition, and
capital formation. Commenters are requested to provide empirical data
to support their views.
VIII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \547\ the Commission must advise OMB
whether a proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results in
or is 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
or individual industries; or (3) significant adverse effects on
competition, investment, or innovation.
---------------------------------------------------------------------------
\547\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C. and 15 U.S.C., and as a
note to 5 U.S.C. 601).
---------------------------------------------------------------------------
We request comment on the potential impact of the proposed new rule
and proposed rule amendments on the economy on an annual basis.
Commenters are requested to provide empirical data and other factual
support for their views to the extent possible.
IX. Statutory Authority
The Commission is proposing new rule 203A-5 and amendments to rules
203A-1, 203A-2, 203A-3, and 203A-4 under the Advisers Act pursuant to
the authority set forth in sections 203A(c), and 211(a) of the
Investment Advisers Act of 1940 [15 U.S.C. 80b-3A(c) and 80b-11(a)];
new rule 204-4 and amendments to rules 204-1 and 204-2 pursuant to the
authority set forth in sections 204 and 211(a) of the Advisers Act [15
U.S.C. 80b-4 and 80b-11(a)]; amendments to rule 206(4)-5 pursuant to
authority set forth in sections 206(4) and 211(a) of the Advisers Act
[15 U.S.C. 80b-6(4) and 80b-11(a)]; amendments to rules 0-7, 222-1, and
222-2 pursuant to authority set forth in section 211(a) of the Advisers
Act [15 U.S.C. 80b-11(a)]; and to amend Form ADV under section 19(a) of
the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and
28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and
78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15
U.S.C. 77sss(a)], section 38(a) of the Investment Company Act of 1940
[15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, and 211(a) of the
Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)]; Form ADV-NR under section 19(a) of the Securities Act of 1933
[15 U.S.C. 77s(a)], section 23(a) of the Securities Exchange Act of
1934 [15 U.S.C. 78w(a)], section 319(a) of the Trust Indenture Act of
1939 [15 U.S.C. 77sss(a)], section 38(a) of the Investment Company Act
of 1940 [15 U.S.C. 78a-
[[Page 77098]]
37(a)], and sections 203(c)(1), 204, and 211(a) of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)]; and
Form ADV-H pursuant to the authority set forth in sections 203(c)(1),
204, and 211(a) of the Advisers Act [15 U.S.C. 80b-3(c)(1), 80b-4, 80b-
11(a)].
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements; Securities.
Text of Rule and Form Amendments
For the reasons set out in the preamble, Title 17 Chapter II of the
Code of Federal Regulations is proposed to be amended as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1-2. The authority citation for Part 275 is amended by revising the
general authority and by adding authority for sections 275.203A-5,
275.204-1 and 275.204-4 to read 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-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
Section 275.203A-5 is also issued under 15 U.S.C. 80b-3a.
Section 275.204-1 is also issued under sec. 407 and 408, Pub. L.
111-203, 124 Stat. 1376.
Section 275.204-4 is also issued under sec. 407 and 408, Pub. L.
111-203, 124 Stat. 1376.
3. Section 275.0-7 is amended by revising the reference to
``Section 203A(a)(2)'' in paragraph (a)(1) to read ``Section
203A(a)(3).''
4. Section 275.203A-1 is revised to read as follows:
Sec. 275.203A-1 Switching to or from SEC registration.
(a) State-registered advisers--switching to SEC registration. If
you are registered with a State securities authority, you must apply
for registration with the Commission within 90 days of filing an annual
updating amendment to your Form ADV reporting that you are eligible for
SEC registration and are not relying on an exemption from registration
under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)).
(b) SEC-registered advisers--switching to State registration. If
you are registered with the Commission and file an annual updating
amendment to your Form ADV reporting that you are not eligible for SEC
registration and are not relying on an exemption from registration
under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)),
you must file Form ADV-W (17 CFR 279.2) to withdraw your SEC
registration within 180 days of your fiscal year end (unless you then
are eligible for SEC registration). During this period while you are
registered with both the Commission and one or more State securities
authorities, the Act and applicable State law will apply to your
advisory activities.
5. Section 275.203A-2 is amended by:
a. Removing paragraph (a);
b. Redesignating paragraphs (b) through (f) as paragraphs (a)
through (e);
c. Revising newly designated paragraph (a)(1);
d. Revising the reference to ``paragraph (b) of this section'' in
newly designated paragraph (a)(2) to read ``paragraph (a) of this
section'';
e. Revising newly designated paragraph (c)(1);
f. Revising the reference in newly designated paragraph (c)(3) to
``Sec. 275.203A-1(b)(2)'' to read ``Sec. 275.203A-1(b)'';
g. Revising newly designated paragraph (d)(1);
h. Further redesignating newly designated paragraphs (d)(2) and
(d)(3) as paragraphs (d)(2)(i) and (d)(2)(ii);
i. Adding new introductory text to paragraph (d)(2) and revising
newly designated paragraphs (d)(2)(i) and (d)(2)(ii);
j. Further redesignating newly designated paragraph (d)(4) as
paragraph (d)(3);
k. Revising the reference to ``paragraph (f) of this section'' in
newly designated paragraphs (e)(1)(ii), (e)(1)(iii), and (e)(2) to read
``paragraph (e) of this section'';
l. Revising the reference to ``paragraph (f)(1)(i) of this
section'' in newly designated paragraph (e)(1)(ii) to read ``paragraph
(e)(1)(i) of this section'';
m. Revising the reference ``paragraph (c) of this section'' in
newly designated paragraph (e)(1)(iii) to read ``paragraph (b) of this
section''; and
n. Revising the reference ``Sec. 275.203(b)(3)-1'' in newly
designated paragraph (e)(3) to read ``Sec. 275.202(a)(30)-1''.
The revisions and additions read as follows:
Sec. 275.203A-2 Exemptions from prohibition on Commission
registration.
(a) Pension Consultants. (1) An investment adviser that is a
``pension consultant,'' as defined in this section, with respect to
assets of plans having an aggregate value of at least $200,000,000.
* * * * *
(c) * * *
(1) Immediately before it registers with the Commission, is not
registered or required to be registered with the Commission or a State
securities authority of any State and has a reasonable expectation that
it would be eligible to register with the Commission within 120 days
after the date the investment adviser's registration with the
Commission becomes effective;
* * * * *
(d) * * *
(1) Upon submission of its application for registration with the
Commission, is required by the laws of 15 or more States to register as
an investment adviser with the State securities authority in the
respective States, and thereafter would, but for this section, be
required by the laws of at least 15 States to register as an investment
adviser with the State securities authority in the respective States;
(2) Elects to rely on paragraph (d) of this section by:
(i) Indicating on Schedule D of its Form ADV that the investment
adviser has reviewed the applicable State and Federal laws and has
concluded that, in the case of an application for registration with the
Commission, it is required by the laws of 15 or more States to register
as an investment adviser with the State securities authorities in the
respective States or, in the case of an amendment to Form ADV, it would
be required by the laws of at least 15 States to register as an
investment adviser with the State securities authorities in the
respective States, within 90 days prior to the date of filing Form ADV;
and
(ii) Undertaking on Schedule D of its Form ADV to withdraw from
registration with the Commission if the adviser indicates on an annual
updating amendment to Form ADV that the investment adviser would be
required by the laws of fewer than 15 States to register as an
investment adviser with the State securities authority in the
respective States, and that the investment adviser would be prohibited
by section 203A(a) of the Act (15 U.S.C. 80b-3a(a)) from registering
with the Commission, by filing a completed Form ADV-W within 180 days
of the adviser's fiscal year end (unless the adviser then has at least
$100 million of assets under management or is otherwise eligible for
SEC registration); and
* * * * *
6. Section 275.203A-3 is amended by revising paragraph (a)(4) and
adding paragraphs (d) and (e) to read as follows:
Sec. 275.203A-3 Definitions.
* * * * *
(a) * * *
[[Page 77099]]
(4) Supervised persons may rely on the definition of ``client'' in
Sec. 275.202(a)(30)-1 to identify clients for purposes of paragraph
(a)(1) of this section, except that supervised persons need not count
clients that are not residents of the United States.
* * * * *
(d) Assets under management. Determine ``assets under management''
by calculating the securities portfolios with respect to which an
investment adviser provides continuous and regular supervisory or
management services as reported on the investment adviser's Form ADV
(17 CFR 279.1).
(e) State securities authority. ``State securities authority''
means the securities commissioner or commission (or any agency, office
or officer performing like functions) of any State.
7. Section 275.203A-4 is removed and reserved.
8. Section 275.203A-5 is added to read as follows:
Sec. 275.203A-5 Transition rules.
(a) Every investment adviser registered with the Commission on July
21, 2011 shall file an other-than-annual amendment to Form ADV (17 CFR
279.1) no later than August 20, 2011 and shall determine its assets
under management based on the current market value of the assets as
determined within 30 days prior to the date of filing the Form ADV.
(b) If an investment adviser registered with the Commission on July
21, 2011 would be prohibited from registering with the Commission under
section 203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)), and is not
otherwise exempted by Sec. 275.203A-2 from such prohibition, such
investment adviser shall withdraw from registration with the Commission
by filing Form ADV-W (17 CFR 279.2) no later than October 19, 2011.
During this period while an investment adviser is registered with both
the Commission and one or more State securities authorities, the Act
and applicable State law will apply to the investment adviser's
advisory activities.
(c) If, prior to the effective date of the withdrawal from
registration of an investment adviser on Form ADV-W, the Commission has
instituted a proceeding pursuant to section 203(e) of the Act (15
U.S.C. 80b-3(e)) to suspend or revoke registration, or pursuant to
section 203(h) of the Act (15 U.S.C. 80b-3(h)) to impose terms or
conditions upon withdrawal, the withdrawal from registration shall not
become effective except at such time and upon such terms and conditions
as the Commission deems necessary or appropriate in the public interest
or for the protection of investors.
9. Section 275.204-1 is amended by revising the heading, paragraphs
(b) and (c) to read as follows:
Sec. 275.204-1 Amendments to Form ADV.
* * * * *
(b) Electronic filing of amendments.
(1) Subject to paragraph (c), you must file all amendments to Part
1A of Form ADV and Part 2A of Form ADV electronically with the IARD,
unless you have received a continuing hardship exemption under Sec.
275.203-3. You are not required to file with the Commission amendments
to brochure supplements if required by Part 2B of Form ADV.
(2) If you have received a continuing hardship exemption under
Sec. 275.203-3, you must, when you are required to amend your Form
ADV, file a completed Part 1A and Part 2A of Form ADV on paper with the
SEC by mailing it to FINRA.
Note to paragraphs (a) and (b): Information on how to file with
the IARD is available on our Web site at http://www.sec.gov/iard.
For the annual updating amendment: Summaries of material changes
that are not included in the adviser's brochure must be filed with
the Commission as an exhibit to Part 2A in the same electronic file;
and if you are not required to prepare a brochure, a summary of
material changes, or an annual updating amendment to your brochure,
you are not required to file them with the Commission. See the
instructions for Part 2A of Form ADV.
(c) Transition to electronic filing. If you are required to file a
brochure and your fiscal year ends on or after December 31, 2010, you
must amend your Form ADV by electronically filing with the IARD one or
more brochures that satisfy the requirements of Part 2A of Form ADV (as
amended effective October 12, 2010) as part of the next annual updating
amendment that you are required to file.
* * * * *
10. Section 275.204-2 is amended by removing paragraph (l), and
revising paragraph (e)(3)(ii) to read as follows:
Sec. 275.204-2 Books and records to be maintained by investment
advisers.
* * * * *
(e) * * *
(3) * * *
(ii) Transition rule. If you are an investment adviser that was,
prior to July 21, 2011, exempt from registration under section
203(b)(3) of the Act (15 U.S.C. 80b-3(b)(3)), as in effect on July 20,
2011, paragraph (e)(3)(i) of this section does not require you to
maintain or preserve books and records that would otherwise be required
to be maintained or preserved under the provisions of paragraph (a)(16)
of this section to the extent those books and records pertain to the
performance or rate of return of such private fund (as defined in
section 202(a)(29) of the Act (15 U.S.C. 80b-2(a)(29)), or other
account you advise for any period ended prior to July 21, 2011,
provided that you were not registered with the Commission as an
investment adviser during such period, and provided further that you
continue to preserve any books and records in your possession that
pertain to the performance or rate of return of such private fund or
other account for such period.
* * * * *
11. Section 275.204-4 is added to read as follows:
Sec. 275.204-4 Reporting by exempt reporting advisers.
(a) Exempt reporting advisers. If you are an investment adviser
relying on the exemption from registering with the Commission under
section 203(l) or (m) of the Act (15 U.S.C. 80b-3(l) or 80b-3(m)), you
must complete and file reports on Form ADV (17 CFR 279.1) by following
the instructions in the Form, which specify the information that an
exempt reporting adviser must provide.
(b) Electronic filing. You must file Form ADV electronically with
the Investment Adviser Registration Depository (IARD) unless you have
received a hardship exemption under paragraph (e) of this section.
Note to paragraph (b): Information on how to file with the IARD
is available on the Commission's Web site at http://www.sec.gov/iard.
(c) When filed. Each Form ADV is considered filed with the
Commission upon acceptance by the IARD.
(d) Filing fees. You must pay FINRA (the operator of the IARD) a
filing fee. The Commission has approved the amount of the filing fee.
No portion of the filing fee is refundable. Your completed Form ADV
will not be accepted by FINRA, and thus will not be considered filed
with the Commission, until you have paid the filing fee.
(e) Temporary hardship exemption.
(1) Eligibility for exemption. If you have unanticipated technical
difficulties that prevent submission of a filing to the IARD system,
you may request a temporary hardship exemption from the requirements of
this chapter to file electronically.
(2) Application procedures. To request a temporary hardship
exemption, you must:
(i) File Form ADV-H (17 CFR 279.3) in paper format no later than
one
[[Page 77100]]
business day after the filing that is the subject of the ADV-H was due;
and
(ii) Submit the filing that is the subject of the Form ADV-H in
electronic format with the IARD no later than seven business days after
the filing was due.
(3) Effective date--upon filing. The temporary hardship exemption
will be granted when you file a completed Form ADV-H.
(f) Final report. You must file a final report in accordance with
instructions in Form ADV when:
(1) You cease operation as an investment adviser;
(2) You no longer meet the definition of exempt reporting adviser
under paragraph (a); or
(3) You apply for registration with the Commission.
Note to paragraph (f): You do not have to pay a filing fee to
file a final report on Form ADV through the IARD.
12. Section 275.206(4)-5 is amended by:
a. In paragraph (f)(2)(i), removing the term ``individual'' and
adding in its place the term ``person''; and
b. Revising paragraphs (a)(1), (a)(2) introductory text, (a)(2)(i),
(d), and (f)(9) to read as follows:
Sec. 275.206(4)-5 Political contributions by certain investment
advisers.
(a) * * *
(1) For any investment adviser registered (or required to be
registered) with the Commission, or unregistered in reliance on the
exemption available under section 203(b)(3) of the Advisers Act (15
U.S.C. 80b-3(b)(3)), or that is an exempt reporting adviser, as defined
in Sec. 275.204-4(a), to provide investment advisory services for
compensation to a government entity within two years after a
contribution to an official of the government entity is made by the
investment adviser or any covered associate of the investment adviser
(including a person who becomes a covered associate within two years
after the contribution is made); and
(2) For any investment adviser registered (or required to be
registered) with the Commission, or unregistered in reliance on the
exemption available under section 203(b)(3) of the Advisers Act (15
U.S.C. 80b-3(b)(3)), or that is an exempt reporting adviser, or any of
the investment adviser's covered associates:
(i) To provide or agree to provide, directly or indirectly, payment
to any person to solicit a government entity for investment advisory
services on behalf of such investment adviser unless such person is:
(A) A regulated municipal advisor; or
(B) An executive officer, general partner, managing member (or, in
each case, a person with a similar status or function), or employee of
the investment adviser; and
* * * * *
(d) Further prohibition. As a means reasonably designed to prevent
fraudulent, deceptive or manipulative acts, practices, or courses of
business within the meaning of section 206(4) of Advisers Act (15
U.S.C. 80b-6(4)), it shall be unlawful for any investment adviser
registered (or required to be registered) with the Commission, or
unregistered in reliance on the exemption available under section
203(b)(3) of the Advisers Act (15 U.S.C. 80b-3(b)(3)), or that is an
exempt reporting adviser, or any of the investment adviser's covered
associates to do anything indirectly which, if done directly, would
result in a violation of this section.
* * * * *
(f) * * *
(9) Regulated municipal advisor means a municipal advisor
registered with the Commission under section 15B of that Act and
subject to rules of the Municipal Securities Rulemaking Board that:
(i) Prohibit municipal advisors from engaging in distribution or
solicitation activities if certain political contributions have been
made; and
(ii) The Commission, by order, finds:
(A) Impose substantially equivalent or more stringent restrictions
on municipal advisors than this section imposes on investment advisers;
and
(B) Are consistent with the objectives of this section.
* * * * *
13. Section 275.222-1 is amended by revising the phrase ``Principal
place of business'' to read ``Principal office and place of business''
in both the heading and the first sentence of paragraph (b).
14. Section 275.222-2 is revised to read as follows:
Sec. 275.222-2 Definition of ``client'' for purposes of the national
de minimis standard.
For purposes of section 222(d)(2) of the Act (15 U.S.C. 80b-
18a(d)(2)), an investment adviser may rely upon the definition of
``client'' provided by Sec. 275.202(a)(30)-1, without giving regard to
paragraph (b)(4) of that section, provided that an investment adviser
is not required to count as a client any person for whom the investment
adviser provides advisory services without compensation.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
15. The authority citation for Part 279 continues to read as
follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1,
et seq.
Sec. 279.1 [Amended]
16. Form ADV [referenced in Sec. 279.1] is amended by:
a. In the instructions to the form, revising the section entitled
``Form ADV: General Instructions.'' The revised version of Form ADV:
General Instructions is attached as Appendix A;
b. In the instructions to the form, revising the section entitled
``Form ADV: Instructions for Part 1A.'' The revised version of Form
ADV: Instructions for Part 1A is attached as Appendix B;
c. In the instructions to the form, revising the section entitled
``Form ADV: Glossary of Terms.'' The revised version of Form ADV:
Glossary of Terms is attached as Appendix C;
d. In the form, revising Part 1A. The revised version of Form ADV,
Part 1A is attached as Appendix D;
e. In the form, revising the reference to ``proceeding'' in Item
3.D. of Part 2B to read ``hearing or formal adjudication''; and
f. In the form, revising the section entitled ``Form ADV: Domestic
Investment Adviser Execution Page.'' The revised version of Form ADV:
Domestic Investment Adviser Execution Page is attached as Appendix E.
The revisions read as follows:
Note: The text of Form ADV does not and the amendments will not
appear in the Code of Federal Regulations.
* * * * *
Form ADV: Part 2B
* * * * *
Item 3. * * *
D. Any other hearing or formal adjudication in which a professional
attainment, designation, or license of the supervised person was
revoked or suspended because of a violation of rules relating to
professional conduct. If the supervised person resigned (or otherwise
relinquished the attainment, designation, or license) in anticipation
of such a hearing or formal adjudication (and the adviser knows, or
should have known, of such resignation or relinquishment), disclose the
event.
* * * * *
Sec. 279.3 [Amended]
17. Form ADV-H [referenced in Sec. 279.3] is amended by revising
the form. The revised version of Form ADV-H is attached as Appendix F.
[[Page 77101]]
Note: The text of Form ADV-H does not and the amendments will
not appear in the Code of Federal Regulations.
Sec. 279.4 [Amended]
18. Form ADV-NR [referenced in Sec. 279.4] is amended by revising
the form. The revised version of Form ADV-NR is attached as Appendix G.
Note: The text of Form ADV-NR does not and the amendments will
not appear in the Code of Federal Regulations.
By the Commission.
November 19, 2010.
Elizabeth M. Murphy,
Secretary.
BILLING CODE P
[[Page 77102]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.000
[[Page 77103]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.001
[[Page 77104]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.002
[[Page 77105]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.003
[[Page 77106]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.004
[[Page 77107]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.005
[[Page 77108]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.006
[[Page 77109]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.007
[[Page 77110]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.008
[[Page 77111]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.009
[[Page 77112]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.010
[[Page 77113]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.011
[[Page 77114]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.012
[[Page 77115]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.013
[[Page 77116]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.014
[[Page 77117]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.015
[[Page 77118]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.016
[[Page 77119]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.017
[[Page 77120]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.018
[[Page 77121]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.019
[[Page 77122]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.020
[[Page 77123]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.021
[[Page 77124]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.022
[[Page 77125]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.023
[[Page 77126]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.024
[GRAPHIC] [TIFF OMITTED] TP10DE10.025
[[Page 77127]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.026
[[Page 77128]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.027
[[Page 77129]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.028
[[Page 77130]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.029
[[Page 77131]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.030
[[Page 77132]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.031
[[Page 77133]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.032
[[Page 77134]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.033
[[Page 77135]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.034
[[Page 77136]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.035
[[Page 77137]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.036
[[Page 77138]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.037
[[Page 77139]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.038
[[Page 77140]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.039
[[Page 77141]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.040
[[Page 77142]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.041
[[Page 77143]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.042
[[Page 77144]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.043
[[Page 77145]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.044
[[Page 77146]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.045
[[Page 77147]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.046
[[Page 77148]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.047
[[Page 77149]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.048
[[Page 77150]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.049
[[Page 77151]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.050
[[Page 77152]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.051
[[Page 77153]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.052
[[Page 77154]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.053
[[Page 77155]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.054
[[Page 77156]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.055
[[Page 77157]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.056
[[Page 77158]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.057
[[Page 77159]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.058
[[Page 77160]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.059
[[Page 77161]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.060
[[Page 77162]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.061
[[Page 77163]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.062
[[Page 77164]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.063
[[Page 77165]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.064
[[Page 77166]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.065
[[Page 77167]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.066
[[Page 77168]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.067
[[Page 77169]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.068
[[Page 77170]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.069
[[Page 77171]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.070
[[Page 77172]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.071
[[Page 77173]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.072
[[Page 77174]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.073
[[Page 77175]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.074
[[Page 77176]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.075
[[Page 77177]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.076
[[Page 77178]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.077
[[Page 77179]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.078
[[Page 77180]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.079
[[Page 77181]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.080
[[Page 77182]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.081
[[Page 77183]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.082
[[Page 77184]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.083
[[Page 77185]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.084
[[Page 77186]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.085
[[Page 77187]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.086
[[Page 77188]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.087
[[Page 77189]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.088
[[Page 77190]]
[GRAPHIC] [TIFF OMITTED] TP10DE10.143
[FR Doc. 2010-29956 Filed 12-9-10; 8:45 am]
BILLING CODE C