February 7, 1997


Mr. Jonathan Katz
Secretary
U.S. Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549


Subject:  Rules Implementing Amendments to the Investment Advisers Act of 1940
	    Rel. No. IA-1601
	    File No. S7-31-96

Dear Secretary Katz::

The Washington State Securities Division (Division) is pleased to submit comments regarding 
the Commissions rule proposals to implement certain provisions of the Investment Advisers 
Supervision Coordination Act. Although we disagree with some of the Commissions views, we 
commend the Commission on its efforts. We support the Commissions attempts to create 
uniformity when appropriate but we believe that certain areas are better left to the states.

I.  SCOPE OF PREEMPTION

We believe that the Commissions interpretation in the Executive Summary of the extent of 
preemption of state laws is both unnecessary and incorrect.  In Subsection 203A(b), Congress 
only preempted state laws requiring the registration, licensing, or qualification of certain 
investment advisers.  Subsection 203A(b)(2) clarifies that states still maintain fraud jurisdiction in 
their states and extraterritorially to the extent of state jurisdiction over investment advisers and 
associates who no longer have to register because of preemption. Nothing in Section 203A(b) 
limits state laws unrelated to registration, licensing or qualification.  While states may no longer 
pass laws tantamount to imposing registration requirements, state regulatory provisions 
unconnected with registration are not preempted.  See, e.g., provisions of Section 102 of the 
Uniform Securities Act which apply regardless of registration.  If Congress had intended to 
preempt these non-registration provisions, Congress would certainly not have limited itself to the 
preempting language   requiring the registration, licensing, or qualification. 

Contrary to the argument advanced by the Commission, Section 307 does not support the 
argument that Congress sought a broader preemption than registration, licensing or qualification 
provisions. Section 307 covers filings and fees that are registration related provisions and, to 
avoid preemption, required preservation. Citing a section preserving registration related 
provisions that would have been preempted hardly supports the argument for preemption of non-
registration provisions. The non-registration provisions do not present any conflict with the 
preemption of registration provisions and therefore are saved by Section 222(a).  The 
Commissions interpretation gives no meaning or purpose to Section 222(a). 

To promulgate meaningful rules after NSMIA, the Commission need not and should not render 
interpretations extending preemption beyond state registration provisions.  

II.  INVESTMENT ADVISER REPRESENTATIVE 

In defining investment adviser representative the Commission is substantially overstepping its 
Congressional mandate. We believe it is up to the states to set standards in this area. Licensing is 
a traditional state function and the states are the regulatory bodies that are, in fact, going to 
license investment adviser representatives. The SEC has never licensed IA representatives and is 
not going to do so now.  It appears that the only reason the term is included within NSMIA at all 
is to clarify that a state may license IA representatives with a place of business in that state even if 
the adviser to which the representative is attached is federally registered.  Unlike other proposed 
definitions in the release, it is completely unnecessary to define IA representative in order to 
implement NSMIA.  The Commissions definition will create significant non uniformity.

Very simply, Congress legislated that investment advisers representatives employed by state 
licensed investment advisers will continue to be licensed at the state level. Investment adviser 
representatives that are employed by federally licensed investment advisers do not have to register 
with a state unless they have a place of business in that state. The Commissions incredibly 
bureaucratic rule that involves natural persons and substantial portion of business is uncalled 
for. The Commission should define place of business and leave it at that. 

Investment adviser representative is a well defined term in state law. The term is defined by 
every state which licenses such  representatives as well as by the Uniform Securities Act  (USA) 
which defines the term to mean:

[A]ny partner, officer, director of (or a person occupying a similar status or 
performing similar functions) or other individual employed by or associated with 
an investment adviser, except clerical or ministerial personnel, who (1) makes any 
recommendations or otherwise renders advice regarding securities, (2) manages 
accounts or portfolios of clients, (3) determines which recommendation or advice 
regarding securities should be given, (4) solicits, offers or negotiates for the sale of 
or sells investment advisory services, or (5) supervises employees who perform any 
of the foregoing.

This well known USA definition is followed relatively consistently by the states and it seems 
evident that Congress was well aware of this definition and took it into consideration in drafting 
NSMIA.  We note that the term is not contained in the Investment Advisers Act of 1940.  
Congress could have borrowed other terms that were defined by the Advisers Act, but it did not.  
The only sources of a definition available to them were the USA and the states.

The proposed definition is narrower than the USA definition, primarily because it introduces the 
brand new concept that only supervised persons having a significant number of  natural person 
clients would be deemed to be investment adviser representatives. Although the Commission cites 
certain testimony by Dee Harris in his role as NASAA President, there is absolutely no evidence 
that Congress intended the Commission to limit the definition of retail to natural persons. No 
credible argument can be made to support the notion that an account with a natural person is a 
retail account while an account with that same persons 100% owned small corporation is non-
retail. It was certainly not NASAAs intent on the states behalf to indicate such limits. In fact, the 
states have a compelling interest in regulating the conduct of investment advisers who advise 
individuals, sole proprietorships, small corporations, or any other retail client. Congress never 
intended to place such limits on the states to register investment advisers representatives that 
advise inherently local interests. In addition, fewer representatives would be required to register 
under this definition. This would negatively impact the stated Congressional intent that NSMIA be 
largely revenue neutral to the states.  

The proposed definition of investment adviser representative excludes solicitors.  This is contrary 
to the USA definition discussed above.  Indeed, many on the investment adviser  representatives 
that are currently licensed with the states are so licensed because of their solicitation activities.  
Very often, the clients primary and perhaps only personal contact in the rendering of advisory 
services will be with the solicitor.  Therefore, it is important that the activities of such persons be 
regulated.  Creating a new solicitors licensing regime would be difficult and costly.  Modification 
of state licensing statutes would be required in many instances.  New rules, databases and forms 
would be necessary.  New examinations would need to be developed.  The continued use of the 
USA definition presents none of these difficulties, and has worked well for years.

We support the Commissions attempt to clarify what Congress meant by place of business in 
order to better identify those investment adviser representatives employed by federally registered 
investment advisers that will have to register with the state. We believe that the term regularly is 
confusing not only because it is so general but also because it is unclear what regularly is meant 
to modify. We suggest that any investment adviser representative who comes into this state to 
give face-to-face, personal investment advice to retail customers and who does not meet the de 
minimus exemption, should be required to have a license.

Finally, we believe that the Commission has gone beyond both Congressional intent and its 
statutory authority in considering whether to except securities agents from the definition of 
investment adviser representative.. It should be up to state legislatures to make the decision on 
this matter. The Washington State Legislature has decided that broker-dealer agents in this state 
should not be excepted from the definition of investment adviser representative.  Broker-dealers 
and investment advisers, even if they share locations and personnel, are frequently separate legal 
entities.  In other instances, an agent may be licensed with a completely separate investment 
adviser.  In either case, it doesnt make any sense to exclude a broker-dealer agent from the 
definition of an investment adviser representative.  Agents and representatives can be subject to 
different licensing requirements, such as examinations and owe different fiduciary duties to their 
clients.  Many professionals, of course, are subject to licensing from more than one regulatory 
body when they are performing different professional services.  An attorney, for example, who is 
also a CPA, is dually licensed with the state bar and the accountancy board.  

To grant an exception will also violate the Congressional mandate that NSMIA be implemented to 
in a revenue neutral manner.   Since the overwhelming majority of investment adviser 
representatives are dually-licensed, creating an exception will result in a substantial negative 
revenue impact.  Finally we note that there is nothing in the definition of investment adviser 
representative nor in the Congressional Record that equates advisory activity with sales activity.

The Commission should concentrate on issues regarding the implementation of NSMIA and leave 
state law to the state legislatures.

We strongly recommend  that the Commission withdraw its definition of investment adviser 
representative or conform it to the Uniform Securities Act definition. The USA definition is 
superior in that it focuses exclusively on the types of services that are provided and avoids 
arbitrary classifications that lack factual basis. 

III. ASSETS UNDER MANAGMENT

In most cases the amount of assets an adviser has under management will determine whether the 
adviser will register with the states or the Commission.

A. Continuous and regular supervisory or management services. The approach proposed 
in the release for non-discretionary accounts could be called write your own 
registration, presenting difficult factual decisions. In fact, a majority of the investment 
adviser firms we examine, most of which are the smaller investment advisers, tell us that 
they perform portfolio management. This approach will lead to an increase in the 
number of advisers unnecessarily subject to SEC registration.

To be useful, any definition of continuous and regular supervisory or management 
services must be functional. The Commission contrasts functions of financial planners 
and consultants, which do not include continuous and regular supervisory or 
management services with the function of traditional portfolio management which does. 
However, this contrast does not provide further guidance because none of these three 
terms is defined. If it intends to use the concept of traditional portfolio management in 
determining which advisers have assets under management for the purpose of NSMIA, the 
Commission should adopt a definition of that term that describes the functions performed 
for advisory clients in traditional portfolio management. The definition should reflect 
normal usage among investment advisory clients. In our experience, most people 
understand traditional portfolio management to mean an arrangement in which an 
investment adviser, based on the goals of the client and the advisers knowledge of the 
securities markets, manages the securities portfolio of the client by causing transactions to 
be made in the clients securities account using the discretionary authority the client has 
granted to the adviser.

The Commission could, instead, equate continuous and regular supervisory or 
management services with discretionary authority. Any lesser standard is subject to 
endless  uncertainties for those subject to registration. 

B. Securities Portfolio. We believe that the Commissions interpretation of securities 
portfolio is unnecessarily restrictive and strays from the language and intent of Congress. 
Following the language of the bill, we think that securities portfolio should be defined to 
take into consideration only securities under management plus cash equivalents. The 
cash component of the portfolio could include money market accounts and other short 
term securities. Inclusion of non-securities components of a portfolio is not expressly 
sanctioned by the language of Congress and appears to be inconsistent with it. In addition 
it would artificially increase the number of advisers that would have to register federally. 
Calculating the value of securities including money market funds and other short term 
securities should pose little if any added burden to investment advisers who may consider 
themselves subject to SEC registration. Inclusion of non-securities components would 
certainly create difficulties, raising questions of the methods and certainty of valuation.

In the alternative, the securities portfolio could be considered the amount upon which the 
investor is paying a fee for purposes of assets under management. That amount is 
obviously already calculated and is easily verified.

Lastly, the following miscellaneous areas are worthy of mention.

IV.  TRANSITIONS

The Commission should make the transitions from state to federal registration and from federal to 
state registration more alike. There is no reason to have a 90 day grace period to transition from 
Commission to state registration. An application for state registration is typically processed in our 
office in less than a week. Any cancellation proceedings by the SEC could be stayed if the 
applicant can show that it has applied for state registration. 

Although I believe that the states are prepared to begin this process immediately, I wonder if the 
short period of time provided in the bill for implementation is sufficient for the Commission.

V.  REGULATED OR REQUIRED TO BE REGULATED

We support the Commissions interpretation that the phrase regulated or required to be 
regulated was intended by Congress to be synonymous with state registration. Until such  time as 
those states that have no registration authority over investment advisers obtain authority from 
their legislatures, it is important that the Commission register those advisers.

In summary, we appreciate the opportunity to comment on this very important release. We hope 
you will consider our comments. Although there were other important questions identified in the 
release, we have chosen to comment only upon those that we feel are the most significant.


Sincerely,


Deborah Bortner 
Securities Administrator





Comment letter on Release No. IA-1601
File No. S7-31-96

6

 
State of Washington
DEPARTMENT OF FINANCIAL INSTITUTIONS

JOHN L. BLEY
Director
 SECURITIES DIVISION
P.O. Box 9033  l  Olympia, Washington 98507-9033
Telephone (360) 902-8760 l  TDD (360) 664-8126  l  FAX (360) 586-5068
DEBORAH R. BORTNER
Assistant Director