[Federal Register Volume 63, Number 129 (Tuesday, July 7, 1998)]
[Proposed Rules]
[Pages 36632-36650]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17927]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-1728; IC-23293; File No. S7-20-98]
RIN 3235-AH45


Investment Adviser Year 2000 Reports

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing for comment a proposed new rule and form under the 
Investment Advisers Act of 1940 that would require most registered 
investment advisers to file with the Commission a report regarding 
preparations for the Year 2000 computer problem. The reports would 
inform the Commission about the steps that investment advisers have 
taken, and will take, to prepare for the challenges posed by the Year 
2000 problem.

DATES: Comments must be received on or before August 10, 1998.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Stop 6-9, Washington, D.C. 20549. Comments also may be submitted 
electronically to the following E-mail address: <a href="/cdn-cgi/l/email-protection#443631282169272b2929212a3037043721276a232b32"><span class="__cf_email__" data-cfemail="295b5c454c044a4644444c475d5a695a4c4a074e465f">[email protected]</span></a>. 
All comment letters should refer to File No. S7-20-98; this file number 
should be included on the subject line if E-mail is used. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Electronically submitted comment letters also will be 
posted on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Arthur B. Laby, Special Counsel, at 
(202) 942-0716, Task Force on Investment Adviser Regulation, Division 
of Investment Management, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Mail Stop 5-6, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission today is requesting public 
comment on proposed rule 204-5 [17 CFR 275.204-5] and Form ADV-Y2K [17 
CFR 279.9] under the Investment Advisers Act of 1940 (``Advisers Act'') 
[15 U.S.C. 80b].

I. Background

    The Commission is undertaking a review of U.S. public companies and 
the U.S. securities industry to examine whether they will be prepared 
for the computer challenges associated with the Year 2000.\1\ As part 
of this initiative, in March 1998, the Commission requested comment on 
proposed rule changes that would require certain broker-dealers \2\ and 
transfer agents \3\ to file with the Commission a report on Year 2000 
readiness. The Commission today is requesting comment on a new rule and 
form that would require most investment advisers registered with the 
Commission under the Advisers Act to file a report on Year 2000 
readiness.
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    \1\ On January 1, 2000, certain computer systems may function 
erroneously if necessary modifications have not been made because, 
among other things, the systems may read incorrectly the date 01/01/
00 as being the year 1900 or another incorrect date. Problems may 
arise earlier than January 1, 2000, because dates after December 31, 
1999, already are being entered into computer programs and may be 
misread.
    \2\ Reports to be Made by Certain Brokers and Dealers, Exchange 
Act Release No. 39724 (Mar. 5, 1998) [63 FR 12056 (Mar. 12, 1998)].
    \3\ Reports to be Made by Transfer Agents, Exchange Act Release 
No. 39726 (Mar. 5, 1998) [63 FR 12062 (Mar. 12, 1998)].
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    Investment advisers (``advisers'') manage approximately $13 
trillion of savings of American families. These assets are managed on 
behalf of investors directly, as well as indirectly through financial 
institutions such as employee benefit plans, trusts, hedge funds and 
mutual funds. Mutual funds alone control over $5 trillion of assets,\4\ 
35 percent of which are estimated to be retirement plan assets.\5\ 
Thus, investment advisers play a key role in the economic life of 
America today.
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    \4\ The Investment Company Institute, Current Statistical 
Releases, Trends in Mutual Fund Investing, April 1998, available at 
<http://www.ici.org/facts__figures/trends__0498html>.
    \5\ The Investment Company Institute, Retirement Statistics, 
Retirement Plans Hold 35 Percent of Mutual Fund Assets (Oct. 14, 
1997), available at <<a href="http://www.ici.org/retirement/
retirement__statistics96.html">http://www.ici.org/retirement/
retirement__statistics96.html</a>>.
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    Advisers manage these assets using computer systems that connect 
them with the markets, service providers and clients. In addition, 
advisers depend upon internal computer systems for various management, 
compliance and recordkeeping functions.\6\ The development and growth 
of the Internet has made advisory clients more dependent upon their 
advisers' computer systems to provide them with information about their 
adviser and their portfolios. The failure of the advisers' or third 
parties' computer

[[Page 36633]]

systems to function properly as a result of the Year 2000 problem could 
threaten the ability of advisers to manage properly client assets, 
communicate information to their clients and comply with the federal 
securities laws.
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    \6\ Under the federal securities laws, advisers and investment 
companies are obligated to make, and keep current, certain books and 
records relating to their business. See rule 204-2 under the 
Advisers Act [17 CFR 275.204-2]; rule 31a-1 under the Investment 
Company Act of 1940 [17 CFR 270.31a-1].
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    Investment companies (``funds'') also are highly dependent on 
sophisticated computer systems to communicate with their advisers and 
other third parties such as underwriters, brokers, transfer agents, 
custodians and sub-advisers. To manage their portfolios, calculate net 
asset values, keep accurate records, process shareholder purchases and 
redemptions, and timely deliver disclosure documents and account 
statements, funds and their advisers continuously must exchange 
information with each other and with their service providers. A 
breakdown in this exchange of information could interfere with the day-
to-day management of fund portfolios, delay shareholder transactions 
and compromise recordkeeping and other compliance systems.
    The Commission has identified six steps of preparation that 
advisers and funds can take to prepare for the Year 2000 computer 
problem. These steps are: (i) Awareness of potential Year 2000 
problems; (ii) assessment of steps advisers and funds must take to 
avoid Year 2000 problems; (iii) implementation of the steps to avoid 
Year 2000 problems; (iv) internal testing of software designed to avoid 
Year 2000 problems; (v) point-to-point testing of software designed to 
avoid Year 2000 problems (i.e., testing with service providers such as 
broker-dealers, custodians, transfer agents and distributors); and (vi) 
implementation of tested software that will avoid Year 2000 problems. 
By taking these steps now, advisers and funds more likely can solve 
potential Year 2000 problems well in advance of December 31, 1999.
    The Commission has for some time recognized the challenges that the 
Year 2000 poses for advisers and funds. Since 1996, Commission 
examiners have raised Year 2000 concerns during adviser and fund 
examinations to increase awareness of, and encourage aggressive and 
timely action to address, Year 2000 problems. In 1997, Chairman Levitt 
sent a letter to all registered investment advisers warning of the 
consequences of not being Year 2000 compliant and urging them to make 
preparations for the Year 2000 their highest priority. In 1997, the 
staff provided guidance on the disclosure obligations of advisers and 
funds.\7\ Commissioners and members of the staff have met with industry 
and professional groups to express these concerns.
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    \7\ Staff Legal Bulletin No. 5 (CF/IM) (revised), Jan. 12, 1998, 
available at <http://www.sec.gov/rules/othern/slbcf5.htm>.
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    Today, the Commission is proposing to require most advisers 
registered with the Commission to complete and submit a report to the 
Commission on their preparedness for the Year 2000 problem. The reports 
will help the Commission evaluate the readiness of advisers for the 
Year 2000 problem, identify those advisers and funds that pose a 
significant risk to their clients and shareholders, and evaluate the 
adequacy of disclosure made by these firms regarding the Year 2000 
problem. Finally, the proposed rule will permit the Commission to make 
the reports about Year 2000 preparations of advisers and funds 
available to the public and to fulfill Congressional requests for 
information regarding the securities industry's readiness for the Year 
2000 problem.

II. Discussion

    The Commission is proposing new rule 204-5, which would require 
most investment advisers registered with the Commission to file with 
the Commission new Form ADV-Y2K.\8\ Form ADV-Y2K would be filed by each 
investment adviser that (i) is registered with the Commission, and (ii) 
has at least $25 million of assets under management \9\ or is an 
adviser to an investment company registered under the Investment 
Company Act of 1940.\10\ The form would have to be filed no later than 
30 days after the rule becomes effective, and an updated form would 
have to be filed no later than eight months from the date of the first 
filing. The second filing would reflect progress made in preparing for 
the Year 2000 problem up to that time.
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    \8\ Under section 204 of the Advisers Act, the Commission has 
the authority to require every registered investment adviser to make 
and keep such reports that the Commission, by rule, may prescribe. 
15 U.S.C. 80b-4. Form ADV-Y2K, like all forms filed with the 
Commission by investment advisers, would be publicly available. See 
section 210(a) of the Advisers Act [15 U.S.C. 80b-10(a)].
    \9\ The amount of assets under management for purposes of Form 
ADV-Y2K would be the amount reported on Schedule I of the adviser's 
most recently filed Form ADV, or the most recent amendment to Form 
ADV.
    \10\ 15 U.S.C. 80a. As a result of the National Securities 
Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416 
(1996) (codified in scattered sections of the United States Code), 
which amended the Advisers Act, generally only advisers that have at 
least $25 million of assets under management or that advise a 
registered investment company can register with the Commission. 
Advisers in the four states that do not regulate investment 
advisers, advisers with principal places of business in foreign 
countries, and other advisers exempt from the $25 million assets 
under management limitation may still register with the Commission. 
See rule 203A-2 under the Advisers Act [17 CFR 275.203A-2]. The $25 
million assets under management reporting threshold, however, would 
exclude most of those advisers from the proposed Form ADV-Y2K filing 
requirement.
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    Proposed Form ADV-Y2K has two parts. Part I would be completed by 
all respondents and would contain 11 questions about the adviser's 
preparation for the Year 2000 problem with respect to all of the 
adviser's clients. The questions all would be in multiple choice or 
fill-in-the-blank format, and advisers would be required to respond to 
each question. Part II would consist of questions similar to those in 
Part I and would be completed by advisers to a registered fund or a 
group of registered funds.
    Investment companies are frequently organized into groups, called 
``complexes'' or ``families,'' that realize efficiencies by sharing 
administrative functions. The instructions to Part II of the proposed 
form specify that each adviser (or sub-adviser) to a fund must complete 
Part II with respect to an entire complex if the adviser advises a 
single fund (or a series) in the complex. An adviser, however, need not 
complete Part II for the complex or a fund (or a series) with respect 
to which another adviser is completing Part II.\11\ The effect of the 
proposed approach would permit multiple advisers to funds in a single 
fund complex to decide among themselves which adviser will be 
responsible for completing Part II with respect to the complex, but 
would assure that the Commission receives Year 2000 information with 
respect to most funds. Comment is requested on this proposed approach.
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    \11\ The Commission intentionally has not proposed to define the 
term complex or family to give advisers flexibility to report for 
groups they administer.
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    The instructions are designed so that the reporting adviser for a 
fund complex would likely be the adviser that has administrative 
responsibilities for the complex and thus is in the best position to 
report on the Year 2000 readiness of the complex--even if that adviser 
does not provide advice for all funds in the complex.\12\ An adviser 
responding to

[[Page 36634]]

Part II on behalf of multiple complexes would complete multiple 
versions of Part II, one for each complex.\13\
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    \12\ In some cases, a third party administrator that is not a 
registered investment adviser may be in the best position to report 
on the Year 2000 readiness of the complex. In such cases, the third 
party administrator could complete the form on behalf of one of the 
advisers to a fund in the complex, although the adviser would have 
the obligation to file the report. The Commission is requiring 
advisers, as opposed to other firms, such as administrators, to file 
the form because, under section 204 of the Advisers Act, the 
Commission has the statutory authority to require only advisers to 
file such reports.
    \13\ See proposed Instructions for Part II of Form ADV-Y2K.
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    The form would require each responding investment adviser to 
provide the Commission with information relating to the following 
areas: (1) The scope and status of the adviser's Year 2000 compliance 
plan; (2) the commitment by the adviser of resources and personnel 
(including consultants) to address Year 2000 issues; (3) the systems 
that may be affected by the Year 2000 problem; (4) progress on each of 
the six steps of preparation identified above;\14\ (5) contingency 
plans in the event that the adviser experiences Year 2000 difficulties 
after December 31, 1999; \15\ and (6) the readiness of third parties 
upon whom the adviser relies for critical systems. The report would be 
required to be signed by an authorized person that participates in 
managing or directing the adviser's affairs, but would not be required 
to be attested to by an independent public accountant. Comment is 
requested on whether an attestation by an independent public accountant 
should be required.
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    \14\ One of the six steps is testing. The form contains 
questions about the progress of both point-to-point testing, also 
known as bilateral testing, and about industry-wide testing, also 
known as street-wide testing, to date. Much of the industry-wide 
testing to take place has been arranged by the Securities Industry 
Association (SIA). The SIA has arranged to test all aspects of its 
members' businesses for Year 2000 compliance and has included 
transactions with funds as one of the tests for its members.
    \15\ Contingency planning should provide for adequate 
protections for critical systems if computer interfaces fail or 
unexpected problems are experienced with operating systems and 
infrastructure software. In addition, contingency plans should 
provide for the failure of external systems. The plans should 
anticipate the failure of a vendor, for example, that services 
critical applications and should provide for the possibility that an 
investor may experience Year 2000 problems.
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    The Commission understands that an adviser or fund may rely on 
multiple systems that are at different stages of preparation for the 
Year 2000 problem. An adviser or fund, for example, may use separate 
systems for portfolio management, financial planning and client 
services. In those cases, the Commission is asking the reporting 
adviser to take a qualitative average and present the most accurate 
picture practicable of the preparedness of the systems of the adviser 
or the fund. In requiring a qualitative average, the Commission intends 
to be flexible and take a common sense approach. If an adviser, for 
example, uses two computer systems that are at different stages of 
preparedness, but one of those systems is more critical than the other, 
the adviser should base its responses primarily on the more critical 
system. Comment is requested on this approach, and on whether 
alternative ways to request information for multiple systems is 
desirable. Would it be preferable, for instance, to require advisers 
and funds to respond to questions about their preparedness for the Year 
2000 problem on a system-by-system basis? Comment also is requested on 
what information advisers to funds underlying variable insurance 
contracts should be required to provide regarding systems supporting 
the contracts and the separate accounts and insurance companies issuing 
the contracts?
    Advisers would be required to file Form ADV-Y2K by fax; a paper 
filing would not be accepted. Instructions in the form would direct 
advisers to use specified fax numbers. The Commission believes that all 
advisers have access to a fax machine and that, as a result, this 
filing method will reduce filing burdens. Comment is requested on the 
Commission's assumption that all advisers will be able easily to file 
the form by fax.

III. General Request for Comment

    Any interested persons wishing to submit written comments on the 
proposed rule and form that are the subject of this release, suggest 
additional changes, or submit comments on other matters that might have 
an effect on the proposal contained in this release, are requested to 
do so.

IV. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules, and understands that completing Form ADV-Y2K may impose 
costs on advisers and funds.\16\ As discussed below, the Commission 
believes that the costs imposed by requiring advisers to complete Form 
ADV-Y2K are necessary and justified in light of the need to make 
information on the Year 2000 problem available to investors, Congress 
and the Commission.
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    \16\ See infra section VI of this release for the Commission's 
estimate of the costs that the proposed rule will impose on affected 
advisers and funds.
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    The Commission believes that requiring advisers to report on their 
readiness for the Year 2000 problem would yield several important 
benefits, both direct and indirect. As discussed above, the Year 2000 
reports required by the rule would yield direct benefits because they 
would help the Commission evaluate the preparedness of advisers and 
funds for the Year 2000 computer problem. The reports also would 
identify advisers and funds that may not be preparing for the Year 2000 
problem and may pose a risk to their clients and shareholders. The 
reports also would identify disclosure by advisers and funds regarding 
risks associated with the Year 2000 problem that may be inadequate. 
Finally, the reports would permit the Commission to make information 
available to the public and to fulfill requests by members of Congress 
for information regarding the securities industry's readiness for the 
Year 2000 problem.
    The Year 2000 reports also would yield important indirect benefits. 
By requiring the Year 2000 reports now, some advisers and funds, whose 
Year 2000 preparedness efforts to date have been inadequate, may be 
persuaded to accelerate their efforts, which would save them 
significant costs in the future if they failed to meet the Year 2000 
challenge.\17\ This indirect benefit is difficult to quantify because 
it is hard to estimate the costs that could be incurred if computer 
systems of advisers and funds fail to function properly after December 
31, 1999.\18\ Moreover, if the systems of advisers and funds were to 
fail after December 31, 1999, it could have negative effects not only 
for the advisers and funds themselves, but also for investors and third 
parties, such as underwriters, brokers, transfer agents, custodians, 
sub-advisers and other service providers.
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    \17\ It has been estimated that without corrective measures, 
ninety percent of all computer applications worldwide may fail, or 
fail to function properly, because of the inability properly to 
recognize the date change. Maggie Parent, Morgan Stanley Year 2000 
Issue Paper (May 1997), available at <<a href="http://www.ms.com/
odyssey.html">http://www.ms.com/
odyssey.html</a>>.
    \18\ The Securities Industry Association has stated that the 
transition to the Year 2000 is the largest business and technology 
effort that the world has ever experienced. See SIA, Year 2000, 
available at <http://www.sia.com/year__2000/index.html>.
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    Avoiding the harm to third parties may be one of most important 
benefits to proper preparation for the Year 2000 problem. Most firms' 
computer systems today depend on the systems of many other firms and 
individuals. If even one of these systems were to fail, this could have 
negative repercussions on the systems of other firms with which its 
computers interface. The failure to address this interdependence may be 
one of the greatest harms stemming from the Year 2000 problem.\19\ The 
benefit of avoiding this harm from occurring,

[[Page 36635]]

although difficult to quantify, may be extremely significant to 
investors, firms and the economy in general.
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    \19\ C. Lawrence Meador and Leland G. Freeman, Year 2000: The 
Domino Effect, Datamation (Jan. 1997), available at <<a href="http://
www.datamation.com/PlugIn/issues/1997/jan/01depend.html">http://
www.datamation.com/PlugIn/issues/1997/jan/01depend.html</a>>.
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    The proposed rule would impose some additional costs on advisers 
and funds. Advisers may need to spend resources obtaining answers to 
questions in the form, completing the form and submitting it to the 
Commission. These costs may vary from adviser to adviser. Small 
advisers, for example, may spend comparatively little time completing 
the form because small advisers likely have fewer systems and one 
person may be responsible for all of the systems. This person is likely 
to have all of the information necessary to complete the form and can 
do so in a few minutes. Larger advisers may require more time. Larger 
advisers are more likely to have more computer systems and it is 
possible that the adviser would have to draw on the knowledge of 
several individuals to complete the form.
    The Commission estimates that there are approximately 7,500 
investment advisers registered with the Commission, approximately 6,500 
of which would be required to file Form ADV-Y2K. Although the time 
needed to comply with the rule could vary from adviser to adviser, the 
Commission estimates that a respondent will devote approximately two 
employee hours of time to completing Part I of the form. In addition, 
approximately 891 registered investment advisers have registered 
investment companies as clients. Therefore, those 891 advisers may be 
required to spend an additional two hours completing Part II of the 
form on behalf of a fund or fund complex. These estimates are based on 
field-testing of the form by the Commission's Office of Compliance, 
Inspections and Examinations. The total annual burden will be 14,782 
hours ((6,500 advisers  x  2 hours) + (891 advisers  x  2 hours)). The 
form will likely be completed by information technology professionals. 
The Commission estimates the hourly wage rate for these professionals 
to be $100 per hour. Therefore, the Commission estimates that the total 
annual cost of completing the forms is $1,478,200. The Commission 
believes that the proposed rule would not impose significant additional 
costs on investment advisers.
    The Commission believes that the costs imposed by the rule are 
insignificant compared to the benefits. If advisers and funds are not 
prepared for the Year 2000 problem, the effect on advisers and funds, 
and their clients and third party service providers, could be very 
substantial. The chance of ameliorating the Year 2000 problem with 
respect to advisers and funds justifies the minimal costs involved.
    The Commission requests comment on the effect of the proposed rule 
on individual investment advisers and on the profession as a whole. 
Commenters should provide data and analyses relating to the costs and 
benefits associated with the proposed rule. Comment is requested on the 
costs of filing Form ADV-Y2K by fax with the Commission. This 
information would assist the Commission in its evaluation of the costs 
and benefits that may result if the proposed rule is adopted.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential effect of the proposed rule on the economy on an annual 
basis. Commenters should provide empirical data to support their views.
    Comment is requested on this cost/benefit analysis. Commenters are 
requested to provide views and empirical data relating to any costs and 
benefits associated with the proposed rule.

V. Summary of Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA''), in accordance with the provisions of the 
Regulatory Flexibility Act,\20\ regarding the proposed rule. As 
discussed more fully in the IRFA, few or none of the advisers that the 
proposed rule would affect are small entities, as defined by new 
Commission rules.\21\ The IRFA states that the purpose of the proposed 
rule is for the Commission to ascertain what steps advisers and funds 
are taking to avoid Year 2000 problems.
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    \20\ 5 U.S.C. 603.
    \21\ The Commission recently adopted revised definitions of 
``small entity.'' See Definitions of ``Small Business'' or ``Small 
Organization'' Under the Investment Company Act of 1940, the 
Investment Advisers Act of 1940, the Securities Exchange Act of 
1934, and the Securities Act of 1933, Investment Adviser Act Release 
No. 1727 (June 24, 1998). The revised definition of small investment 
adviser for Regulatory Flexibility Act purposes reflects the 
National Securities Markets Improvement Act. If the Commission 
adopts the proposed rule, the new definitions of small entities 
would be effective before the final rule would be adopted.
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    The IRFA sets forth the statutory authority for the proposed rule. 
The IRFA also discusses the effect of the proposed rule on advisers 
that are small entities. An adviser generally is a small entity (i) if 
it manages assets of $25 million or less reported on Form ADV-T [17 CFR 
279.3] or its most recent Schedule I to Form ADV [17 CFR 279.1], (ii) 
if it does not have total assets of $5 million or more on the last day 
of the most recent fiscal year, and (iii) if it is not in a control 
relationship with another investment adviser that is not a small 
entity. The Commission estimates that there are approximately 7,500 
registered advisers, approximately 1000 of which are small entities. 
The Commission estimates that few or none of the small entities would 
be required to complete Form ADV-Y2K.
    Under the terms of the rule, only an adviser that is (i) registered 
with the Commission, and (ii) has assets under management of not less 
than $25 million or is an investment adviser to an investment company 
registered under the Investment Company Act must file Form ADV-Y2K. 
Since the new definition of small entity establishes a threshold of $25 
million under management, most or all small entities would be exempted 
from the rule by its terms. In addition, the Commission believes that 
few or no investment advisers that have less than $25 million under 
management have more than $5 million in assets or are in a control 
relationship with an entity that is not considered a small entity. 
Finally, the only small entities that still would be subject to the 
rule are those small entities that advise a registered investment 
company. The Commission is not aware of any small entity that advises a 
registered investment company. Comment is requested on the number of 
small entities that would not be subject to the rule.\22\
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    \22\ If the Commission were to adopt a final rule, it may 
prepare a Regulatory Flexibility Act Certification stating that the 
rule will not have a substantial impact on small entities.
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    The IRFA states that the proposed rule would impose new reporting 
requirements because most investment advisers would have to file with 
the Commission a new form regarding their readiness for the Year 2000 
problem. The Commission estimates that, on average, a respondent would 
devote approximately two employee hours of preparation time to 
completing Part I of the form in 1998 and again in 1999. If the adviser 
is required to complete Part II, it would devote approximately an 
additional two hours to completing the form in 1998 and in 1999. The 
IRFA states that the Commission estimates that few or no small entities 
would be required to complete Form ADV-Y2K. The IRFA states that the 
proposed rule would not impose any other reporting, recordkeeping, or 
compliance requirements, and that the Commission believes that there 
are no rules that duplicate, overlap, or conflict with the proposed 
rule.

[[Page 36636]]

    The analysis discusses the various alternatives considered by the 
Commission in connection with the proposed rule that might minimize the 
effect on small entities, including: (a) The establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources of small entities; (b) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the proposed rule for small entities; (c) the use of 
performance rather than design standards; and (d) an exemption from 
coverage of the rule or any part of it, for small entities. The 
Commission has determined that it is not feasible to further clarify, 
consolidate, or simplify the proposed rule for small entities.
    As discussed in the analysis, most or all small entities are 
exempted from the rule. The Commission believes that it would be 
inconsistent with the purpose of the rule proposal to further exempt 
small entities from the proposed rule or to use performance standards 
to specify different requirements for small entities. As discussed in 
the IRFA, investment advisers registered with the Commission would be 
required to file Form ADV-Y2K because they likely have substantial 
financial exposure to the market and investors.
    In the IRFA, the Commission encourages the submission of written 
comments with respect to all aspects of the IRFA. In particular, the 
Commission is interested in comments that specify costs of compliance 
with the proposed rule, and suggest alternatives that would accomplish 
the objective of the proposed rule. A copy of the IRFA may be obtained 
by contacting Arthur B. Laby, Division of Investment Management, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 
5-6, Washington, D.C. 20549.

VI. Paperwork Reduction Act

    The proposed rule contains collection of information requirements 
within the meaning of the Paperwork Reduction Act of 1995,\23\ and the 
Commission has submitted them to the Office of Management and Budget 
for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The 
title for the collection of information is: ``Proposed Rule 204-5'' and 
``Form ADV-Y2K.''
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    \23\ 44 U.S.C. 3501.
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    Collection of information by the Commission is contemplated by the 
proposed rule because registered advisers would have to file new Form 
ADV-Y2K with the Commission. Advisers would be required to file Form 
ADV-Y2K twice, first no later than 30 days after the rule is effective 
and again eight months from the date that the first filing must be 
made. The form is necessary for the Commission to assess the steps 
advisers are taking to manage and avoid Year 2000 problems.
    The Commission estimates that there are approximately 7,500 
investment advisers registered with the Commission, approximately 6,500 
of which would be required to file Form ADV-Y2K. Although the amount of 
time needed to comply with the rule could vary from adviser to adviser, 
the Commission estimates that, on average, a respondent would devote 
approximately two employee hours of preparation time to completing Part 
I of the form, and an additional two employee hours to completing Part 
II of the form, if the adviser is required to complete Part II. This 
estimate is based on field-testing of Form ADV-Y2K by the Commission's 
Office of Compliance, Inspections and Examinations. The total annual 
burden will be 14,782 hours ((6,500 advisers  x  2 hours) + (891 
advisers  x  2 hours)). It is important to note that this burden would 
be incurred only twice, once in 1998 and once in 1999. The rule would 
not impose an ongoing reporting requirement.
    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 control number. Filing of this form is mandatory. The 
principal purpose of this collection of information is to enable the 
Commission to address the Year 2000 problem faced by advisers and 
funds. The Commission would use the information, among other things, to 
assess the readiness of advisers and funds for the Year 2000 problem 
and make the information available to the public, to assist the 
Commission in its inspection and examination program and to report to 
Congress on the readiness of advisers and funds for the Year 2000 
problem. Any member of the public may direct to the Commission any 
comments concerning the accuracy of the burden estimate of this form, 
and any suggestions for reducing this burden.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
commenters to:
    (i) evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
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) enhance the quality, utility and clarity of the information 
to be collected; and
    (iv) minimize the burden of 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 following persons: 
Desk Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Room 3208, New Executive Office Building, Washington, D.C. 20503; and 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 20549, and refer to File No. S7-
20-98. OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release in 
the Federal Register, so a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of this publication.

VII. Statutory Authority

    The Commission is proposing new Rule 204-5 and new Form ADV-Y2K 
pursuant to the authority set forth in sections 204 and 211(a) of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-4 and 80b-11(a)].

List of Subjects in 17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rules and Form

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

    Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.
* * * * *
    2. Section 275.204-4 is added and reserved and Sec. 275.204-5 is 
added to read as follows:


Sec. 275.204-4  Reserved.


Sec. 275.204-5  Year 2000 reports.

    Every investment adviser registered with the Commission that has 
assets under management of not less than $25 million or is an 
investment adviser to an

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investment company registered under the Investment Company Act of 1940 
(15 U.S.C. 80a-1) must file with the Commission by fax in accordance 
with the instructions in the form:
    (a) A completed Form ADV-Y2K (17 CFR 279.9) no later than [30 days 
after the rule becomes effective]; and
    (b) An additional Form ADV-Y2K, no later than [eight months from 
the date that the first filing must be made], reflecting information as 
of the date of the filing.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

    3. 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.

    4. Section 279.9 and Form ADV-Y2K are added to read as follows:


Sec. 279.9  Form ADV-Y2K.

    This form must be filed pursuant to Sec. 275.204-5 of this chapter 
by certain investment advisers.
    By the Commission.

    Dated: June 30, 1998.
Margaret H. McFarland,
Deputy Secretary.
    Note: The text of the following Form ADV-Y2K will not appear in 
the Code of Federal Regulations.
BILLING CODE 8010-01-P

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[FR Doc. 98-17927 Filed 7-6-98; 8:45 am]
BILLING CODE 8010-01-C


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