35508 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations

it is not subject to the analytical

requirements of the Regulatory

Flexibility Act, 5 U.S.C. 601 et seq.

List of Subjects in 15 CFR Part 280

Business and industry, Fastener

industry, Imports.

Dated: June 25, 1998.

Robert E. Hebner,

Acting Deputy Director, National Institute of

Standards and Technology.

PART 280—FASTERNER QUALITY

For the reasons set forth in the

preamble, Title 15 of the Code of

Federal regulations part 280 is amended

as follows:

1. The authority for part 280

continues to read as follows:

Authority: Sec. 13 of the Fastener Qaulity

Act (Pub. L. 101–592, as amended by Pub. L.

104–113).

2. Section 280.12 is revised to read as

follows:

§ 280.12 Applicability.

(a) The requirements of the Fastener

Qaulity Act and this report shall be

applicable only to fasteners

manufactured on or after October 25,

1998.

(b) Metal manufactured prior to

october 25, 1998 may not be used to

manufacture fasteners subject to the Act

and this part unless the metal has not

tested for chemistry pursuant to

§ 280.15 of this part by a laboratory

accredited under the Act and this part

and the chemical charteristics of the

metal conform to those required by the

standards and specifications.

(c) Nothing in the Act and this part

prohibits selling finished fasteners

manufacture prior to october 25, 1998 or

representing that such fasteners meet

standards and specifications of a

consensus standards organization or a

government agency.

3. Section 280.602(k) is revised to

read as follows:

§ 280.602 Violations.

* * * * *

(k) Sale of fasteners manufactured

prior the implementation date as

compliant with the Act. No person shall

represent, sell, or offer for sale fasteners

manufactured prior to October 25, 1998

as being in conformance with the Act of

this part except as provided for in

§ 280.12 (d) or (e) of this part.

* * * * *

4. Section 280.810(c)(3)(i) is revised to

read as follows:

§ 280.810 Listing of recognized

accreditors, accredited registrars, and

registered facilities.

* * * * *

(c) List of Facilities. * * *

(3)(i) If a Facility intends to be listed

in accordance with § 280.810(c)(1) but

the registration process will not be

completed by October 25, 1998, the

Facility may be provisionally listed on

the Facilities List by providing the

following to NIST on or before

September 30, 1998:

(A) Certification that:

(1) The Facility is registered to QS–

9000 or an equivalent by a quality

systems registrar;

(2) The facility conforms to all other

requirements of the Act and these

regulations at the time of certification;

(3) If the Facility ceases to be

registered to QS–9000 or an equivalent

by an accredited Registrar and/or ceases

to conform to any other requirement of

the Act and these regulations at any

time during the provisional listing

period, it will notify NIST of that fact

within three working days; and

(4) If the Facility fails to apply to an

accredited Registrar for registration

under the FQA within 30 days of the

time the Registrar is accredited by a

NIST-approved Accreditor, an

authorized representative of the Facility

will immediately notify NIST. (If the

Facility’s current Registrar decides not

to seek accreditaton under the FQA, it

is the Facility’s responsibility to apply

to another Registrary that has been

approved by NIST-ABEP.);

* * * * *

[FR Doc. 98–17319 Filed 6–29–98; 8:45 am]

BILLING CODE 3510–13–M

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 230, 240, 270, and 275

[Release Nos. 33–7548, 34–40122, IC–23272,

and IA–1727; File No. S7–4–97]

RIN 3235–AG62; 3235–AH01

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

AGENCY: Securities and Exchange

Commission.

ACTION: Final rules.

SUMMARY: The Securities and Exchange

Commission is amending the definitions

of ‘‘small business’’ and ‘‘small

organization’’ that are used in

connection with Commission

rulemaking 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 regarding

regulatory requirements applicable to

investment companies, investment

advisers, exchanges, securities

information processors, transfer agents

and issuers, and broker-dealers. These

definitions are used specifically for

purposes of the Regulatory Flexibility

Act, which requires the Commission to

consider the impact of its regulations on

small entities. The amendments to these

definitions reflect recent changes in the

law as well as changes in the securities

markets over the past decade, including

technological innovations and increased

business relationships among

participants in the securities industry.

EFFECTIVE DATE: The rule amendments

will become effective July 30, 1998.

FOR FURTHER INFORMATION CONTACT:

General

Christopher Gilkerson, Assistant

General Counsel at (202–942–0929), or

Anne H. Sullivan, Senior Counsel at

(202–942–0954), Office of the General

Counsel, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Mail Stop 6–6, Washington, D.C. 20549.

Divisions with Particular Responsibility

Thomas M.J. Kerwin, Senior Counsel,

Division of Investment Management,

(definitions applicable to investment

companies and investment advisers)

(202–942–0690).

Glenn J. Jessee, Special Counsel,

Office of the Chief Counsel, Division of

Market Regulation (definitions

applicable to brokers, dealers,

exchanges, transfer agents and issuers,

securities information processors, and

broker-dealers) (202–942–0073).

SUPPLEMENTARY INFORMATION: The

Commission is amending the definitions

of ‘‘small business’’ and ‘‘small

organization’’ (together, ‘‘small

business’’) set forth in Rule 0–10 (17

CFR 270.0–10) under the Investment

Company Act of 1940 (15 U.S.C. 80a–1

et seq.) (‘‘Investment Company Act’’),

Rule 0–7 (17 CFR 275.0–7) under the

Investment Advisers Act of 1940 (15

U.S.C. 80b–1 et seq.) (the ‘‘Advisers

Act’’), Rule 0–10 (17 CFR 240.0–10)

under the Securities Exchange Act of

1934 (15 U.S.C. 78a et seq.) (the

‘‘Exchange Act’’), and Rule 157 (17 CFR

230.157) under the Securities Act of

1933 (15 U.S.C. 77a et seq.) (the

‘‘Securities Act’’) as those terms are

used for purposes of Chapter Six of the

Administrative Procedure Act, 5 U.S.C.

601 et seq. (the Regulatory Flexibility

Act, Pub. L. No. 96–354, 94 Stat. 1164

(1980), as amended, Pub. L. No. 104–
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations 35509

1 5 U.S.C. 603, 604.

2 15 U.S.C. 631 et seq.

3 13 CFR Part 121.

4Securities Act Release No. 7383, Exchange Act

Release No. 38190, Investment Company Act

Release No. 22478, Investment Advisers Act Release

No. 1609, 62 FR 4106 (Jan. 28, 1997) (the

‘‘Proposing Release’’).

5The Commission’s Website is located at http://

www.sec.gov.

6Securities Act Release No. 7404, Exchange Act

Release No. 38401, Investment Company Act

Release No. 22566, Investment Advisers Act Release

No. 1619, 62 FR 13356 (Mar. 20, 1997).

7The Commission intends to maintain its current

definitions of ‘‘small business’’ as they relate to

small business issuers, clearing agencies, bank

municipal securities dealers, and public utility

holding company systems.

8Pub. L. No. 104–290, 110 Stat. 3416 (1996).

9See 5 U.S.C. 601(3), 601(4).

10 Id. § 601(6).

11 13 CFR Part 121.

12 15 U.S.C. 632(a)(2)(A) (SBA authority to

establish standards for determining ‘‘small business

concern’’).

13 5 U.S.C. 601(3), 601(4).

14See Proposing Release, supra note 4.

15The SBA adopted its size standards in 1980.

Small Business Size Standards, Revisions of

Methods of Establishing Size Standards and

Definitions of Small Business, 45 FR 15442 (Mar.

10, 1980). The Commission determined that the

SBA size standards were generally inappropriate in

the context of regulations affecting securities issuers

and reporting companies. See Proposed Definitions

of ‘‘Small Business’’ and ‘‘Small Organization’’ for

Purposes of the Regulatory Flexibility Act,

Securities Act Release No. 6302, Exchange Act

Release No. 17645, PUHCA Release No. 21970,

Trust Indenture Act Release No. 619, Investment

Company Act Release No. 11694, Investment

Advisers Act Release No. 754, 46 FR 19251 (Mar.

30, 1981) (‘‘1981 Proposing Release’’); see also Final

Definitions of ‘‘Small Business’’ and ‘‘Small

Organization’’ for Purposes of the Regulatory

Flexibility Act, Securities Act Release No. 6380,

Exchange Act Release No. 18452, PUHCA Release

No. 22371, Trust Indenture Act Release No. 693,

Investment Company Act Release No. 12194,

Investment Advisers Act Release No. 791, 47 FR

5215, 5216 (Feb. 4, 1982) (‘‘1982 Adopting

Release’’).

16See 5 U.S.C. 601(4) (‘‘small organization’’ under

the Reg. Flex. Act means an entity that is

‘‘independently owned and operated and is not

dominant in its field’’); 15 U.S.C. 632(a)(1)

(definition of ‘‘small-business concern’’ under the

Small Business Act (as incorporated in the Reg.

Flex. Act definition of ‘‘small business,’’ 5 U.S.C.

601(3)) means an entity that is ‘‘independently

owned and operated and * * * is not dominant in

its field’’).

17See SBA size standards, 13 CFR 121.102 (size

eligibility provisions and standards).

18 Id. § 121.103.

19 Id. § 121.103(a)(1) (describing control

relationships that constitute affiliation); id.

§ 121.103(a)(2) (describing factors such as

ownership, management, previous relationships

with or ties to another concern, and contractual

relationships that SBA considers in determining

whether affiliation exists).

20See id. § 121.103(a)(3).

21Under certain of the current definitions of

‘‘small business’’ under the Exchange Act (broker,

dealer, clearing agency, municipal securities dealer,

securities information processor, transfer agent), the

Commission has considered control interests in

determining whether an entity was ‘‘small.’’

Exchange Act Rule 0–10 (17 CFR 240.0–10). The

SBA regulations also address factors of control. 13

CFR 121.103(a)(1).

22Under the current definitions, approximately

75 percent of investment advisers and 60 percent

of registered broker-dealers qualify as ‘‘small.’’ The

number of ‘‘small’’ investment advisers registered

with the Commission was significantly reduced as

of July 8, 1997, however, as a result of legislation

that reallocated primary responsibility for

regulating most smaller investment advisers to the

states. See infra notes 45–47 and accompanying

text.

121, Title II, Subtitle D, 110 Stat. 864

(1996) (the ‘‘Reg. Flex. Act’’)).

The Reg. Flex. Act, enacted in 1980,

requires federal agencies, among other

things, to consider the impact of

rulemaking on entities that qualify as

‘‘small’’ under applicable standards in

the Reg. Flex. Act,1 the Small Business

Act,2 or regulations promulgated by the

Small Business Administration

(‘‘SBA’’).3 In 1982, the Commission

adopted definitions that it considered

appropriate for issuers and other entities

subject to its regulation.

On January 22, 1997, the Commission

published for comment proposed

amendments to its definitions of ‘‘small

business’’ for purposes of the Reg. Flex.

Act, when used in connection with

rulemaking affecting investment

companies, investment advisers,

exchanges, securities information

processors, transfer agents and issuers,

and broker-dealers.4 In addition to

publishing the rule proposal in the

Federal Register, the Commission

posted the proposed rule changes on the

small business page of the

Commission’s Website.5 To give the

public additional time to comment, the

Commission extended the comment

period for the proposed amendments.6

The Commission received no comments

on the proposal. The Commission is

adopting the amendments to the ‘‘small

business’’ definitions as proposed.7 The

Commission is, however, making some

modifications to the ‘‘small business’’

definition of investment adviser to

reflect amendments to the Investment

Advisers Act enacted under the

National Securities Markets

Improvement Act of 1996 (the

‘‘Improvement Act’’) 8 and to simplify

the definition. As required under the

Reg. Flex. Act, the Commission has

consulted with the SBA Office of

Advocacy regarding the amendments it

is adopting.9

I. Background

The Reg. Flex. Act defines the term

‘‘small entity’’ as a ‘‘small business,’’

‘‘small organization,’’ or ‘‘small

governmental jurisdiction.’’ 10 The

definition of ‘‘small business’’

incorporates the Small Business Size

Regulations (‘‘SBA size standards’’) 11

established by the SBA under the Small

Business Act.12 In addition, the Reg.

Flex. Act definition of ‘‘small business’’

authorizes agencies to establish their

own definitions if they determine that

specialized definitions are more

appropriate to the activities of the

agency.13

As discussed in greater detail in the

Proposing Release, the Commission has

a longstanding commitment to

understanding and addressing the

concerns of small business.14 Consistent

with this commitment, in 1982, the

Commission chose to adopt its own

definitions of ‘‘small business’’ for

purposes of Commission rulemaking

after reviewing size standards adopted

by the SBA.15

As discussed in the Proposing

Release, the Commission’s definitions

adopted in 1982 were, in many ways,

more expansive than the statutory

definitions of ‘‘small business’’ and

‘‘small organization’’ in the Reg. Flex.

Act. Under the Reg. Flex. Act, a

business is not considered ‘‘small’’ if it

is not ‘‘independently owned and

operated.’’ 16 The Commission’s

definitions went beyond the Reg. Flex.

Act requirements because, for the most

part, the Commission’s definitions did

not limit ‘‘small businesses’’ to those

that were independently owned and

operated. The Commission’s original

definitions also were broader in certain

respects than the SBA size standards,

which consider various limiting factors

when determining if an entity is

‘‘small.’’ 17 For example, the SBA size

standards aggregate the interests of

affiliated entities for the purpose of

determining whether an entity is

‘‘independently owned and operated,’’

and thus, ‘‘small.’’ 18 In determining

whether entities are affiliated, the SBA

size standards consider such factors as

control, management, ownership, and

contractual relationships.19 In addition,

the SBA may treat multiple entities that

have identical or substantially identical

business or economic interests as a

single entity.20 Although the

Commission’s current definitions in

some cases address the concept of

control,21 none of the other affiliation

concepts set forth in the SBA size

standards were considered when the

Commission originally adopted its

definitions of ‘‘small business’’ in 1982.

Under the Commission’s current

definitions, a majority of broker-dealers

and investment advisers qualify as

small.22 Some of those ‘‘small’’ brokerdealers handle customer orders in

excess of $200 million from which they

earn more than $6 million per year in
35510 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations

23The revenue amount is based on information

provided by broker-dealers in quarterly FOCUS

reports. The amount of customer order flow is

derived using revenue data in the FOCUS reports.

24Between 1980 and 1996, the value of public

offerings (including debt and equity, but not

investment company securities) increased from $58

billion to over $1 trillion. Between 1990 and 1996,

the dollar volume of equity securities traded on

registered national securities exchanges and Nasdaq

grew 277 percent, with over $7.8 trillion traded in

1996. Assets under management by investment

advisers (excluding bank advisers to registered

investment companies) rose from $205 billion to

over $10 trillion (a 4,778 percent increase) between

1980 and 1996. Over the same period, assets of

investment companies increased 1,514 percent from

$235 billion to $3.794 trillion. The number of

securities firms and professionals registered with

the Commission or with self-regulatory

organizations has also surged. The number of

broker-dealers grew, over the same period, from

around 5,200 to approximately 7,760 (a 49 percent

increase). In addition, technological progress has

changed the securities industry. For example,

advances in information technology have resulted

in the proliferation of information vendors and

electronic trading systems not contemplated in

1982. Since 1982, the markets have seen the

development of fully automated electronic brokerdealers and exchanges, improved electronic order

execution systems at broker-dealers, exchanges, and

national securities associations, and improved

electronic linkages among markets and between

broker-dealers and their customers. These changes

have created substantially deeper and more liquid

markets and have made trading more immediate

and less expensive for both institutional and retail

customers.

25See Introduction to the Regulatory Plan and the

Unified Agenda of Federal Regulations, 60 FR

59503, 61073 (Nov. 28, 1995) (noting Division of

Investment Management’s consideration whether to

recommend that the Commission propose amended

definition of ‘‘small entity’’ in Rule 0–10 (17 CFR

270.0–10) under the Investment Company Act).

26Pub. L. No. 104–121, Title II, 110 Stat. 857

(1996).

27 Id. §§ 212, 213(b), 110 Stat. 858, 859.

28 Id. § 242, 110 Stat. 865.

29 5 U.S.C. 504; 28 U.S.C. 2412.

30Pub. L. No. 104–121, § 232(b)(2), 110 Stat 863.

31The Commission is concerned that, as a result

of the Commission’s existing broad definitions of

‘‘small business,’’ certain of the amendments made

by SBREFA could result in a significant increase in

the Commission’s exposure to litigation beyond that

reasonably contemplated by the Reg. Flex. Act. The

Commission’s enforcement litigation and other

litigation matters have increased in recent years. In

light of increased exposure to litigation under

SBREFA, which could further strain the

Commission’s limited budget, the Commission

believes it is appropriate to revise certain small

business definitions under its own rules to reflect

better the policies underlying the Reg. Flex. Act and

the SBA size standards.

32 In instances where the Commission has already

instituted a rulemaking proceeding and prepared an

Initial Regulatory Flexibility Analysis (IRFA) under

the old small business definitions, those definitions

will apply for purposes of any final rulemaking and

the Commission’s preparation of the required Final

Regulatory Flexibility Analysis (FRFA).

33See amended Rule 0–10 (17 CFR 270.0–10);

Proposing Release, supra note 4.

34Rule 0–10 (17 CFR 270.0–10).

35Amended Rule 0–10. Conforming amendments

to Rule 157(b) (17 CFR 230.157(b)) under the

Securities Act and Rule 0–10(b) (17 CFR 240.0–

10(b)) under the Exchange Act adopt the same small

business definition of an investment company. To

facilitate the efficient computation of net assets, the

amended rule provides that the Commission may

base its count of the assets of any group of related

funds on the net assets of each fund (or series) in

the group at the end of each fund’s fiscal year, as

generally reported in Form N–SAR. Amended Rule

0–10(c) (17 CFR 270.0–10(c)); see 17 CFR 274.101;

Form N–SAR, Item 74T. As under the current rule,

small business status will be determined on a

company-by-company basis rather than a series-byseries basis (even in the unusual circumstances

when some series of a multi-series company may

not constitute a group of related funds with respect

to other series).

36Amended Rule 0–10(a)(1) (17 CFR 270.0–

10(a)(1)). Under this definition, the assets to be

aggregated for a multi-series company would

include those of all series of the company, and of

any separately organized company (and its series)

in a related group.

37Amended Rule 0–10(a)(2) (17 CFR 270.0–

10(a)(2)). A UIT holds a fixed portfolio of securities

deposited by its sponsor, and does not have an

investment adviser. See generally Section 4(2) of the

Investment Company Act (15 U.S.C. 80a–4(2)). The

amended rule does not define a group of related

funds as applied to a face amount certificate

company, another type of fund, which will

continue to be subject to the $50 million test on a

company-by-company basis.

38Separate accounts contain assets used to fund

certain insurance and investment contracts between

revenue.23 These entities are classified

as ‘‘small’’ under current Commission

rules even though they may be affiliated

with larger entities that are responsible

for many of the smaller firms’ securities

functions. Similarly, today most mutual

funds are affiliated with large mutual

fund families, and many investment

advisers are affiliated with larger

financial services firms. These

relationships allow the ‘‘small’’ affiliates

to rely on a larger entity that centralizes

administrative and compliance systems

for all affiliates, significantly reducing

regulatory burdens for each individual

affiliate.

A similar relationship exists between

introducing broker-dealers and the large

firms through which they clear

securities trades. Although introducing

and clearing firms share responsibility

for ensuring that a customer’s account is

handled properly, introducing firms

typically depend on clearing firms to

execute customer trades, to handle

customer funds and securities, and to

handle many back-office functions,

including issuing the confirmation of

the customer’s trade. The increase in

these affiliations since 1982 occurred

along with tremendous growth and

significant technological changes in the

securities industry that facilitate such

arrangements.24 These changes in the

securities industry prompted the

Commission to begin reviewing certain

of its ‘‘small business’’ definitions in

1995.25

The Commission expanded its review

of ‘‘small business’’ definitions in 1996,

after Congress enacted the Small

Business Regulatory Enforcement

Fairness Act of 1996 (‘‘SBREFA’’).26

Among other things, SBREFA (i)

imposed new obligations on the

Commission and other agencies to assist

small entities in understanding and

complying with regulatory

requirements,27 (ii) amended the Reg.

Flex. Act to allow small entities to seek

judicial review of agency compliance

with the Reg. Flex. Act,28 and (iii)

amended the Equal Access to Justice Act

(‘‘EAJA’’) 29 by expanding the class of

litigants eligible to receive EAJA awards

to include small entities as defined

under the Reg. Flex. Act.30 In view of

the Commission’s expanded obligations

under SBREFA,31 and changes in the

securities industry discussed above, the

Commission is adopting amendments to

certain of its ‘‘small business’’

definitions to take into account more of

the factors suggested by SBA size

standards in determining whether an

entity qualifies as ‘‘small.’’ 32 The

following sections of this release

describe the amendments to specific

‘‘small business’’ definitions. The

release also discusses how the amended

definition of ‘‘small business’’ as it

relates to investment advisers differs

from the proposal and the reasons for

the changes.

II. Discussion of Amendments

A. Investment Companies

The Commission is adopting, as

proposed, amendments to the rule

under the Investment Company Act that

defines ‘‘small business’’ as applied to

investment companies.33 The current

rule treats as a small business each

investment company (‘‘fund’’) that has

$50 million or less in assets as of the

end of its fiscal year.34 As amended, the

rule generally treats a fund as a small

business only if it and any group of

related funds have aggregate net assets

of $50 million or less.35 The

Commission estimates that

approximately 400 funds will be treated

as small businesses under the amended

rule.

The amended rule defines a group of

related funds to include two or more

management companies (including any

series of such a company) that hold

themselves out to investors as related

companies for purposes of investment

and investor services, and share either

a common investment adviser (or

affiliated advisers) or a common

administrator.36 In the case of a unit

investment trust (‘‘UIT’’), a group of

related funds means two or more UITs

that have a common sponsor.37

There is a special rule applicable to

insurance company separate accounts.38
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations 35511

the sponsoring insurance company and contract

owners. Each account typically is organized as a

UIT, or in some cases as a management company

having a sponsor-affiliated investment adviser. See

generally Section 2(a)(37) of the Investment

Company Act (15 U.S.C. 80a–2(a)(37)).

39Amended Rule 0–10(b) (17 CFR 270.0–10(b)).

40See amended Rule 0–7 (17 CFR 275.0–7);

Proposing Release, supra note .

41Rule 0–7 (17 CFR 275.0–7).

42Amended Rule 0–7. ‘‘Total assets’’ is a broader

and simpler term than ‘‘business assets.’’ See

amended Rule 0–7(b)(2) (total assets means total

assets as shown on the balance sheet of investment

adviser or other ‘‘person’’ in a control relationship

with the adviser). It includes business assets, such

as leases and equipment, as well as other types of

assets, such as cash and accounts receivable. Total

assets should be easier for advisers to calculate than

business assets, since the information on total assets

is readily available on the balance sheets of advisers

and their affiliates.

43See Proposing Release, supra note , at text

accompanying n.60.

44 Id. As noted above, the Commission received

no comments.

45See Rules Implementing Amendments to the

Investment Advisers Act of 1940, Investment

Advisers Act Release No. 1633 (May 15, 1997) at

text accompanying note 5 (62 FR 28112 (May 22,

1997)) (‘‘Adviser Registration Release’’).

46See Section 203A(a)(1) of the Advisers Act (15

U.S.C. 80b–3a(a)(1)) (prohibiting an adviser from

registering with the Commission if it is subject to

regulation by its home state unless it has assets

under management of $25 million or more). The

Commission retains primary responsibility for

larger advisers, advisers to investment companies,

advisers whose principal office and place of

business is located in one of the four states that do

not regulate advisers or is located overseas, and

advisers exempted by rule from the prohibition on

registration with the Commission. See Section

203A(a)(1) and (c) of the Advisers Act (15 U.S.C.

80b–3a(a)(1) and (c)); Rule 203A–2 (17 CFR

275.203A–2) (exempting nationally recognized

statistical rating organizations, certain pension

consultants, any smaller adviser having the same

principal office and place of business as a registered

adviser affiliated with it through a control

relationship, and any new firm reasonably

expecting to have $25 million or more of assets

under management).

47See Report on S. 1815, ‘‘The Securities

Investment Promotion Act of 1996,’’ S. Rep. No.

293, 104th Cong., 2d Sess. 1–4 (1996) (legislation

would focus SEC supervision ‘‘on investment

advisers most likely to be engaged in interstate

commerce’’ and focus state supervision ‘‘on

advisers whose activities are most likely to be

centered in their home state’’; ‘‘legislation allows

states to assume the primary role with respect to

regulating advisers that are small, local businesses,

managing less than $25 million in client assets,

while the Commission’s role is focused on larger

advisers with $25 million or more in client assets

under management’’).

48The Advisers Act permits the Commission to

increase (but not to reduce) the $25 million

minimum threshold for registration with the

Commission. See Section 203A(a)(1)(A) of the

Advisers Act (15 U.S.C. 80b–3a(a)(1)(A)). To

coordinate amended Rule 0–7 with future

Commission rulemaking in this regard, the

amended rule provides that the maximum threshold

for a small business will increase in tandem with

any increase in the minimum threshold for

Advisers Act registration. Amended Rule 0–7(a)(1)

and (3) (17 CFR 275.0–7(a)(1) and (3)). Rule 203A–

1 (17 CFR 275.203A–1), which gives an adviser

discretion whether to register with the Commission

instead of a state if the adviser has between $25

million and $30 million of assets under

management, does not affect the definition of small

business for purposes of amended Rule 0–7. See

Adviser Registration Release, supra note 45, at text

accompanying nn.48–49 (Rule 203A–1 merely

makes registration optional within a specified range

without raising the minimum threshold for

registration).

49See Proposing Release, supra note , at nn.51–

58 and accompanying text (proposing to extend

current Rule 0–7’s $50,000 business asset test to all

advisers; proposing not to treat adviser as small

entity if affiliated with large adviser or fund or

entity deemed large under Rule 0–10 under the

Exchange Act (17 CFR 240.0–10)).

50See 1981 Proposing Release, supra note 15 at

19257, 19263 (two attributes desirable in size

standards are capacity to differentiate the small

members of an industry from other members and

the use of readily available information to derive

standards). Under the amended rule, the

determination of the adviser’s small status will be

based on information reported by the adviser about

its size and the size of its affiliates under two tests,

as explained below. In contrast, the proposed

amendments would have applied two size tests to

the adviser and several other tests to affiliates. The

Commission expects to propose to amend Form

ADV to add questions needed to obtain the

information.

Because state law generally treats

separate account assets as the property

of the sponsoring insurance company,

the amended rule aggregates each

separate account’s assets with the assets

of its sponsor, including other

sponsored accounts.39 As a result, the

Commission expects few, if any,

separate accounts to be treated as small

businesses.

B. Investment Advisers

The Commission is adopting

proposed amendments to the rule under

the Advisers Act that defines ‘‘small

business’’ as applied to investment

advisers, with changes designed to

reflect recent legislation and to simplify

the proposed amendments.40 The

current rule defines as a small business

each investment adviser that either (i)

manages assets (‘‘client assets’’) with a

total value of $50 million or less as of

the end of its most recent fiscal year,

and performs no other advisory services;

or (ii) performs other advisory services,

manages client assets of $50 million or

less if it manages client funds, and has

assets related to its advisory business

(‘‘business assets’’) that do not exceed

$50,000.41 As amended, Rule 0–7 treats

an adviser as a small business if (i)

neither the adviser nor an adviser it

controls, is controlled by, or is under

common control with has $25 million or

more of assets under management, and

(ii) neither the adviser nor any person

it controls, is controlled by, or is under

common control with has $5 million or

more of total assets.42

In the Proposing Release, the

Commission requested comment

whether, in light of the Improvement

Act’s transfer of primary responsibility

for regulating small advisers to the

states, a threshold of $25 million for

client assets under management would

be more appropriate than the $50

million threshold.43 The Commission

also requested comment whether the

$50,000 threshold for business assets

continued to be appropriate.44 The

Commission has now determined that

the $25 million client asset threshold

coupled with a $5 million total assets

test more appropriately reflects the

Improvement Act’s allocation of

regulatory responsibilities between the

Commission and the states.

The Improvement Act reallocated

regulatory responsibility over

investment advisers between the

Commission (which is now responsible

for larger advisers with national

businesses) and state securities

regulators (which are now responsible

for smaller advisers with essentially

local businesses).45 To effect this

division of responsibility, Congress

generally prohibited advisers with less

than $25 million of assets under

management from registering with the

Commission after July 8, 1997.46 Thus,

Congress viewed ‘‘small advisers’’ as

those having less than $25 million of

assets under management.47 The

Commission believes that the definition

of small business as applied to

investment advisers for Reg. Flex. Act

purposes should be revised to reflect the

threshold that Congress used in the

Improvement Act for similar purposes.

Therefore, the Commission is reducing

the threshold to $25 million of assets

under management.48

Under the proposed amendments, an

adviser having less than $50 million of

client assets would not have been

considered a small business if the

adviser (i) had substantial business

assets or (ii) was affiliated with a large

firm.49 Amended Rule 0–7 reflects the

policy of extending an asset test to all

investment advisers, but substantially

simplifies the proposed amendments

and reduces the amount of information

the Commission must collect to

determine whether an adviser is a small

business.50 As adopted, the rule

excludes from the definition of small

business an adviser having less than $25

million of assets under management if,

based on information filed with the

Commission, the adviser (i) has $5

million or more of ‘‘total assets,’’ or (ii)

controls, is controlled by, or is under

common control with (a) another

adviser that has $25 million or more of

assets under management or (b) any

person (other than a natural person) that
35512 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations

51See amended Rule 0–7(a) (2) and (3) (17 CFR

275.0–7(a)(2) and (3)). The $5 million total assets

test is one measure of a small entity under Rule 0–

10 (17 CFR 240.0–10(a)) under the Exchange Act.

Amended Rule 0–7(b)(1) defines control consistent

with Rule 203A–2(c) under the Advisers Act (17

CFR 275.203A–2(c)).

52The number of small businesses for which the

Commission has primary regulatory responsibility

has dropped sharply as a result of the Improvement

Act’s prohibiting most small advisers from

registering with the Commission. See supra text

accompanying notes 45–47. Following the final deregistration of those advisers no longer eligible to

register with the Commission, there will be

approximately 7,600 Commission-registered

advisers. In contrast, prior to July 8, 1997 there

were approximately 23,000 advisers registered with

the Commission.

53See supra note 46. When one or more of these

four states institutes a registration scheme for

advisers with assets under management of less than

$25 million, the number of small business advisers

registered with the Commission will decrease. See

also Adviser Registration Release, supra note 45, at

n.42 (‘‘Commission data suggests that most advisers

that will remain registered with the Commission

have assets under management well in excess of

$25 million’’).

54The term ‘‘exchange’’ is defined in Section

3(a)(1) of the Exchange Act (15 U.S.C. 78c(a)(1)).

The Commission is retaining the existing provisions

of Rule 0–10 that define as ‘‘small’’ those exchanges

that are exempt from the requirements of rule

11Aa3–1 (17 CFR 240.11Aa3–1) regarding the

dissemination of transaction reports and last sale

data with respect to transactions in securities.

Currently, none of the eight registered exchanges is

fully exempted from the requirements of Rule

11Aa3–1 and, consequently, none is considered a

‘‘small business’’ under Rule 0–10.

55This amendment is consistent with the

Commission’s belief that it is appropriate to exclude

entities with significant economic and financial

resources from regulatory treatment as small

businesses under the Reg. Flex. Act. See 1981

Proposing Release, 46 FR at 19257.

56The term ‘‘securities information processor’’ is

defined in Section 3(a)(22) of the Exchange Act (15

U.S.C. 78c(a)(22)). Currently, neither of the two

registered exclusive securities information

processors is designated as a ‘‘small business’’

under Rule 0–10.

57The term ‘‘transfer agent’’ is defined in Section

3(a)(25) of the Exchange Act (15 U.S.C. 78c(a)(25)).

58Small issuers, for this purpose, are issuers with

total assets of $5 million or less.

59See Securities and Exchange Commission,

Study of Unsafe and Unsound Practices of Broker

and Dealers 37–39 (1971).

60 15 U.S.C. 78l, 78m, 78n, 78o(d), and 78p.

61See supra note 16. As noted above, amended

Rule 0–10 provides that only those transfer agents

that limit the number of items they transfer, handle

a limited number of shareholder accounts, and

transfer small issuer securities are considered small

businesses. Because this category is limited to those

transfer agents that would generally be exempt from

registration under Exchange Act Section 17A, the

Commission believes that there will be few, if any,

registered transfer agents that qualify as small

businesses for purposes of the Reg. Flex. Act.

62The term ‘‘broker’’ is defined in Section 3(a)(4)

of the Exchange Act (15 U.S.C. 78c(a)(4)).

63The term ‘‘dealer’’ is defined in Section 3(a)(5)

of the Exchange Act (15 U.S.C. 78c(a)(5)).

64Rule 0–10 under the Exchange Act (17 CFR

240.0–10(c)) currently defines ‘‘small business’’ to

include any broker or dealer that has total capital

of less than $500,000 and that is not affiliated with

has $5 million or more of total assets.51

The Commission estimates that under

amended Rule 0–7, approximately 1,500

registered advisers will be treated as

small businesses, approximately 500

fewer than under the proposed

amendments.52 Most of this change is

attributable to reducing the threshold

for client assets to less than $25 million

of assets under management. The

advisers considered small businesses

under the amended rule will consist

primarily of the advisers that have less

than $25 million of assets under

management but are registered with the

Commission because they have a

principal office and place of business in

one of the four states that does not

regulate advisers.53

C. Definitions Under the Exchange Act

1. Exchanges

As discussed in the Proposing

Release, the Commission is expanding

the definition of ‘‘small business’’ as it

applies to exchanges to include a

requirement that an exchange also not

be affiliated with any person (other than

a natural person) that is not a small

business as defined in Rule 0–10.54

Under the amended rule, an exchange is

‘‘affiliated’’ with another entity when

the exchange controls, is controlled by,

or is under common control with the

other entity. This change will conform

the definition applicable to exchanges

with other definitions of ‘‘small

business’’ under the Exchange Act by

applying the affiliation standard already

applicable to broker-dealers, clearing

agencies, bank municipal securities

dealers, securities information

processors, and transfer agents.55

2. Securities Information Processors

The Commission is retaining in

substantially the same form the existing

criteria for determining whether a

securities information processor is a

‘‘small business.’’ This includes the

requirement that, to be considered

small, a securities information processor

must have serviced less than 100

interrogation devices or moving tickers

during the preceding fiscal year.56 As

proposed, the Commission also is

modifying the definition of

‘‘interrogation device’’ for purposes of

Rule 0–10 to take into account new

technologies used to disseminate

securities industry information to

markets and market participants

through increasingly diverse methods.

Accordingly, for purposes of the

amended small business definition,

‘‘interrogation device’’ includes any

device that may be used to read or

receive electronic information,

including proprietary terminals or

personal computers via computer-tocomputer interfaces, or gateway access.

This will include electronic devices that

display securities information such as

quotations and indications of interest, as

well as those that display only last sale

data or transaction reports.

3. Transfer Agents and Issuers

The amended small business

definition for transfer agents retains the

existing criteria based on volume of

transfer business and number of

shareholder accounts.57 As discussed in

the Proposing Release, however, the

Commission is adding a third criterion:

whether a transfer agent transfers only

the items of ‘‘small issuers,’’ as defined

under Exchange Act Rule 0–10.58 The

shares of small issuers, as opposed to

those of large publicly-traded

companies, typically are held by a small

portion of the investing public and are

less likely to be the subject of a

substantial amount of trading activity.

Thus, the activities of small transfer

agents, many of which are not subject to

registration under Section 17A of the

Exchange Act, are not likely to have a

substantial effect on the investing public

or the operation of the national

clearance and settlement system. In

contrast, transfer agents for large

companies whose shares are heavily

traded are likely to have a far greater

effect on securities processing,

generally, and on the operation of the

national clearance and settlement

system.59

The Commission also is deleting

language in Rule 0–10(a) that currently

limits the definition of small business,

as it refers to ‘‘issuer’’ or ‘‘person,’’ to

Sections 12, 13, 14, 15(d), or 16 of the

Exchange Act.60 This deletion reflects

that, under the amended rule, transfer

agents who transfer items of issuers

with total assets greater than $5 million

will not be considered small for

purposes of the Reg. Flex. Act. In

addition, no transfer agent, brokerdealer, exchange, clearing agency,

securities information processor, or

bank municipal securities dealer will be

classified as small if it is affiliated with

an issuer that does not qualify as small

under Rule 0–10. This change is

consistent with the intent of the Reg.

Flex. Act that only businesses and

organizations that are ‘‘independently

owned’’ may qualify as small entities.61

4. Broker-Dealers

As discussed in the Proposing

Release, the Commission is retaining the

capital standard currently set forth in

Rule 0–10 that is used for determining

whether a broker 62 or dealer 63 is

deemed a ‘‘small business.’’ 64 The
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations 35513

any person (other than a natural person) that is not

a small business under the rule.

65From a functional perspective, introducing and

clearing brokers act as a unit in handling a

customer’s account. In most respects, introducing

brokers are dependent on clearing firms to clear and

to execute customer trades, to handle customer

funds and securities, and to handle many backoffice functions, including issuing confirmations of

customer trades and customer account statements.

The clearing agreement outlining the respective

duties and obligations of an introducing broker and

its clearing firm typically contains various

requirements imposed by the clearing firm with

respect to the handling of customer accounts by the

clearing and introducing brokers, and the clearing

firm’s maintenance of customer assets. Although

the customer places its order directly with the

introducing firm, the Commission considers the

account to be an account of the clearing firm, which

has primary legal responsibility with respect to the

handling of customer funds and securities, and for

sending account statements to the customer. Thus,

both introducing and clearing firms have a shared

responsibility for ensuring that a customer’s

account is handled properly.

66See supra notes 19–20 and accompanying text

(SBA size standard considerations in determining

‘‘small business concern’’). See also Report to

Accompany H.R. 4660, H.R. Rep. No. 96–519, pt.1,

at 19 (1979) (suggesting that the definition of ‘‘small

businesses’’ was intended to encompass businesses

that are independently owned and operated and not

dominant in their field of operation). Consistent

with the Reg. Flex. Act definitions of small

business, SBA regulations that address affiliation

consider whether individuals or firms have

identical or substantially identical business

interests, as in the case of firms that are

economically dependent through contractual or

other relationships. 13 CFR 121.103(a).

67As a legal matter, for purposes of the Securities

Investor Protection Act of 1970 (15 U.S.C. 78aaa et

seq.) and the Commission’s financial responsibility

rules, a customer is the customer of the clearing

firm. See Exchange Act Release No. 31511, 57 FR

56973 (Dec. 2, 1992).

68 15 U.S.C. 78w(a)(2). 69See Proposing Release, 62 FR at 4113.

Commission, however, is expanding the

affiliation standard applicable to brokerdealers. Under the amended definition,

the Commission estimates that

approximately 13 percent of all

registered broker-dealers will be

characterized as ‘‘small.’’

The affiliation test currently only

looks to whether a broker-dealer

controls, is controlled by, or is under

common control with, an entity other

than a small business or small

organization. This test focuses primarily

on relationships between broker-dealers

based on voting control or the sharing

of profits. As discussed in the Proposing

Release, the structure and operation of

broker-dealer activities suggest that

other kinds of business relationships,

such as the contractual relationship

between an introducing broker and its

clearing firm, can give rise to an

opportunity by which a clearing firm

can exercise substantial influence over

the business of its introducing brokers.

In order to conform better its affiliation

standard to the nature of business

relationships that exist between brokerdealers, the Commission is expanding

the definition of affiliation applicable to

broker-dealers under Rule 0–10 to

include arrangements whereby one

broker-dealer introduces transactions in

securities to another.65

This new affiliation standard is

consistent with SBA regulations

addressing affiliation that consider

whether individuals or firms have

identical or substantially identical

business interests, as in the case of firms

that are economically dependent

through contractual or other

relationships.66 As a practical matter,

clearing and introducing firms have

identical business interests. In fact, most

introducing brokers could not be in

business without the capital,

technology, and back-office support

provided by the clearing firm.

Introducing and clearing brokers also

have a shared legal responsibility for

ensuring that a customer’s account is

handled properly.67

Under amended Rule 0–10, an

introducing broker that introduces

transactions to a large clearing firm

generally will not be considered a

‘‘small business’’ for purposes of the

Reg. Flex. Act. The Commission

acknowledged in the Proposing Release,

however, that certain broker-dealers that

limit their activities to handling only

investment company securities or

interests or participations in insurance

company separate accounts typically are

small, sometimes one-person operations

that combine limited securities

activities with broader tax, financial

planning, and insurance services.

Accordingly, the Commission is

providing an exception from the

affiliation standard for these brokerdealers.

III. Effects on Competition and

Regulatory Flexibility Considerations

Section 23(a)(2) of the Exchange Act 68

requires the Commission, in adopting

rules under the Exchange Act, to

consider the impact a rule would have

on competition and to refrain from

adopting a rule that would impose a

burden on competition not necessary or

appropriate in furtherance of the

purposes of the Exchange Act. The

Commission is of the view that the

amendments to Exchange Act Rule 0–10

will not impose any burden on

competition. The rule changes will not

affect the manner in which any

regulated entity conducts its business.

Moreover, entities that will no longer be

classified as small businesses for Reg.

Flex. Act purposes should suffer no

resulting competitive disadvantage.

Although the Commission considers the

impact of its rules and rule proposals on

small entities, any modification or

accommodation relating to size is based

on objective criteria such as net assets

and not whether an entity meets a

‘‘small business’’ definition under the

Commission’s Rules.

As discussed in the Proposing

Release, the Commission has conferred

with the SBA and the SBA concurs that

no regulatory flexibility analysis is

required for the amendments.69 The

definitions of the terms ‘‘small

business’’ do not impose any

requirements on small businesses. The

definitions are interpretations of terms

that identify those entities that the

Commission will study for Reg. Flex.

Act purposes when proposing and

adopting rules, and are rules of agency

practice and procedure.

IV. Statutory Authority

The Commission is amending Rule

157 (17 CFR 230.157), Rule 0–10 (17

CFR 240.0–10), Rule 0–10 (17 CFR

270.0–10), and Rule 0–7 (17 CFR 275.0–

7) pursuant to chapter 6 of title 5 of the

United States Code (particularly Section

601 thereof (5 U.S.C. 601)), and

pursuant to Section 19 of the Securities

Act of 1933 (15 U.S.C. 77s), Section 23

of the Securities Exchange Act of 1934

(15 U.S.C. 78w), Section 38 of the

Investment Company Act of 1940 (15

U.S.C. 80a–37), and Section 211 of the

Investment Advisers Act of 1940 (15

U.S.C. 80b–11).

Text of Rule Amendments

List of Subjects

17 CFR Parts 230 and 270

Investment companies, Reporting and

recordkeeping requirements, Securities.

17 CFR Part 240

Brokers, Reporting and recordkeeping

requirements, Securities.

17 CFR Part 275

Investment advisers, Reporting and

recordkeeping requirements, Securities.

For the reasons set out in the

preamble, Title 17, Chapter II of the

Code of Federal Regulations is amended

as follows:

PART 230—GENERAL RULES AND

REGULATIONS, SECURITIES ACT OF

1933

The authority citation for Part 230

continues to read, in part, as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j,

77s, 77sss, 78c, 78d, 78l, 78m, 78n, 78o, 78w,
35514 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations

78ll(d), 79t, 80a–8, 80a–24, 80a–29, 80a–30,

and 80a–37, unless otherwise noted.

* * * * *

Section 230.157 is amended by

revising the section heading and

paragraph (b) to read as follows:

§ 230.157 Small entities under the

Securities Act for purposes of the

Regulatory Flexibility Act.

* * * * *

(b) When used with reference to an

investment company that is an issuer for

purposes of the Act, have the meaning

ascribed to those terms by § 270.0–10 of

this chapter.

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

3. The authority citation for Part 240

continues to read in part as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,

77s, 77z–2, 77eee, 77ggg, 77nnn, 77sss, 77ttt,

78c, 78d, 78f, 78i, 78j, 78j–1, 78k, 78k–1, 78l,

78m, 78n, 78o, 78p, 78q, 78s, 78u–5, 78w,

78x, 78ll(d), 78mm, 79q, 79t, 80a–20, 80a–23,

80a–29, 80a–37, 80b–3, 80b–4 and 80b–11,

unless otherwise noted.

* * * * *

4. Section 240.0–10 is amended to

revise the section heading and

paragraphs (a), (b), (e), (g)(2), (g)(3), and

(i); redesignate paragraphs (h)(2) and

(h)(3) as paragraphs (h)(3) and (h)(4),

respectively; and add paragraphs (h)(2),

(j) and (k) to read as follows:

§ 240.0–10 Small entities under the

Securities Exchange Act for purposes of

the Regulatory Flexibility Act.

* * * * *

(a) When used with reference to an

‘‘issuer’’ or a ‘‘person,’’ other than an

investment company, mean an ‘‘issuer’’

or ‘‘person’’ that, on the last day of its

most recent fiscal year, had total assets

of $5 million or less;

(b) When used with reference to an

‘‘issuer’’ or ‘‘person’’ that is an

investment company, have the meaning

ascribed to those terms by § 270.0–10 of

this chapter;

* * * * *

(e) When used with reference to an

exchange, mean any exchange that:

(1) Has been exempted from the

reporting requirements of § 240.11Aa3–

1; and

(2) Is not affiliated with any person

(other than a natural person) that is not

a small business or small organization

as defined in this section;

* * * * *

(g) * * *

(2) Provided service to fewer than 100

interrogation devices or moving tickers

at all times during the preceding fiscal

year (or in the time that it has been in

business, if shorter); and

(3) Is not affiliated with any person

(other than a natural person) that is not

a small business or small organization

under this section; and

(h) * * *

(2) Transferred items only of issuers

that would be deemed ‘‘small

businesses’’ or ‘‘small organizations’’ as

defined in this section; and

* * * * *

(i) For purposes of paragraph (c) of

this section, a broker or dealer is

affiliated with another person if:

(1) Such broker or dealer controls, is

controlled by, or is under common

control with such other person; a person

shall be deemed to control another

person if that person has the right to

vote 25 percent or more of the voting

securities of such other person or is

entitled to receive 25 percent or more of

the net profits of such other person or

is otherwise able to direct or cause the

direction of the management or policies

of such other person; or

(2) Such broker or dealer introduces

transactions in securities, other than

registered investment company

securities or interests or participations

in insurance company separate

accounts, to such other person, or

introduces accounts of customers or

other brokers or dealers, other than

accounts that hold only registered

investment company securities or

interests or participations in insurance

company separate accounts, to such

other person that carries such accounts

on a fully disclosed basis.

(j) For purposes of paragraphs (d)

through (h) of this section, a person is

affiliated with another person if that

person controls, is controlled by, or is

under common control with such other

person; a person shall be deemed to

control another person if that person has

the right to vote 25 percent or more of

the voting securities of such other

person or is entitled to receive 25

percent or more of the net profits of

such other person or is otherwise able

to direct or cause the direction of the

management or policies of such other

person.

(k) For purposes of paragraph (g) of

this section, ‘‘interrogation device’’ shall

refer to any device that may be used to

read or receive securities information,

including quotations, indications of

interest, last sale data and transaction

reports, and shall include proprietary

terminals or personal computers that

receive securities information via

computer-to-computer interfaces or

gateway access.

PART 270—RULES AND

REGULATIONS, INVESTMENT

COMPANY ACT OF 1940

5. The authority citation for Part 270

continues to read, in part, as follows:

Authority: 15 U.S.C. 80a–1 et seq., 80a–

34(d), 80a–37, 80a–39, unless otherwise

noted;

* * * * *

6. Section 270.0–10 is revised to read

as follows:

§ 270.0–10. Small entities under the

Investment Company Act for purposes of

the Regulatory Flexibility Act.

(a) General. For purposes of

Commission rulemaking in accordance

with the provisions of Chapter Six of the

Administrative Procedure Act (5 U.S.C.

601 et seq.) and unless otherwise

defined for purposes of a particular

rulemaking, the term small business or

small organization for purposes of the

Investment Company Act of 1940 shall

mean an investment company that,

together with other investment

companies in the same group of related

investment companies, has net assets of

$50 million or less as of the end of its

most recent fiscal year. For purposes of

this section:

(1) In the case of a management

company, the term group of related

investment companies shall mean two

or more management companies

(including series thereof) that:

(i) Hold themselves out to investors as

related companies for purposes of

investment and investor services; and

(ii) Either:

(A) Have a common investment

adviser or have investment advisers that

are affiliated persons of each other; or

(B) Have a common administrator;

and

(2) In the case of a unit investment

trust, the term group of related

investment companies shall mean two

or more unit investment trusts

(including series thereof) that have a

common sponsor.

(b) Special rule for insurance

company separate accounts. In

determining whether an insurance

company separate account is a small

business or small entity pursuant to

paragraph (a) of this section, the assets

of the separate account shall be

cumulated with the assets of the general

account and all other separate accounts

of the insurance company.

(c) Determination of net assets. The

Commission may calculate its

determination of the net assets of a

group of related investment companies

based on the net assets of each

investment company in the group as of

the end of such company’s fiscal year.
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations 35515

PART 275—RULES AND

REGULATIONS, INVESTMENT

ADVISERS ACT OF 1940

7. The authority citation for Part 275

continues to read, in part, as follows:

Authority: 15 U.S.C. 80b–2(a), 80b–3, 80b–

4, 80b–6(4), 80b–6A, 80b–11, unless

otherwise noted.

* * * * *

8. Section 275.0–7 is revised to read

as follows:

§ 275.0–7. Small entities under the

Investment Advisers Act for purposes of

the Regulatory Flexibility Act.

(a) For purposes of Commission

rulemaking in accordance with the

provisions of Chapter Six of the

Administrative Procedure Act (5 U.S.C.

601 et seq.) and unless otherwise

defined for purposes of a particular

rulemaking proceeding, the term small

business or small organization for

purposes of the Investment Advisers Act

of 1940 shall mean an investment

adviser that:

(1) Has assets under management, as

defined under Section 203A(a)(2) of the

Act (15 U.S.C. 80b–3a(a)(2)) and

reported on Form ADV–T (17 CFR

279.3) or its most recent Schedule I to

Form ADV (17 CFR 279.1), having a

total value of less than $25 million, or

such higher amount as the Commission

may by rule deem appropriate under

Section 203A(a)(1)(A) of the Act (15

U.S.C. 80b–3a(a)(1)(A));

(2) Did not have total assets of $5

million or more on the last day of the

most recent fiscal year; and

(3) 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 such higher amount

as the Commission may deem

appropriate), or any person (other than

a natural person) that had total assets of

$5 million or more on the last day of the

most recent fiscal year.

(b) For purposes of this section:

(1) Control means the power to direct

or cause the direction of the

management or policies of a person,

whether through ownership of

securities, by contract, or otherwise.

Any person that directly or indirectly

has the right to vote 25 percent or more

of the voting securities, or is entitled to

25 percent or more of the profits, of

another person is presumed to control

the other person.

(2) Total assets means the total assets

as shown on the balance sheet of the

investment adviser or other person

described above under paragraph (a)(3)

of this section, or the balance sheet of

the investment adviser or such other

person with its subsidiaries

consolidated, whichever is larger.

Dated: June 24, 1998.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17387 Filed 6–29–98; 8:45 am]

BILLING CODE 8010–01–M

SOCIAL SECURITY ADMINISTRATION

20 CFR Parts 404 and 416

RIN 0960–AE86

Administrative Review Process;

Prehearing Proceedings and Decisions

by Attorney Advisors; Extension of

Expiration Date

AGENCY: Social Security Administration.

ACTION: Final rules.

SUMMARY: These final rules extend the

time period set out in our regulations

during which attorney advisors in our

Office of Hearings and Appeals (OHA)

may conduct certain prehearing

proceedings and, where the

documentary record developed as a

result of these proceedings warrants,

issue decisions that are wholly favorable

to the parties to the hearing in claims for

Social Security or Supplemental

Security Income (SSI) benefits based on

disability. We are extending the date at

which these rules will no longer be

effective from July 1, 1998, until April

1, 1999.

EFFECTIVE DATE: These rules are effective

June 30, 1998.

FOR FURTHER INFORMATION CONTACT:

Harry J. Short, Legal Assistant, Office of

Process and Innovation Management,

Social Security Administration, 6401

Security Boulevard, Baltimore, MD

21235, (410) 965–6243 for information

about these rules. For information on

eligibility or claiming benefits, call our

national toll-free number, 1–800–772–

1213.

SUPPLEMENTARY INFORMATION: On June

30, 1995, in an action undertaken to

reduce the record numbers of requests

for an administrative law judge (ALJ)

hearing pending in our OHA hearing

offices, we published final rules in the

Federal Register (60 FR 34126) that

authorize OHA’s attorney advisors to

conduct certain prehearing proceedings

and, if a decision that is wholly

favorable to the parties to the hearing

may be issued at the completion of these

proceedings, to issue such a decision.

These regulations, which are codified at

§§ 404.942 and 416.1442, included a

provision stating that the rules would

no longer be effective on June 30, 1997,

unless the Commissioner of Social

Security extended the expiration date of

the provisions by publication of a final

rule in the Federal Register. We

subsequently published a final rule in

the Federal Register on June 30, 1997

(62 FR 35073), stating that these rules

would no longer be effective on July 1,

1998.

In order to maximize our ability to

meet our hearing production goals, we

have decided to extend the date on

which these rules will no longer be

effective from July 1, 1998, to April 1,

1999. The final rules amend the sunset

provision in §§ 404.942 and 416.1442

(which expressly provides for extending

the expiration date of those sections) to

provide that the provisions authorizing

prehearing proceedings and decisions

by attorney advisors will no longer be

effective on April 1, 1999, unless the

provisions are extended by the

Commissioner of Social Security by

publication of a final rule in the Federal

Register.

Regulatory Procedures

Pursuant to section 702(a)(5) of the

Social Security Act, 42 U.S.C. 902(a)(5),

as amended by section 102 of Public

Law 103–296, SSA follows the

Administrative Procedure Act (APA)

rulemaking procedures specified in 5

U.S.C. 553 in the development of its

regulations. The APA provides

exceptions to its notice and public

comment procedures when an agency

finds there is good cause for dispensing

with such procedures on the basis that

they are impracticable, unnecessary, or

contrary to the public interest. We have

determined that, under 5 U.S.C.

553(b)(B), good cause exists for

dispensing with the notice and public

comment procedures in this case. Good

cause exists because these rules only

extend the date on which the regulatory

provisions concerning prehearing

proceedings and decisions by attorney

advisors will no longer be effective.

These rules make no substantive change

to those provisions. The current

regulations expressly provide that the

provisions may be extended. Therefore,

opportunity for prior comment is

unnecessary, and we are issuing these

regulations as final rules.

In addition, we find good cause for

dispensing with the 30-day delay in the

effective date of a substantive rule,

provided for by 5 U.S.C. 553(d). As

explained above, we are not making any

substantive changes in the provisions on

prehearing proceedings and decisions

by attorney advisors. However, without

a timely extension of the expiration date

for these provisions, we will lack