36632 Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 / Proposed Rules

1On 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.

2Reports to be Made by Certain Brokers and

Dealers, Exchange Act Release No. 39724 (Mar. 5,

1998) [63 FR 12056 (Mar. 12, 1998)].

3Reports to be Made by Transfer Agents,

Exchange Act Release No. 39726 (Mar. 5, 1998) [63

FR 12062 (Mar. 12, 1998)].

4The Investment Company Institute, Current

Statistical Releases, Trends in Mutual Fund

Investing, April 1998, available at <http://

www.ici.org/factslfigures/trendsl0498html>.

5The Investment Company Institute, Retirement

Statistics, Retirement Plans Hold 35 Percent of

Mutual Fund Assets (Oct. 14, 1997), available at

<http://www.ici.org/retirement/

retirementlstatistics96.html>.

6Under 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 270.31a1].

modified, altered, or repaired in the area

subject to the requirements of this AD. For

airplanes that have been modified, altered, or

repaired so that the performance of the

requirements of this AD is affected, the

owner/operator must request approval for an

alternative method of compliance in

accordance with paragraph (b) of this AD.

The request should include an assessment of

the effect of the modification, alteration, or

repair on the unsafe condition addressed by

this AD; and, if the unsafe condition has not

been eliminated, the request should include

specific proposed actions to address it.

Compliance: Required as indicated, unless

accomplished previously.

To prevent wear of the attach points of the

uplock system of the nose landing gear

(NLG), which could result in damage to the

adjacent emergency hydraulic system, or

jamming of the uplock system, and

consequent inability to extend and retract the

NLG, accomplish the following:

(a) Prior to the accumulation of 9,000 total

landings, or within 1,000 landings after the

effective date of this AD, whichever occurs

later, modify the attach points of the uplock

system of the NLG, in accordance with

Jetstream Alert Service Bulletin J41–53–041,

dated July 25, 1997.

(b) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager,

International Branch, ANM–116, FAA,

Transport Airplane Directorate. Operators

shall submit their requests through an

appropriate FAA Principal Maintenance

Inspector, who may add comments and then

send it to the Manager, International Branch,

ANM–116.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the International Branch,

ANM–116.

(c) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the airplane to

a location where the requirements of this AD

can be accomplished.

Note 3: The subject of this AD is addressed

in British airworthiness directive 009–07–97.

Issued in Renton, Washington, on June 30,

1998.

Vi L. Lipski,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 98–17950 Filed 7–6–98; 8:45 am]

BILLING CODE 4910–13–U

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.

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: rule-comments@sec.gov. 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.

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.

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
Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 / Proposed Rules 36633

7Staff Legal Bulletin No. 5 (CF/IM) (revised), Jan.

12, 1998, available at <http://www.sec.gov/rules/

othern/slbcf5.htm>.

8Under 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)].

9The 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.

11The Commission intentionally has not

proposed to define the term complex or family to

give advisers flexibility to report for groups they

administer.

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

Continued

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.

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.

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.

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.

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
36634 Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 / Proposed Rules

has the statutory authority to require only advisers

to file such reports.

13See proposed Instructions for Part II of Form

ADV–Y2K.

14One of the six steps is testing. The form

contains questions about the progress of both pointto-point testing, also known as bilateral testing, and

about industry-wide testing, also known as streetwide 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.

15Contingency 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.

16See 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.

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 <http://www.ms.com/odyssey.html>.

18The 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/yearl2000/index.html>.

19C. Lawrence Meador and Leland G. Freeman,

Year 2000: The Domino Effect, Datamation (Jan.

1997), available at <http://www.datamation.com/

PlugIn/issues/1997/jan/01depend.html>.

Part II on behalf of multiple complexes

would complete multiple versions of

Part II, one for each complex.13

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.

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-bysystem 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.

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.

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,
Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 / Proposed Rules 36635

20 5 U.S.C. 603.

21The 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.

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.

although difficult to quantify, may be

extremely significant to investors, firms

and the economy in general.

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 ×

2 hours) + (891 advisers × 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.

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

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.
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23 44 U.S.C. 3501.

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.’’

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 × 2 hours) + (891

advisers × 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 § 275.204–5 is added to

read as follows:

§ 275.204–4 Reserved.

§ 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
Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 / Proposed Rules 36637

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:

§ 279.9 Form ADV-Y2K.

This form must be filed pursuant to

§ 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 ADVY2K will not appear in the Code of Federal

Regulations.

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[FR Doc. 98–17927 Filed 7–6–98; 8:45 am]

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