39708 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations

1Pub. L. No. 104–290, 110 Stat. 3416 (1996)

(codified in scattered sections of the United States

Code).

2 15 U.S.C. 80b–3a(a).

PART 71—DESIGNATION OF CLASS A,

CLASS B, CLASS C, CLASS D, AND

CLASS E AIRSPACE AREAS;

AIRWAYS; ROUTES; AND REPORTING

POINTS

1. The authority citation for part 71

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389.

§ 71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of the Federal Aviation

Administration Order 7400.9E, Airspace

Designations and Reporting Points,

dated September 10, 1997, and effective

September 16, 1997, is amended as

follows

Paragraph 6005 Class E airspace areas

extending upward from 770 feet or more

above the surface of the earth.

* * * * *

AGL WI E5 Beaver Dam, WI [New]

Hillside Hospital Heliport, WI

Point in Space Coordinates

(Lat. 42° 26′ 45′′N., long. 88° 48′ 36′′W.)

That airspace extending upward from 700

feet above the surface within a 6.0-mile

radius of the Point in Space serving Hillside

Hospital Heliport excluding that airspace

within the Juneau, WI, Class E airspace area.

* * * * *

Issued on Des Plaines, Illinois, on July 15,

1988.

Richard K. Petersen,

Acting Assistant Manager, Air Traffic

Division.

[FR Doc. 98–19851 Filed 7–23–98; 8:45 am]

BILLING CODE 4910–13–M

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 275 and 279

[Release No. IA–1733, File No. S7–28–97]

RIN 3235–AH22

Exemption for Investment Advisers

Operating in Multiple States; Revisions

to Rules Implementing Amendments to

the Investment Advisers Act of 1940;

Investment Advisers With Principal

Offices and Places of Business in

Colorado or Iowa

AGENCY: Securities and Exchange

Commission.

ACTION: Final rules.

SUMMARY: The Commission is adopting

rule amendments under the Investment

Advisers Act of 1940 to exempt multistate investment advisers from the

prohibition on Commission registration

and to revise the definition of the term

‘‘investment adviser representative.’’

The Commission also is adopting

amendments to Schedule I to Form ADV

to reflect the enactment of investment

adviser statutes in Colorado and Iowa.

The rule amendments refine rules

implementing the Investment Advisers

Supervision Coordination Act.

DATES: Effective Date: The rule

amendments will become effective

August 31, 1998.

Compliance Date: Supervised persons

of Commission-registered investment

advisers must comply with amendments

to § 275.203A–3(a)(3)(i) no later than

December 31, 1998.

FOR FURTHER INFORMATION CONTACT:

Carolyn-Gail Gilheany, Attorney, or

Jennifer S. Choi, Special Counsel, at

(202) 942–0716, Task Force on

Investment Adviser Regulation, Division

of Investment Management, Stop 5–6,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549.

SUPPLEMENTARY INFORMATION: The

Commission is adopting amendments to

rule 203A–2 (17 CFR 275.203A–2), rule

203A–3 (17 CFR 275.203A–3), rule

206(4)–3 (17 CFR 275.206(4)–3), Form

ADV (17 CFR 279.1), Schedule G to

Form ADV (17 CFR 279.1), and

Schedule I to Form ADV (17 CFR 279.1)

under the Investment Advisers Act of

1940 (15 U.S.C. 80b) (‘‘Advisers Act’’).

The Commission also is withdrawing

rule 203A–5 (17 CFR 275.203A–5) and

Form ADV–T (17 CFR 279.3) under the

Advisers Act.

Table of Contents

Executive Summary

I. Background

II. Discussion

A. Multi-State Investment Adviser

Exemption from Prohibition on

Registration with the Commission

B. Definition of Investment Adviser

Representative

1. Accommodation Clients

2. High Net Worth Clients and Other

Excepted Persons

C. Other Amendments

D. Investment Advisers with Principal

Offices and Places of Business in

Colorado or Iowa

III. Cost-Benefit Analysis

IV. Paperwork Reduction Act

V. Summary of Regulatory Flexibility

Analysis

VI. Statutory Authority

Text of the Rule and Form Amendments

Appendix A: Schedule I to Form ADV

Appendix B: Schedule G to Form ADV

Appendix C: Illustrations of Accommodation

Client Provision

Executive Summary

Section 203A of the Advisers Act

generally prohibits an investment

adviser from registering with the

Commission unless it has more than $25

million of assets under management or

is an adviser to a registered investment

company. The Commission is adopting

amendments to rule 203A–2 under the

Advisers Act to exempt from the

prohibition on Commission registration

those advisers that are required to

register as investment advisers in 30 or

more states.

Section 203A preempts most state

regulatory requirements for

Commission-registered investment

advisers and their supervised persons

except for certain ‘‘investment adviser

representatives.’’ The Commission is

adopting amendments to rule 203A3

under the Advisers Act to revise the

definition of investment adviser

representative. Under the amended

definition, supervised persons of

Commission-registered investment

advisers are investment adviser

representatives (and therefore subject to

state qualification requirements) if they

have more than five clients who are

natural persons and more than ten

percent of their clients are natural

persons.

Under section 203A, the Commission

retains regulatory authority for an

investment adviser with a principal

office and place of business in a state

that does not have an investment

adviser statute. The Commission is

adopting amendments to Schedule I to

Form ADV to reflect that Colorado and

Iowa have recently enacted investment

adviser statutes.

I. Background

Two years ago, Congress enacted the

National Securities Markets

Improvement Act of 1996 (‘‘1996 Act’’).1

Title III of the 1996 Act, the Investment

Advisers Supervision Coordination Act

(‘‘Coordination Act’’), amended the

Advisers Act to, among other things,

reallocate federal and state

responsibilities for regulation of

investment advisers by limiting federal

registration and preempting certain state

laws. Under section 203A(a) of the

Advisers Act,2 an investment adviser

that is regulated or required to be

regulated as an investment adviser in

the state in which it maintains its

principal office and place of business is

prohibited from registering with the

Commission unless the investment

adviser (i) has at least $25 million of

assets under management, or (ii) is an

investment adviser to an investment
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations 39709

3 15 U.S.C. 80a. The Commission has authority to

deny registration to any applicant that does not

meet the criteria for Commission registration and to

cancel the registration of any adviser that no longer

meets the registration criteria. Sections 203(c) and

(h) of the Advisers Act (15 U.S.C. 80b–3(c) and (h)).

4 15 U.S.C. 80b–3a(b). In addition, state law is

preempted with respect to advisers that are

excepted from the definition of investment adviser

under section 202(a)(11) of the Advisers Act (15

U.S.C. 80b–2(a)(11)).

5Rules Implementing Amendments to the

Investment Advisers Act of 1940, Investment

Advisers Act Release No. 1633 (May 15, 1997) (62

FR 28112 (May 22, 1997)) (‘‘Implementing

Release’’).

6See rule 203A–2 (17 CFR 275.203A–2). See infra

section II.A of this Release.

7See rule 203A–3 (17 CFR 275.203A–3). See infra

section II.B of this Release.

8Exemption for Investment Advisers Operating in

Multiple States; Revisions to Rules Implementing

Amendments to the Investment Advisers Act of

1940, Investment Advisers Act Release No. 1681

(Nov. 13, 1997) (62 FR 61866 (Nov. 19, 1997)).

9NASAA represents the 50 U.S. state securities

agencies responsible for the administration of state

securities laws, also known as ‘‘blue sky laws.’’

10Section 203A(a) and (b). Notwithstanding

section 203A(b)(1), states retain authority over

Commission-registered advisers under state

investment adviser statutes to: (1) investigate and

bring enforcement actions with respect to fraud or

deceit against an investment adviser or a person

associated with an investment adviser; (2) require

filings, for notice purposes only, of documents filed

with the Commission; and (3) require payment of

state filing, registration, and licensing fees. See

section 203A(b)(2) of the Advisers Act (15 U.S.C.

80b–3a(b)(2)). Moreover, section 203A(b)

specifically preserves state law with respect to

investment adviser representatives of Commissionregistered advisers who have a place of business in

the state. See infra section II.B of this Release.

11See S. REP. NO. 293, 104th Cong., 2d Sess. 3–

5 (1996).

12 Id. at 5.

13 15 U.S.C. 80b–3a(c).

14See Arthur Andersen Financial Advisers,

Investment Advisers Act Release Nos. 1637 (June

16, 1997), 62 FR 33689 (Notice of Application),

1642 (July 8, 1997 64 SEC Docket 2417 (Order);

Ernst & Young Investment Advisers LLP,

Investment Advisers Act Release Nos. 1638 (June

16, 1997), 62 FR 33692 (Notice of Application), and

1641 (July 8, 1997), 64 SEC Docket 2416 (order);

KPMG Investment Advisors, Investment Advisers

Act Release Nos. 1639 (June 17, 1997), 62 FR 33945

(Notice of Application), and 1643 (July 8, 1997), 64

SEC Docket 2418 (Order); and ProFutures Capital

Management, Inc., Investment Advisers Act Release

Nos. 1686 (Dec. 11, 1997), 62 FR 66153 (Notice of

Application), and 1693 (Jan. 8, 1998), 66 SEC

Docket 0835 (Order).

15Proposing Release, supra note 8, at section II.A.

16 17 CFR 275.203A–2(d).

company registered under the

Investment Company Act of 1940

(‘‘Investment Company Act’’).3 Section

203A(b) of the Advisers Act generally

preempts state regulatory requirements

with respect to Commission-registered

investment advisers and their

supervised persons, except for certain of

their investment adviser

representatives.4

Last year, the Commission adopted

new rules and rule amendments to

implement the Coordination Act.5 These

implementing rules included

exemptions from the statutory

prohibition on Commission registration

for four types of investment advisers.6

The rules also defined certain terms

used in the Coordination Act, including

the term ‘‘investment adviser

representative.’’ 7 At the time it adopted

these rules, the Commission anticipated

that experience with the new regulatory

scheme might reveal the need for

additional rules or refinement of

existing rules.

On November 13, 1997, the

Commission issued a release proposing

(1) amendments to rule 203A–2 to

exempt multi-state investment advisers

from the prohibition on Commission

registration; (2) two alternative

amendments to rule 203A–3 to revise

the definition of investment adviser

representative; and (3) other

amendments to clarify certain

implementing rules (‘‘Proposing

Release’’).8 The proposed amendments

to rule 203A–2 would allow an

investment adviser that does not have

$25 million of assets under management

but has a national or multi-state practice

that requires it to register as an

investment adviser in 30 or more states

to register with the Commission. The

proposed amendments to rule 203A–3

would correct an anomaly in the current

rule and allow supervised persons who

provide services to a small number of

institutions to have accommodation

clients without being subject to state

qualification requirements.

In response to the proposals, the

Commission received 12 comment

letters from professional and trade

organizations, investment advisers, the

North American Securities

Administrators Association, Inc.

(‘‘NASAA’’),9 and two state securities

administrators. Most commenters

supported the proposals.

II. Discussion

A. Multi-State Investment Adviser

Exemption from Prohibition on

Registration With the Commission

As discussed above, section 203A

limits registration with the Commission,

in most cases, to investment advisers

with at least $25 million of assets under

management and preempts state adviser

regulation of these investment

advisers.10 The $25 million threshold

was designed to allocate regulatory

responsibility to the Commission for

larger investment advisers, whose

activities are likely to affect national

markets, and to relieve these larger

advisers of the burdens associated with

multiple state regulations.11 Congress

recognized, however, that some

investment advisers with less than $25

million of assets under management

may have national businesses for which

multiple state registration would be

burdensome.12 To reduce the burden on

these advisers, the Commission was

given authority in section 203A(c) of the

Advisers Act to exempt investment

advisers, by rule or order, from the

prohibition on Commission registration

if the prohibition would be ‘‘unfair, a

burden on interstate commerce, or

otherwise inconsistent with the

purposes’’ of section 203A.13

Using this authority, the Commission

adopted rule 203A–2, which permits

Commission registration for nationally

recognized statistical rating

organizations and certain pension

consultants, affiliated investment

advisers, and newly formed investment

advisers. The Commission also, by

order, has granted individual exemptive

relief to certain investment advisers that

do not have $25 million of assets under

management but have a national or

multi-state practice that requires them

to register as investment advisers in 30

or more states.14 The Commission

proposed to amend rule 203A–2 to

codify the exemptions provided by the

individual orders to investment advisers

required to be registered in multiple

states.15

Under proposed rule 203A–2(e), an

investment adviser required to be

registered as an investment adviser with

30 or more state securities authorities

would register with the Commission

even if it has less than $25 million of

assets under management. Once

registered with the Commission, the

investment adviser would remain

eligible for the exemption as long as the

adviser would, but for the exemption, be

obligated to register in at least 25 states,

five fewer than when it initially

registered under the multi-state

exemption (‘‘five-state provision’’). The

Commission also proposed to permit

newly formed advisers to rely on the

multi-state exemption in conjunction

with the ‘‘start-up adviser’’ exemption

in paragraph (d) of rule 203A2.16

Commenters generally supported the

multi-state proposal as being consistent

with the language and intent of the

Coordination Act. Commenters agreed

that the five-state provision should be

the minimum cushion to prevent an

investment adviser registered with the

Commission from having to de-register

and then re-register with the

Commission frequently as a result of a

change in registration obligation in one

or a few states. All commenters

concurred with the Commission that
39710 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations

17 17 CFR 275.203A–2(e). In determining the

number of states in which an adviser is required to

register, the investment adviser would be required

to exclude those states in which it is not obligated

to register because of the applicable state laws or

the national de minimis standard of section 222(d)

of the Advisers Act (15 U.S.C. 80b–18a). At the time

of its application for registration with the

Commission or upon subsequent amendment of its

registration to reflect reliance on the multi-state

exemption, the investment adviser would include

on Schedule E to Form ADV an undertaking to

withdraw from registration with the Commission if

it would no longer be required to register in at least

25 states at the time of filing Schedule I. Under the

rule, as adopted, an investment adviser that

indicates that it is no longer obligated to register in

at least 25 states would be required to withdraw

from Commission registration by filing Form ADV–

W within 180 days after the end of the adviser’s

fiscal year. Rule 203A–2(e)(3)(17 CFR 275.203A–

2(e)(3)). The Commission is adopting a slight

revision to the grace period for withdrawing from

Commission registration. Under the rule as

proposed, the period would have run from the date

on which the adviser filed its Schedule I to indicate

that it was no longer eligible to maintain its

registration under the multi-state exemption. Under

the rule as adopted, the period begins to run on the

date on which the adviser was obligated by rule

204–1(a) to file such amendment. 17 CFR 275.204–

1(a).

18This representation must be attached to the

investment adviser’s annual amendment to Form

ADV revising Schedule I. Rule 203A–2(e)(2) (17

CFR 275.203A–2(e)(2)). If an adviser that is

registered with the Commission in reliance on

another exemption (e.g., affiliated adviser

exemption) relies on the multi-state exemption

because the adviser can no longer rely on the other

exemption (e.g., the affiliate has moved its principal

office and place of business), the adviser would be

required: (1) to attach a representation to Schedule

I that, but for the exemption, it would be required

to register with at least 25 states; (2) to check box

(a)(x) of Part I of Schedule 1; and (3) to include an

undertaking on Schedule E that the adviser will

withdraw from Commission registration if it would

be no longer required to register in at least 25 states.

If the adviser is no longer eligible for Commission

registration under any criterion and therefore

cannot check any box in (a) of Part I of Schedule

I, then the adviser must check box (b) of part I of

Schedule I to Form ADV and file Form ADV–W

within 180 days after the end of the adviser’s fiscal

year. See rule 203A–2(e)(3).

19Rule 203A–2(e)(4)(17 CFR 275.203A–2(e)(4)).

20After the 120-day period, the investment

adviser would be required to file an amendment to

Form ADV revising Schedule I and attach a

representation that, but for the multi-state

exemption, the investment adviser would be

required to register in at least 25 states. See rules

203A–2(d) and 203A–2(e)

21The term supervised person is defined in the

Advisers Act as ‘‘any partner, officer, director * * *

or employee of an investment adviser, or other

person who provides investment advice on behalf

of the investment adviser and is subject to the

supervision and control of the investment adviser.’’

Section 202(a)(25) of the Advisers Act (15 U.S.C.

80b–2(a)(25)).

22Section 203A(b).

23Rule 203A–3(a)(3)(i) defines ‘‘excepted

persons’’ as natural persons who have $500,000 or

more under management with the representative’s

investment advisory firm immediately after entering

into the advisory contract with the firm, or whom

the advisory firm reasonably believes immediately

prior to entering into the advisory contract have a

net worth in excess of $1 million. 17 CFR

275.203A–3(a)(3)(i). (The Commission is adopting

changes to the criteria for determining excepted

persons. See infra section II.B.2 of this Release.) The

Commission also excluded from the term

‘‘investment adviser representative’’ those

supervised persons who do not on a regular basis

solicit, meet with, or otherwise communicate with

clients of the investment adviser or who provide

only impersonal investment advice. Rule 203A–

3(a)(2)(17 CFR 275.203A–3(a)(2)).

24 17 CFR 275.203A–3(a).

25 Implementing Release, supra note 5, at nn.113–

117 and accompanying text.

26Proposing Release, supra note 8, at section

II.B.1.

newly formed investment advisers

should be permitted to rely on the

multi-state exemption in conjunction

with the ‘‘start-up’’ adviser exemption.

Most commenters supported the 30-

state threshold as an appropriate

measure of whether an adviser has a

national business. Three commenters,

however, recommended lowering the

threshold because they believed that

investment advisers that do business in

fewer than 30 states also may have

national businesses. NASAA opposed

lowering the 30-state threshold, arguing

that an adviser that is required to

register in less than 30 states does not

have a national business. At this time,

the Commission believes the 30-state

threshold to be an appropriate standard

for measuring whether an adviser has a

national business and therefore is

adopting the threshold and the rule, as

proposed.

Rule 203A–2(e), as adopted, requires

an investment adviser applying for

registration in reliance on the multistate exemption to submit a

representation to the Commission that

the adviser is obligated to register in 30

or more states.17 To continue to rely on

the exemption, the adviser annually

must provide a representation that it is

obligated to register in at least 25

states.18 The investment adviser also

must maintain a record of the states that

the adviser believes it would, but for the

exemption, be required to register.19 A

newly formed investment adviser not

registered in any state could register

with the Commission if it reasonably

expected that it would be required to

register in 30 or more states within 120

days after the date its registration

becomes effective.20

B. Definition of Investment Adviser

Representative

Section 203A preempts most state

regulatory requirements for

Commission-registered investment

advisers and their supervised persons,21

but permits a state to continue to

license, register, or otherwise qualify an

‘‘investment adviser representative’’

who has a place of business in the

state.22 Under the current definition of

investment adviser representative in

rule 203A–3, supervised persons of

Commission-registered investment

advisers are not deemed to be

investment adviser representatives and

thus not subject to state qualification

requirements if no more than ten

percent of their clients are natural

persons other than ‘‘excepted

persons’’ 23 (‘‘ten percent allowance’’).24

1. Accommodation Clients

The ‘‘ten percent allowance’’ in the

definition of investment adviser

representative was designed to permit

supervised persons who provide

advisory services principally to clients

other than natural persons to continue

to accept ‘‘accommodation clients’’

without being subject to state

qualification requirements.25 The ten

percent allowance, however, can pose a

problem for supervised persons with

one or a few institutional clients: for a

supervised person to have one

accommodation client without being

subject to state qualification

requirements, the supervised person

would need to have at least ten clients

that are not retail clients.

To address this concern, the

Commission proposed two alternative

amendments to the definition of

investment adviser representative to

allow supervised persons who provide

services to a few institutional clients to

have accommodation clients without

being subject to state qualification

requirements.26 Under the first

alternative, the Commission proposed to

retain the ten percent allowance and to

add a provision to the rule that would

permit supervised persons to have,

without being subject to state

qualification requirements, the greater

of five natural person clients or the

number of natural person clients

permitted under the ten percent

allowance (‘‘Alternative I’’). Under the

second alternative, the Commission

proposed to eliminate the ten percent

allowance and to permit supervised

persons to have, without being subject

to state qualification requirements, an

unlimited number of accommodation

clients who are (1) partners, officers, or

directors of the investment adviser for
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations 39711

27NASAA recommended a slight modification to

Alternative I. In the Proposing Release, the

Commission acknowledged that the disadvantage to

Alternative I was that the five natural person

minimum could include natural persons who have

no relationship to the investment adviser or its

institutional or business clients. Proposing Release,

supra note 8, at section II.B.1. NASAA, addressing

this concern, suggested that a supervised person be

permitted to claim the five client exemption only

if he has at least one client who is either an

excepted person or non-natural person and cannot

otherwise claim the ten percent allowance. The

Commission is not adopting this proposal because

it is concerned that this formula would make the

provision too complicated.

28See Appendix C for examples that illustrate the

application of rule 203A–3. The Commission

believes that amending the definition of investment

adviser representative to allow for five natural

person clients would not affect many supervised

persons. As the Commission noted in the Proposing

Release, many states do not require supervised

persons to register in the state until they have more

than five clients in the respective state. Proposing

Release, supra note 8, at n.27.

29 Id. at n.28.

30Rule 203A–3(a)(3)(i).

31 17 CFR 275.205–3.

32See Exemption to Allow Investment Advisers

to Charge Fees Based Upon a Share of Capital Gains

Upon or Capital Appreciation of a Client’s Account,

Investment Advisers Act Release No. 1731 (July 15,

1998) (‘‘Performance Fee Release’’).

33Amended rule 203A–3(a)(3)(i) (17 CFR

275.203A–3(a)(3)(i)).

34This amount represents an increase from

$500,000 under management.

35This amount represents an increase from

$1,000,000 net worth.

36 15 U.S.C. 80a–2(a)(51)(A).

37The term ‘‘qualified client’’ does not include

employees performing solely clerical, secretarial or

administrative functions on behalf of the

investment adviser.

38Amendments to rule 203A–3(a)(3)(i) would

immediately change the state licensing obligations

of only those supervised persons, a sufficient

number of whose clients would no longer be

considered ‘‘high net worth’’ clients under the new

threshold levels. The other amendments to the rule

(i.e., acceptance of qualified purchasers and

knowledgeable employees as clients) would not

subject supervised persons to new state licensing

obligations. Therefore, the Commission will not

require compliance with amendments to rule 203A–

3(a)(3)(i) to the extent that the increase in the

threshold levels would obligate a supervised person

to register with a state until December 31, 1998;

supervised persons, however, may choose to

comply with the other amendments upon the

effective date of the amendments.

39 17 CFR 275.203A–2(b)(3). Under the current

rule, investment advisers relying on the pension

consultant exemption are required to value plan

assets as of the date during the investment adviser’s

most recent fiscal year that the investment adviser

was last employed or retained by contract to

provide investment advice to the plan with respect

to those assets.

40 17 CFR 275.206(4)–3(a)(1)(ii)(D).

41 15 U.S.C. 80b–3(e)(4).

whom the supervised person works or

of a business or institutional client of

the investment adviser for whom the

supervised person works; (2) relatives,

spouses, or relatives of spouses of such

partners, officers, or directors; or (3)

relatives, spouses, or relatives of

spouses of the supervised person

(‘‘Alternative II’’).

Three commenters supported

Alternative I, none favored Alternative

II, and three recommended combining

Alternatives I and II. The commenters

favoring Alternative I praised it as a

simple and straightforward method of

permitting supervised persons with a

few institutional clients to accept a

small number of accommodation clients

without being subject to state

registration or qualification

requirements. NASAA supported

Alternative I because it believes that the

benefits of a bright line test outweigh

the concern that the five natural person

clients may not necessarily be limited to

those clients who the supervised person

advises on an accommodation basis.27

Several commenters acknowledged that

Alternative II would more closely tie the

accommodation client provision to the

purpose for which it was adopted, but

believe it is too complicated. These

commenters were concerned with the

problems that advisory firms may have

in monitoring the relationships of the

accommodation clients and in adopting

costly and complex compliance

systems. The Commission agrees that

Alternative I has many advantages over

Alternative II and is adopting it, as

proposed.28

Three commenters recommended

combining aspects of Alternative I and

Alternative II in ways that would

expand the accommodation client

provision to allow supervised persons to

have a defined group of accommodation

clients in addition to a group of natural

persons (up to ten percent of the

supervised person’s clients) who have

no relationship to the supervised

persons. In the Proposing Release, the

Commission, in response to a similar

proposal, explained that it wanted to

limit the provision to clients who are or

may reasonably be presumed to be

accommodation clients.29 The

Commission believes that combining the

two alternatives would expand the

accommodation client provision beyond

the purpose for which it was adopted.

2. High Net Worth Clients and Other

Excepted Persons

Under the current rule, certain ‘‘high

net worth’’ individuals are not treated as

retail clients; they are considered

‘‘excepted persons’’ for purposes of the

definition of investment adviser

representative and thus are not counted

towards the ten percent allowance.30

The criteria for determining which

clients are excepted persons are based

on the criteria in rule 205–3 under the

Advisers Act, which permits advisers to

enter into performance fee contracts

with certain clients.31 The Commission

has revised the criteria to reflect the

effects of inflation since the rule was

adopted in 1985 and to include

qualified purchasers and certain

knowledgeable employees of the

investment adviser. 32

The Commission is adopting, as

proposed, an amendment to the

definition of investment adviser

representative to treat ‘‘qualified

clients’’ under rule 205–3 as excepted

persons.33 As a result, the following

clients would not be counted towards

the ten percent allowance: (1) Clients

who immediately after entering into the

investment advisory contract have at

least $750,000 under management with

the investment adviser; 34 (2) clients

whom the investment adviser

reasonably believes, immediately prior

to entering into the investment advisory

contract, either have a net worth of more

than $1,500,000 at the time the contract

is entered into 35 or are qualified

purchasers as defined in section

2(a)(51)(A) of the Investment Company

Act 36 at the time the contract is entered

into; and (3) executive officers,

directors, trustees, general partners, or

persons serving in a similar capacity, of

the investment adviser, as well as

certain other employees of the adviser

who participate in investment activities

and have performed such functions for

at least 12 months.37

As several commenters pointed out,

increasing the threshold levels for

determining high net worth clients may

result in some supervised persons being

subject to state licensing requirements

to which they were not previously

subject. The Commission has decided

not to require compliance with the

amendments to rule 203A–3(a)(3)(i)

until December 31, 1998, to provide

supervised persons who are affected by

this change with sufficient time to

prepare for and pass state qualification

examinations.38

C. Other Amendments

The Commission is adopting, in

addition to the rule amendments

discussed above, several technical and

clarifying amendments to the rules

implementing the Coordination Act.

Amended rule 203A–2(b)(3) permits

investment advisers relying on the

pension consultant exemption from the

prohibition on Commission registration

to determine the aggregate value of plan

assets during a 12-month period ending

90 days before the investment adviser

files Schedule I to Form ADV.39 The

Commission is amending rule 206(4)–

3(a)(1)(ii)(D) 40 to cross-reference to

section 203(e)(4),41 and amending

Instructions 5 and 7 to Schedule I for
39712 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations

42The Commission also is deleting the

unnecessary reference to the date of the valuation

of the assets under management in Part II of

Schedule I.

43 17 CFR 275.203A–5.

44 17 CFR 279.3.

45See Implementing Release, supra note 5, at

section I.1.

46 15 U.S.C. 80b–3a(a)(1).

47The Commission also is revising Schedule I to

reflect that the U.S. Virgin Islands does not have an

investment adviser statute.

48Advisers that are no longer eligible for

Commission registration must check box (b) of Part

I of Schedule I to Form ADV and withdraw their

registration using Form ADV–W within the 90-day

grace period provided by rule 203A–1(c) (17 CFR

275.203A–1(c)). Advisers that are no longer eligible

for Commission registration and do not voluntarily

withdraw their registration will be subject to a

cancellation proceeding under section 203(h). See

generally Implementing Release, supra note 5. An

adviser in Colorado or Iowa that is no longer

eligible for Commission registration may withdraw

from Commission registration as early as January 1,

1999, or as late as 180 days after the end of the

adviser’s fiscal year.

49See supra section II.A of this Release.

50Every investment adviser applying for

registration with the Commission is required to file

Form ADV with the Commission and to file an

amended Form ADV when information on the form

has changed. Form ADV requires information about

the states in which an investment adviser is

registered, but does not distinguish between states

in which the registration is mandatory and in which

registration is voluntary. Moreover, the Commission

no longer receives Form ADV information for stateregistered advisers.

51According to information provided to the

Commission on Form ADV–T, approximately 21

advisers are registered with 30 or more states but

no longer are registered with the Commission as a

result of the enactment of the Coordination Act.

Although approximately 21 investment advisers are

registered in more than 30 states, the Commission

estimates that only about half of these advisers are

required to register in 30 or more states. Therefore,

the Commission estimates that there may be ten

investment advisers that will qualify for the multistate exemption each year.

52 In the Cost-Benefit Analysis of Rules

Implementing Amendments to the Investment

Advisers Act of 1940, the Commission estimated

that the cost for a mid-size adviser to comply with

state-law registration requirements could be as

much as $20,000. See Cost-Benefit Memorandum

(available in File No. S7–31–96) (‘‘Implementing

Amendments Cost-Benefit Analysis’’). The

Commission believes that, because advisers eligible

for the multi-state exemption would typically be

required to register in more states (i.e., in at least

30 states) than the average adviser registered with

the Commission, the cost would be at least $30,000

per adviser. These dollar estimates were based on

discussions with law firms that provide these kinds

of services to investment advisers.

53Nebraska commented that, although it has not

begun routine examinations of investment advisory

firms, it estimates the examination of a small firm

to cost between $200 and $400 and the examination

of a larger firm to cost between $800 and $1,000.

54The Commission estimated this figure by

multiplying the aggregate burden hours that are

required in making a representation, which is

attached to Schedule I to Form ADV (240 hours),

by an average hourly compensation rate of $100.

The estimation of the aggregate burden hours for

complying with the requirements of the multi-state

exemption is based on the Commission’s Paperwork

clarification.42 Rule 203A–5,43 Form

ADV–T,44 and Instruction 8 to Schedule

I to Form ADV are withdrawn. The

Commission is amending Items 18 and

19 to Part I of Form ADV to eliminate

an erroneous instruction. Finally, the

Commission is revising the introductory

language to Schedule G to Form ADV to

remove an unnecessary reference to

Form ADV–S, which has been

eliminated.45

D. Investment Advisers With Principal

Offices and Places of Business in

Colorado or Iowa

Under section 203A(a)(1) of the

Advisers Act, the Commission retains

regulatory responsibility for an adviser

with a principal office and place of

business in a state that has not enacted

an investment adviser statute.46 Since

the implementing rules were adopted

and the publication of the Proposing

Release, Colorado and Iowa have

enacted investment adviser statutes,

which become effective on January 1,

1999. As a result, an adviser that has its

principal office and place of business in

Colorado or Iowa will be prohibited

from registering with the Commission

after January 1, 1999, unless it has $25

million of assets under management, is

an adviser to a registered investment

company, or qualifies for one of the

exemptions in rule 203A–2. The

Commission is revising Schedule I and

Instructions to Schedule I to

accommodate and explain these

changes.47

Commission-registered advisers that

have their principal offices and places

of business in Colorado or Iowa and are

no longer eligible for Commission

registration after January 1, 1999, must

indicate on their annual amendment to

Form ADV revising Schedule I that they

are no longer eligible for Commission

registration.48 Advisers withdrawing

their Commission registration must

register, if required, with their

appropriate state securities authorities.

III. Cost-Benefit Analysis

The multi-state investment adviser

exemption will permit investment

advisers required to register with 30 or

more states to register with the

Commission even though they do not

otherwise meet the criteria for

Commission registration.49 The

Commission has limited data on the

number of investment advisers that will

qualify for the multi-state investment

adviser exemption.50 Generally, most

advisers that have clients in as many as

30 states have assets under management

of more than $25 million. Thus, the

Commission estimates that as few as ten

investment advisers will qualify for the

multi-state exemption each year.51 The

Commission requested comment on the

number of investment advisers that

would qualify for this exemption but

received none. The Commission

believes that the multi-state exemption

generally will not impose significant

additional costs on investment advisers

but will result in a net savings for

certain advisers when compared with

the costs of complying with multiple

state registration requirements.

The multi-state exemption will

benefit investment advisers who register

with the Commission relying on the

exemption by saving those advisers the

costs of complying with the regulations

of 30 different states. For the purposes

of this analysis, the Commission

estimates that it costs each adviser

$30,000 to comply with state

registration requirements.52 Therefore,

the cost savings for the ten advisers

expected to be eligible for the multistate exemption may be as much as

$300,000 annually. The Commission

requested comment on the

reasonableness of the savings estimates

but did not receive any comments.

The benefits of the multi-state

exemption will include savings for

investment advisers of the costs

associated with being examined by 30

different state regulators. State

regulators also would save the expense

of examining these investment advisers.

In response to the Commission’s request

for comment on the costs of examining

investment advisers and the frequency

of adviser examinations, the Department

of Banking and Finance of Nebraska

stated that it would save between $200

and $1,000 per examination depending

on the size of the advisory firm.53 In

addition, the multi-state exemption will

provide unquantifiable regulatory

benefits to advisers that will be

regulated by one entity instead of 30

separate entities.

The multi-state investment adviser

exemption will impose certain costs on

advisers relying on the exemption.

Investment advisers relying on the

exemption will be required to attach a

representation to Schedule I initially

when registering, and annually when

amending Form ADV, about the number

of states in which the adviser would be

required to register. The investment

adviser also will be required to maintain

a record of the states in which it

believes, but for the exemption, it would

be required to register. The Commission

estimates that the cost per year to each

adviser will be approximately $24,000

for a total of $240,000 for the ten

investment advisers expected to be

eligible for the exemption.54 The
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations 39713

Reduction Act Submission. See Proposing Release,

supra note 8, at section IV.

55See supra section II.B.1 of this Release.

56See supra section II.B.2 of this Release.

57This estimate of the number of investment

adviser representatives was made for the purposes

of the Implementing Amendments Cost-Benefit

Analysis. See Cost-Benefit Memorandum, supra

note 52.

58See, e.g., Unif. Sec. Act section 201(c) (1997);

Burns Ind. Code Ann. section 23–2–1–8(c)(3)

(1997); Md. Code Ann., Corps. & Ass’ns section 11–

401(b)(3)(ii) (1997); Utah Code Ann. section 61–1–

3(3)(c) (1997).

59The Commission estimated the following costs:

$96 to take an exam, $850 for examination

preparation, and $150 annually per investment

adviser representative to monitor state registration

requirements. See Cost-Benefit Memorandum,

supra note 52.

60The Commission estimated that the revenue

from examination fees would be $32 per

examination. Id.

61See supra section II.C of this Release.

62This number is based on information provided

to the Commission on Form ADV–T.

63Because the Coordination Act preserved the

authority of the states to require the payment of

state filing, registration, and licensing fees, advisers

in Colorado or Iowa will be required to pay fees

regardless of whether they are registered with the

Commission or with the state in which they have

their principal offices and places of business.

64 44 U.S.C. 3501–3520.

Commission requested comment on the

costs associated with the requirements

of the multi-state exemption, but did not

receive any empirical data concerning

the costs.

As discussed above, the Commission

is amending the definition of

investment adviser representative to

allow supervised persons who provide

advice to a few institutional or business

clients to have at least five natural

persons as accommodation clients

without being subject to state

registration requirements even if they

are not able to take advantage of the ten

percent allowance.55 The revised

definition provides a bright-line test that

should enable firms and representatives

alike to determine easily whether a

supervised person would be subject to

state qualification requirements. The

Commission also is amending the

definitions of high net worth clients and

other ‘‘excepted persons,’’ who are not

counted towards the ten percent

allowance.56 As discussed above, the

amendments raise the threshold levels

for determining high net worth clients

and include qualified purchasers and

certain knowledgeable employees as

excepted persons.

The Commission estimates that

Commission-registered advisers together

employ approximately 153,000

investment adviser representatives.57

The Commission, however, has no data

on the number of representatives who

may be affected by the amendments.

Although the Commission requested

comment on the number of investment

adviser representatives who would be

affected by the revision of the

definition, commenters did not provide

any data. The Commission, therefore, is

unable to quantify the total benefits and

costs that may result from these

amendments.

The amendments to the definitions of

investment adviser representative and

excepted persons who are excluded

from the ten percent allowance may

increase the number of supervised

persons of Commission-registered

advisers who are not subject to state

qualification requirements. Under the

amended definition of investment

adviser representative, all supervised

persons of Commission-registered

investment advisers may provide

services to five natural person clients

without being subject to state

qualification requirements. Moreover,

the amendments to the definition of

excepted persons permit supervised

persons to accept qualified purchasers

and certain knowledgeable employees of

the investment adviser as clients

without being subject to state

qualification requirements. On the other

hand, the number of supervised persons

who are not subject to state qualification

requirements may not increase

substantially because many states

already do not require investment

adviser representatives to register with

the state until they have more than five

clients in the state.58 Moreover,

supervised persons must count clients

who no longer qualify as high net worth

under the amended criteria towards the

ten percent allowance.

Although the Commission is unable to

quantify the total benefits and costs

relating to the adoption of the

amendments, the Commission believes

that the amendments generally will not

impose significant costs on investment

advisers and their supervised persons.

Supervised persons who are no longer

subject to state qualification

requirements because of the revised

definitions may benefit by saving the

expense associated with state

qualification examinations (i.e.,

monitoring state registration

requirements and registering for state

exams).59 Moreover, because the

Coordination Act preserved the

authority of the states to require the

payment of state filing, registration, and

licensing fees, there will be no loss to

the states of fees collected.

The costs associated with revising the

definitions, which may result in certain

supervised persons no longer being

subject to state qualification

requirements, include the fees for state

examinations of investment advisers

that will not be collected by the

National Association of Securities

Dealers Regulation, Inc. (‘‘NASDR’’) and

NASAA.60 The Commission requested

comment on the costs incurred by

investment advisers and their

supervised persons and on the

examination fees collected by the

NASDR and NASAA but did not receive

any comments on these issues.

The clarifying amendments that the

Commission is adopting, which are

described above, will eliminate any

confusion created by the language of the

rules and instructions.61 The

Commission believes that these

amendments will not impose any

additional costs on investment advisers.

Finally, the Commission believes that

the amendments to Schedule I to Form

ADV to reflect the enactment of

investment adviser statutes in Colorado

and Iowa will not impose significant

costs on investment advisers. The

Commission estimates that

approximately 650 advisers that have

their principal offices and places of

business in Colorado or Iowa will no

longer be eligible for Commission

registration after January 1, 1999.62

The benefits of amending Schedule I

to Form ADV to reflect the enactment of

investment adviser statutes include: (1)

Implementing the Coordination Act by

prohibiting Commission registration of

advisers that have their principal offices

and places of business in a state that

regulates investment advisers; and (2)

preventing the preemption of state law

in Colorado and Iowa for those advisers

that should be regulated by the states.

These benefits are substantial, but are

not quantifiable.

Advisers that are no longer eligible for

Commission registration will incur

some additional costs in complying

with state registration requirements

once they are no longer registered with

the Commission and state law is not

preempted.63 These advisers may be

required to register and to comply with

requirements of other states in which

they transact business if they have a

place of business in the state or have six

or more clients who are residents of that

state.

IV. Paperwork Reduction Act

As set forth in the Proposing Release,

certain provisions of the rule

amendments contain ‘‘collection of

information’’ requirements within the

meaning of the Paperwork Reduction

Act of 1995 (‘‘PRA’’).64 Therefore, the

collection of information requirements,

titled ‘‘Form ADV’’ and ‘‘Schedule I to

Form ADV’’ contained in the rule
39714 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations

65Rule 275.0–7 (17 CFR 275.0–7) The

Commission has revised the definition of ‘‘small

entity,’’ effective July 30, 1998. See Definitions of

‘‘Small Business’’ or ‘‘Small Organization’’ Under

the Investment Company Act of 1940, the

Investment Advisors Act of 1940, the Securities

Exchange Act of 1934, and the Securities Act of

1933, Release No. 33–7548, 34–40122, IC–23272,

and IA–1727 (June 24, 1998) (63 FR 35508 (June 30,

1998)). Because the IRFA concerning the proposed

amendments was prepared under the old definition,

that definition applies to the Commission’s

preparation of the FRFA concerning these

amendments Id. at n. 32.

66These estimates of the number of small entities

were made for purposes of the Final Regulatory

Flexibility Analysis for the rules implementing the

Coordination Act. See Implementing Release, supra

note 5, at nn. 189–190 and accompanying text.

amendments were submitted to the

Office of Management and Budget

(‘‘OMB’’) for review pursuant to section

3507(d) of the PRA and 5 CFR 1320.11.

The Commission did not receive any

comments from the public in response

to its request for comments in the

Paperwork Reduction Act section of the

Proposing Release. An agency may not

conduct or sponsor, and a person is not

required to respond to, a collection of

information unless the agency displays

a valid OMB control number. OMB

approved the PRA request and assigned

control numbers 3235–0049 to Form

ADV and 3235–0490 to Schedule I to

Form ADV, each with an expiration date

of February 28, 2001.

Form ADV is required by rule 203–1

(17 CFR 275.203–1) to be filed by every

adviser applying for registration with

the Commission as an investment

adviser. The rules imposing this

collection of information are found at 17

CFR 275.203–1 and 17 CFR 279.1. The

Commission is not amending rule 203–

1, but is amending Schedule I to Form

ADV, which is referenced in rule 279.1

(discussed below as a related, though

separate, collection of information).

Rule 204–1 (17 CFR 275.204–1)

describes the circumstances requiring

the filing of an amended Form ADV.

Registrants must file an amended Form

ADV when information on the initial

Form ADV has changed, either at the

end of the fiscal year or promptly for

certain material changes. In addition,

rule 204–1 requires an investment

adviser to file the cover page of Form

ADV (along with a Schedule I to Form

ADV) annually within 90 days after the

end of the investment adviser’s fiscal

year regardless of whether other changes

have taken place during the year. The

Commission is not amending rule 204–

1. The collection of information

required by Form ADV is mandatory,

and responses are not kept confidential.

The Commission has revised its

estimate of the burden hours required

by Form ADV as a result of a change in

the number of estimated respondents.

The total burden hours imposed by

Form ADV are estimated to be

19,448.42.

Schedule I to Form ADV requires an

investment adviser to declare whether it

is eligible for Commission registration.

Schedule I, as part of Form ADV, is

required to be filed with an investment

adviser’s initial application on Form

ADV. The rules imposing this collection

of information are found at 17 CFR

275.203–1 and 17 CFR 279.1. The

Commission is not amending rule 203–

1, but is amending Schedule I to Form

ADV, which is referenced in rule 279.1.

The collection of the information

required by Schedule I to Form ADV is

mandatory, and responses are not kept

confidential.

Schedule I to Form ADV permits the

Commission to determine whether

investment advisers meet the eligibility

criteria for Commission registration set

out in section 203A and the rules under

the section, both at the time of initial

registration and annually thereafter.

Schedule I to Form ADV also will be

used to determine the eligibility of

investment advisers that rely on the

multi-state exemption under rule 203A–

2(e) and to implement that exemption.

The Commission has revised its

estimate of the burden hours required

by Schedule I to Form ADV as a result

of a change in the number of estimated

respondents and a program change (i.e.,

requirements for advisers relying on the

new multi-state exemption). The total

burden hours imposed by Schedule I to

Form ADV are estimated to be 9,480.

The rule amendments, as adopted, do

not impose a greater paperwork burden

upon respondents than that estimated

and described in the Proposing Release.

V. Summary of Regulatory Flexibility

Analysis

A summary of the Initial Regulatory

Flexibility Analysis (‘‘IRFA’’) was

published in the Proposing Release. No

comments were received on the IRFA.

The Commission has prepared a Final

Regulatory Flexibility Analysis

(‘‘FRFA’’) in accordance with 5 U.S.C.

604 relating to amendments to rules

203A–2, 203A–3, and 206(4)–3, Form

ADV, Schedule G to Form ADV, and

Schedule I to Form ADV, and the

withdrawal of rule 203A–5 and Form

ADV–T under the Advisers Act. The

following summarizes the FRFA.

The FRFA discusses the need for, and

objectives of, the rule amendments. The

amendments, as adopted, refine rules

implementing the Coordination Act.

The amendments (1) exempt multi-state

investment advisers from the

prohibition on Commission registration;

(2) revise the definition of investment

adviser representative; (3) clarify other

implementing rules; and (4) amend

Schedule I to Form ADV to reflect that

Colorado and Iowa have recently

enacted investment adviser statutes. In

addition, the Commission is

withdrawing rule 203A–5 and Form

ADV–T to eliminate the transition rule

and form that are no longer necessary.

The FRFA also provides a description

of and an estimate of the number of

small entities to which the rule

amendments will apply. For purposes of

the Advisers Act and the Regulatory

Flexibility Act, an investment adviser

generally is a small entity (i) if it

manages assets of $50 million or less, in

discretionary or non-discretionary

accounts, as of the end of its most recent

fiscal year or (ii) if it renders other

advisory services, has $50,000 or less in

assets related to its advisory business.65

The Commission estimates that up to

17,650 advisers are small entities and

that approximately 850 investment

advisers that are registered with the

Commission are small entities.66

The rule amendments will have some

effect on small entities. The multi-state

rule should affect only a few small

entities because the Commission

estimates that only ten investment

advisers can avail themselves of the

multi-state exemption annually. The

Commission believes that the effect on

small entities from the amended

definition of investment adviser

representative may be significant; the

Commission estimates that the number

of supervised persons who are not

investment adviser representatives and

are thus not subject to state qualification

requirements will increase slightly. The

clarifying amendments should not have

a significant effect on small entities

because the amendments eliminate any

confusion the language of the rules or

the instructions to forms may have

created and do not impose any

additional burden on investment

advisers. The withdrawal of rule 203A–

5 and Form ADV–T should not affect

any small entities because there should

not be any advisers currently filing

Form ADV–T. Finally, the enactment of

investment adviser statutes by Colorado

or Iowa (and the resulting amendments

to Schedule I to Form ADV to reflect

these changes) may have a significant

effect on small entities. The

Commission estimates that

approximately 650 investment advisers

that have their principal offices and

places of business in Colorado or Iowa

will no longer be eligible for

Commission registration after January 1,

1999.
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations 39715

Finally, the FRFA states that, in

adopting the amendments, the

Commission considered (a) the

establishment of differing compliance

requirements that take into account the

resources available to small entities; (b)

simplification of the rule’s requirements

for small entities; (c) the use of

performance rather than design

standards; and (d) an exemption from

the rules for small entities. The FRFA

states that the Commission concluded

that different standards for small

entities are not necessary or appropriate.

The FRFA is available for public

inspection in File No. S7–28–97, and a

copy may be obtained by contacting

Carolyn-Gail Gilheany, Securities and

Exchange Commission, 450 Fifth Street,

N.W., Stop 5–6, Washington, D.C.

20549.

VI. Statutory Authority

The Commission is adopting

amendments to rule 203A–2 under the

authority set out in section 203A(c) of

the Investment Advisers Act of 1940 (15

U.S.C. 80b–3a(c)).

The Commission is adopting

amendments to rule 203A–3 under the

authority set out in sections 202(a)(17)

and 211(a) of the Investment Advisers

Act of 1940 (15 U.S.C. 80b–2(a)(17),

80b–11(a)).

The Commission is adopting

amendments to rule 206(4)–3 under the

authority set out in sections 204, 206,

and 211 of the Investment Advisers Act

of 1940 (15 U.S.C. 80b–4, 80b–6, 80b–

11).

The Commission is withdrawing rule

203A–5 under the authority set out in

sections 204 and 211(a) of the

Investment Advisers Act of 1940 (15

U.S.C. 80b–4, 80b–11(a)).

The Commission is adopting

amendments to Form ADV, Schedule G

to Form ADV, and Schedule I to Form

ADV under the authority set out in

sections 203(c)(1) and 204 of the

Investment Advisers Act of 1940 (15

U.S.C. 80b–3(c)(1), 80b–4).

The Commission is removing and

reserving rule 279.3 and removing Form

ADV–T under the authority set out in

sections 204 and 211(a) of the

Investment Advisers Act of 1940 (15

U.S.C. 80b–4, 80b11(a)).

List of Subjects in 17 CFR Parts 275 and

279

Reporting and recordkeeping

requirements, Securities.

Text of Rule and Form Amendments

For the reasons set out in the

preamble, Title 17, Chapter II of the

Code of Federal Regulations is 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 275.203A–2 is amended by

revising the introductory texts of

§ 275.203A–2 and paragraph (b),

revising paragraphs (b)(1) and (b)(3) and

adding paragraph (e) to read as follows:

§ 275.203A–2 Exemptions from prohibition

on Commission registration.

The prohibition of section 203A(a) of

the Act (15 U.S.C. 80b–3a(a)) does not

apply to:

* * * * *

(b) Pension Consultants. (1) An

investment adviser that is a ‘‘pension

consultant,’’ as defined in this section,

with respect to assets of plans having an

aggregate value of at least $50,000,000.

* * * * *

(3) In determining the aggregate value

of assets of plans, include only that

portion of a plan’s assets for which the

investment adviser provided investment

advice (including any advice with

respect to the selection of an investment

adviser to manage such assets).

Determine the aggregate value of assets

by cumulating the value of assets of

plans with respect to which the

investment adviser was last employed

or retained by contract to provide

investment advice during a 12-month

period ended within 90 days of filing

Schedule I to Form ADV (17 CFR 279.1).

* * * * *

(e) Multi-state investment advisers.

An investment adviser that:

(1) Upon submission of its application

for registration with the Commission, is

required by the laws of 30 or more

States to register as an investment

adviser with the securities

commissioners (or any agencies or

officers performing like functions) in the

respective States, and thereafter would,

but for this section, be required by the

laws of at least 25 States to register as

an investment adviser with the

securities commissioners (or any

agencies or officers performing like

functions) in the respective States;

(2) Attaches a representation to

Schedule I to Form ADV (17 CFR 279.1)

that the investment adviser has

reviewed the applicable State and

federal laws and has concluded that, in

the case of an application for

registration with the Commission, it is

required by the laws of 30 or more

States to register as an investment

adviser with the securities

commissioners (or any agencies or

officers performing like functions) in the

respective States or, in the case of an

amendment to Form ADV revising

Schedule I to Form ADV, it would be

required by the laws of at least 25 States

to register as an investment adviser with

the securities commissioners (or any

agencies or officers performing like

functions) in the respective States,

within 90 days prior to the date of filing

Schedule I;

(3) Includes on Schedule E to Form

ADV (17 CFR 279.1) an undertaking to

withdraw from registration with the

Commission if an amendment to Form

ADV revising Schedule I to Form ADV

indicates that the investment adviser

would be required by the laws of fewer

than 25 States to register as an

investment adviser with the securities

commissioners (or any agencies or

officers performing like functions) in the

respective States, and, if an amendment

to Form ADV revising Schedule I

indicates that the investment adviser

would be prohibited by section 203A(a)

of the Act (15 U.S.C. 80b–3a(a)) from

registering with the Commission, files a

completed Form ADV–W (17 CFR 279.2)

within 90 days from the date the

investment adviser was required by

§ 275.204–1(a) to file the amendment to

Form ADV revising Schedule I, whereby

the investment adviser withdraws from

registration with the Commission; and

(4) Maintains in an easily accessible

place a record of the States in which the

investment adviser has determined it

would, but for the exemption, be

required to register for a period of not

less than five years from the filing of a

Schedule I to Form ADV that includes

a representation that is based on such

record.

3. In § 275.203A–3 the introductory

text and paragraph (a) are revised to

read as follows:

§ 275.203A–3 Definitions.

For purposes of section 203A of the

Act (15 U.S.C. 80b–3a) and the rules

thereunder:

(a)(1) Investment adviser

representative. ‘‘Investment adviser

representative’’ of an investment adviser

means a supervised person of the

investment adviser:

(i) Who has more than five clients

who are natural persons (other than

excepted persons described in

paragraph (a)(3)(i) of this section); and

(ii) More than ten percent of whose

clients are natural persons (other than

excepted persons described in

paragraph (a)(3)(i) of this section).
39716 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 /Rules and Regulations

(2) Notwithstanding paragraph (a)(1)

of this section, a supervised person is

not an investment adviser representative

if the supervised person:

(i) Does not on a regular basis solicit,

meet with, or otherwise communicate

with clients of the investment adviser;

or

(ii) Provides only impersonal

investment advice.

(3) For purposes of this section:

(i) ‘‘Excepted person’’ means a natural

person who is a qualified client as

described in § 275.205–3(d)(1).

(ii) ‘‘Impersonal investment advice’’

means investment advisory services

provided by means of written material

or oral statements that do not purport to

meet the objectives or needs of specific

individuals or accounts.

(4) Supervised persons may rely on

the definition of ‘‘client’’ in

§ 275.203(b)(3)–1 to identify clients for

purposes of paragraph (a)(1) of this

section, except that supervised persons

need not count clients that are not

residents of the United States.

* * * * *

4. Section 275.203A–5 is removed and

reserved.

5. In § 275.206(4)–3 paragraph

(a)(1)(ii)(D) is amended by revising the

cite ‘‘203(e)(3)’’ to read ‘‘203(e)(4)’’.

§ 275.203A–1 and 275.203A–2 [Amended]

6. In 17 CFR part 275 remove ‘‘(15

U.S.C. 80b–3A(a))’’ and add, in its place,

‘‘(15 U.S.C. 80b–3a(a))’’ in the following

places:

a. Section 275.203A–1(b)(2), (c), and

(d); and

b. Section 275.203A–2(d)(2) and

(d)(3).

PART 279—FORMS PRESCRIBED

UNDER THE INVESTMENT ADVISERS

ACT OF 1940

7. 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.

8. By removing the last sentence in

Items 18 and 19 to Part I of Form ADV

(referenced in § 279.1).

Note: The text of Form ADV (§ 279.1) does

not and the amendments will not appear in

the Code of Federal Regulations.

9. By revising Schedule G to Form

ADV (referenced in § 279.1) to read as

follows:

Note: The text of Schedule G to Form ADV

(§ 279.1) does not and the amendments will

not appear in the Code of Federal

Regulations. Schedule G is attached as

Appendix B.

10. By revising Schedule I to Form

ADV (referenced in § 279.1) to read as

follows:

Note: The text of Schedule I to Form ADV

(§ 279.1) does not and the amendments will

not appear in the Code of Federal

Regulations. Schedule I is attached as

Appendix A.

11. Section 279.3 is removed and

reserved.

12. Form ADV–T is removed.

Note: Form ADV–T does not appear in the

Code of Federal Regulations.

By the Commission.

Dated: July 17, 1998.

Jonathan G. Katz,

Secretary.

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[FR Doc. 98–19750 Filed 7–23–98; 8:45 am]

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