[Federal Register Volume 83, Number 8 (Thursday, January 11, 2018)]
[Rules and Regulations]
[Pages 1296-1302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00299]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-4839; File No. S7-05-17]
RIN 3235-AM02


Exemptions From Investment Adviser Registration for Advisers to 
Small Business Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting amendments to the rule that defines a venture 
capital fund (rule 203(l)-1) and the rule that implements the private 
fund adviser exemption (rule 203(m)-1) under the Investment Advisers 
Act of 1940 (the ``Advisers Act'') in order to reflect changes made by 
title LXXIV, sections 74001 and 74002 of the Fixing America's Surface 
Transportation Act of 2015 (the ``FAST Act''), which amended sections 
203(l) and 203(m) of the Advisers Act. Title LXXIV, section 74001 of 
the FAST Act amended the exemption from investment adviser registration 
for any adviser solely to one or more ``venture capital funds'' in 
Advisers Act section 203(l) by deeming ``small business investment 
companies'' to be ``venture capital funds'' for purposes of the 
exemption. Accordingly, we are amending the definition of a venture 
capital fund to include ``small business investment companies.'' Title 
LXXIV, section 74002 of the FAST Act amended the exemption from 
investment adviser registration for any adviser solely to ``private 
funds'' with less than $150 million in assets under management in 
Advisers Act section 203(m) by excluding the assets of ``small business 
investment companies'' when calculating ``private fund assets'' towards 
the registration threshold of $150 million. Accordingly, we are 
amending the definition of ``assets under management'' in the rule that 
implements the private fund adviser exemption to exclude the assets of 
``small business investment companies.''

DATES: Effective March 12, 2018.

FOR FURTHER INFORMATION CONTACT: Jennifer Songer, Senior Counsel, or 
Sara Cortes, Assistant Director, at (202) 551-6787 or <a href="/cdn-cgi/l/email-protection#0f464e7d7a636a7c4f7c6a6c21686079"><span class="__cf_email__" data-cfemail="6a232b181f060f192a190f09440d051c">[email protected]</span></a>, 
Investment Adviser Regulation Office, Division of Investment 
Management, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
rules 203(l)-1 [17 CFR 275.203(l)\1] and 203(m)-1 [17 CFR 275.203(m)-1] 
under the Investment Advisers Act of 1940 [15 U.S.C. 80b].\1\
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    \1\ Unless otherwise noted, when we refer to the Advisers Act, 
or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 
80b of the United States Code [15 U.S.C. 80b], at which the Advisers 
Act is codified, and when we refer to Advisers Act rules, or any 
paragraph of these rules, we are referring to title 17, part 275 of 
the Code of Federal Regulations [17 CFR part 275], in which these 
rules are published.
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Table of Contents

I. Background
II. Discussion
    A. Amendment to Rule 203(l)-1
    B. Amendment to Rule 203(m)-1
III. Effective Date
IV. Economic Analysis
    A. Introduction and Economic Justification
    B. Costs and Benefits
    C. Efficiency, Competition, and Capital Formation
V. Paperwork Reduction Act Analysis
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority

I. Background

    Prior to the enactment of the Fixing America's Surface 
Transportation Act of 2015 (the ``FAST Act''),\2\ we believe that 
investment advisers to small business investment companies (``SBICs'') 
\3\ primarily relied upon an exemption

[[Page 1297]]

from investment adviser registration under the Investment Advisers Act 
of 1940 (the ``Advisers Act'') \4\ for advisers solely to SBICs (the 
``SBIC adviser exemption'').\5\ The FAST Act expanded the applicability 
of two additional exemptions from investment adviser registration for 
investment advisers to SBICs: (1) The exemption for any adviser solely 
to one or more ``venture capital funds'' in Advisers Act section 203(l) 
(the ``venture capital fund adviser exemption''), and (2) the exemption 
for any adviser solely to ``private funds'' with less than $150 million 
in assets under management in Advisers Act section 203(m) (the 
``private fund adviser exemption''). This had the effect of permitting 
investment advisers to SBICs to advise both SBICs and other types of 
private funds without being required to register as investment advisers 
with the Commission.
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    \2\ Public Law 114-94, 129 Stat. 1312 (Dec. 4, 2015).
    \3\ An SBIC is (other than an entity that has elected to be 
regulated or is regulated as a business development company pursuant 
to section 54 of the Investment Company Act of 1940): (A) A small 
business investment company that is licensed under the Small 
Business Investment Act of 1958 (``SBIA''), (B) an entity that has 
received from the Small Business Administration notice to proceed to 
qualify for a license as a small business investment company under 
the SBIA, which notice or license has not been revoked, or (C) an 
applicant that is affiliated with 1 or more licensed small business 
investment companies described in subparagraph (A) and that has 
applied for another license under the SBIA, which application 
remains pending. Advisers Act section 203(b)(7).
    \4\ 15 U.S.C. 80b.
    \5\ Advisers Act section 203(b)(7). Although we believe that 
most, if not all, SBICs are private funds, we believe that very few 
advisers to SBICs have private fund assets under management in the 
United States of less than $150 million. Therefore, very few 
advisers to SBICs are likely to qualify for the private fund adviser 
exemption. See SBIC Program Overview, Small Business Administration, 
Office of Investment and Innovation, Data Management Branch, 
September 30, 2016, available at: https://www.sba.gov/sbic/general-information/program-overview (``SBIC Program Overview'').
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    The FAST Act amended sections 203(l) and 203(m) of the Advisers Act 
regarding the registration of investment advisers to SBICs. Title 
LXXIV, section 74001 of the FAST Act amended the venture capital fund 
adviser exemption by deeming SBICs to be ``venture capital funds'' for 
purposes of the exemption. Title LXXIV, section 74002 of the FAST Act 
amended the private fund adviser exemption by excluding the assets of 
SBICs for purposes of calculating private fund assets towards the 
registration threshold of $150 million.\6\ Accordingly, on May 3, 
2017,\7\ we proposed to amend (1) the definition of ``venture capital 
funds'' in Advisers Act rule 203(l)-1 to include SBICs and (2) the 
definition of ``assets under management'' in Advisers Act rule 203(m)-1 
to exclude the assets of SBICs.
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    \6\ The term ``private fund'' means an issuer that would be an 
investment company, as defined in section 3 of the Investment 
Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that Act. 
Advisers Act section 202(a)(29). While we believe that most SBICs 
are private funds, it is possible for an SBIC to be an investment 
company registered with the Commission. See 13 CFR 107.115 (stating 
that a registered investment company is eligible to apply for an 
SBIC license).
    \7\ See Amendments to Investment Advisers Act Rules to Reflect 
Changes Made by the FAST Act, Investment Advisers Act Release No. 
4697 (May 3, 2017) [82 FR 21487 (May 9, 2017)] (``Proposing 
Release'').
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    Advisers who rely on the SBIC adviser exemption are not subject to 
reporting or recordkeeping provisions under the Advisers Act or 
examination by our staff.\8\ Advisers who rely on the venture capital 
fund adviser exemption and the private fund adviser exemption are 
exempt from registration under the Advisers Act; however, they are 
considered ``exempt reporting advisers'' and must maintain such records 
and submit such reports as the Commission determines necessary or 
appropriate in the public interest or for the protection of 
investors.\9\ Exempt reporting advisers are required to file a subset 
of the information requested by Form ADV with the Commission but are 
not subject to many of the other substantive requirements to which 
registered investment advisers are subject.\10\
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    \8\ Under section 204(a) of the Advisers Act, the Commission has 
the authority to require an investment adviser to maintain records 
and provide reports, as well as the authority to examine such 
adviser's records, unless the adviser is specifically exempted from 
the requirement to register pursuant to Advisers Act section 203(b). 
Advisers Act section 203(b)(7) provides an exemption from 
registration for advisers solely to SBICs. Advisers Act sections 
204(a) and 203(b)(7); Exemptions for Advisers to Venture Capital 
Funds, Private Fund Advisers With Less Than $150 Million in Assets 
Under Management, and Foreign Private Advisers, Investment Advisers 
Act Release No. 3222 (June 22, 2011) [76 FR 39646 (July 6, 2011)] 
(``Exemptions Release'') at footnote 5 and accompanying text.
    \9\ Under Advisers Act section 204(a), the Commission has the 
authority to require an investment adviser to maintain records and 
provide reports, as well as the authority to examine such adviser's 
records, unless the adviser is specifically exempted from the 
requirement to register pursuant to Advisers Act section 203(b). 
Investment advisers that are exempt from registration in reliance on 
other sections of the Advisers Act, such as sections 203(l) or 
203(m), are not specifically exempted from the requirement to 
register pursuant to section 203(b), and thus the Commission has 
authority under Advisers Act section 204(a) to require those 
advisers to maintain records and provide reports and has authority 
to examine such advisers' records. Advisers Act sections 203(l)(1) 
and 203(m)(2). See also Exemptions Release supra footnote 8 at 
footnote 5 and accompanying text. Advisers Act rule 204-4 requires 
an exempt reporting adviser to complete and file reports on Form ADV 
by following the instructions in the Form, which specify the 
information that an exempt reporting adviser must provide. See 
``Frequently Asked Questions on Form ADV and IARD'' available at: 
https://www.sec.gov/divisions/investment/iard/iardfaq.shtml (``Form 
ADV FAQs'') at section entitled: Reporting to the SEC as an Exempt 
Reporting Adviser; Form ADV: General Instructions available at: 
https://www.sec.gov/about/forms/formadv-instructions.pdf (``General 
Instructions to Form ADV'') at Instruction 3. Further, an adviser 
electing to be an exempt reporting adviser with the Commission must 
separately evaluate the need to register in any state in which it 
operates. General Instructions to Form ADV at Instruction 14.
    \10\ In addition to reporting requirements, registered 
investment advisers are required to comply with Advisers Act rules 
204-2, 204-3, 204(b)-1, 204A-1, 206(4)-1, 206(4)-2, 206(4)-3, 
206(4)-6 and 206(4)-7.
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    Since the enactment of the FAST Act, advisers to SBICs have been 
able to rely on the following exemptions from investment adviser 
registration with the Commission: (1) The SBIC adviser exemption by 
advising only SBICs; (2) the venture capital fund adviser exemption by 
advising both SBICs and venture capital funds (as defined in rule 
203(l)-1); or (3) the private fund adviser exemption by advising both 
SBICs and non-SBIC private funds, provided those non-SBIC private funds 
account for less than $150 million in assets under management in the 
United States.\11\
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    \11\ See FAST Act supra footnote 2. See generally, FAST Act 
Changes Affecting Investment Advisers to Small Business Investment 
Companies (March 2016), available at: https://www.sec.gov/investment/im-guidance-2016-03.pdf (``Staff Guidance'').
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    As discussed above, we proposed to amend the definition of a 
``venture capital fund'' in Advisers Act rule 203(l)-1 to include SBICs 
and to amend the definition of ``assets under management'' in Advisers 
Act rule 203(m)-1 to exclude the assets of SBICs.\12\ We received three 
comment letters,\13\ none of which specifically addressed the proposed 
amendments.\14\ We are adopting the amendments as proposed.
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    \12\ Proposing Release supra footnote 7.
    \13\ Comment letters submitted in File No. S7-05-17 are 
available on the Commission's website at: https://www.sec.gov/comments/s7-05-17/s70517.htm.
    \14\ See Comment Letter of Daphne K. Ross (June 7, 2017) 
(generally addressing the need for consumer protections), Comment 
Letter of Donald H. Homan (June 5, 2017) (commenting on the impact 
of regulations on the investment advisory industry) and Comment 
Letter of Thomas Garrett (June 3, 2017) (making a request that did 
not address the rule proposal).
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II. Discussion

A. Amendment to Rule 203(l)-1

    The venture capital fund adviser exemption in section 203(l) of the 
Advisers Act provides an exemption from registration under the Advisers 
Act for investment advisers that solely advise venture capital 
funds.\15\ Advisers

[[Page 1298]]

who rely on the venture capital fund adviser exemption are exempt from 
registration under the Advisers Act; however, they are considered 
``exempt reporting advisers'' and must maintain such records and submit 
such reports as the Commission determines necessary or appropriate in 
the public interest or for the protection of investors.\16\ The FAST 
Act amended the venture capital fund adviser exemption by deeming SBICs 
to be venture capital funds for purposes of the exemption.\17\
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    \15\ We note, however, that depending on the facts and 
circumstances, we may view two or more separately formed advisory 
entities, each of which purports to rely on a separate exemption 
from registration, as a single adviser for purposes of assessing the 
availability of exemptions from registration. For example, an 
adviser may not advise venture capital funds with more than $150 
million in assets under management in reliance on the venture 
capital fund adviser exemption and also advise other types of 
private funds with less than $150 million in assets under management 
in reliance on the private fund adviser exemption. See Exemptions 
Release supra footnote 8 at footnote 314, footnote 506 and 
accompanying text. See also In the Matter of TL Ventures Inc., 
Investment Advisers Act Release No. 3859 (June 20, 2014) (settled 
action); Advisers Act section 208(d) (prohibiting a person from 
doing indirectly or through or by another person, any act or thing 
which it would be unlawful for such person to do directly).
    \16\ Advisers Act section 203(l)(1). See Rules Implementing 
Amendments to the Investment Advisers Act of 1940, Investment 
Advisers Act Release No. 3221 (June 22, 2011) [76 FR 42950 (July 11, 
2011)] (``Implementing Release'') at section II.B. Advisers Act rule 
204-4 requires an exempt reporting adviser to complete and file 
reports on Form ADV by following the instructions in the Form, which 
specify the information that an exempt reporting adviser must 
provide. See Form ADV FAQs supra footnote 9 at section entitled: 
Reporting to the SEC as an Exempt Reporting Adviser; General 
Instructions to Form ADV supra footnote 9 at Instruction 4. 
    \17\ Advisers Act section 203(l)(2).
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    Advisers Act rule 203(l)-1 defines a ``venture capital fund'' for 
purposes of the venture capital fund adviser exemption.\18\ While most, 
if not all, SBICs meet the definition of a ``private fund'' under the 
Advisers Act,\19\ they may not meet the rule 203(l)-1 definition of a 
``venture capital fund.'' We proposed to amend Advisers Act rule 
203(l)-1 to include SBICs in the definition of venture capital funds 
for purposes of the venture capital fund adviser exemption.\20\ We did 
not receive any comments on the proposed amendment, and we are adopting 
the amendment as proposed.\21\ Amending the definition of venture 
capital fund in Advisers Act rule 203(l)-1 makes it consistent with 
Advisers Act section 203(l)(2), thereby reflecting in the rule the 
application of the venture capital fund adviser exemption to advisers 
to SBICs. An adviser to SBICs who relies on the venture capital fund 
adviser exemption will be required to submit Form ADV reports to the 
Commission as an exempt reporting adviser, consistent with the current 
requirement for advisers relying on the venture capital fund adviser 
exemption.\22\
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    \18\ Advisers Act rule 203(l)-1(a) generally defines a ``venture 
capital fund'' as a private fund that: (i) Represents to investors 
and potential investors that it pursues a venture capital strategy; 
(ii) holds no more than 20 percent of the fund's capital commitments 
in assets that are not qualifying investments (other than short-term 
holdings); (iii) does not borrow or otherwise incur leverage in 
excess of 15 percent of the fund's capital commitments, and such 
borrowing is for a non-renewable term of no longer than 120 days 
(excluding certain guarantees of qualifying portfolio company 
obligations by the fund from the 120 day limit); (iv) does not offer 
its investors redemption or certain other liquidity rights except in 
extraordinary circumstances; and (v) is not registered under the 
Investment Company Act and has not elected to be treated as a 
business development company. See also Advisers Act rule 203(l)-1(b) 
and (c).
    \19\ Advisers Act section 202(a)(29).
    \20\ Proposed amended Advisers Act rule 203(l)-1(a).
    \21\ Amended Advisers Act rule 203(l)-1(a).
    \22\ Advisers Act section 203(l)(1). See Implementing Release 
supra footnote 16 at section II.B.
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B. Amendment to Rule 203(m)-1

    The private fund adviser exemption in Advisers Act section 203(m) 
directs the Commission to provide an exemption from registration to any 
investment adviser that solely advises private funds if the adviser has 
assets under management in the United States of less than $150 
million.\23\ Advisers Act rule 203(m)-1 implements the private fund 
adviser exemption. Advisers who rely on the private fund adviser 
exemption are exempt from registration under the Advisers Act; however, 
they are considered ``exempt reporting advisers'' and must maintain 
such records and submit such reports as the Commission determines 
necessary or appropriate in the public interest or for the protection 
of investors.\24\ The FAST Act amended the private fund adviser 
exemption to require that private fund advisers exclude the assets of 
their SBICs for purposes of calculating private fund assets towards the 
registration threshold of $150 million.\25\
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    \23\ Supra footnote 15.
    \24\ Advisers Act section 203(m)(2). See Implementing Release 
supra footnote 16 at section II.B. Advisers Act rule 204-4 requires 
an exempt reporting adviser to complete and file reports on Form ADV 
by following the instructions in the Form, which specify the 
information that an exempt reporting adviser must provide. See Form 
ADV FAQs supra footnote 9 at section entitled: Reporting to the SEC 
as an Exempt Reporting Adviser; General Instructions to Form ADV 
supra footnote 9 at Instruction 3.
    \25\ Advisers Act section 203(m)(3).
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    Advisers Act rule 203(m)-1(d)(1) defines ``assets under 
management'' for purposes of the private fund adviser exemption.\26\ 
The rule 203(m)-1(d)(1) definition of assets under management includes 
an adviser's regulatory assets under management attributable to SBICs. 
We proposed to amend Advisers Act rule 203(m)-1(d)(1) to exclude an 
adviser's regulatory assets under management attributable to SBICs from 
the definition of assets under management for purposes of the private 
fund adviser exemption.\27\ We did not receive any comments on our 
proposed amendment, and we are adopting the amendment as proposed.\28\ 
Amending the definition of assets under management in Advisers Act rule 
203(m)-1 to make it consistent with Advisers Act section 203(m)(3) will 
reflect that advisers to both private funds and SBICs can rely on the 
private fund adviser exemption without regard to the SBIC assets that 
they advise. An adviser to SBICs who relies on the private fund adviser 
exemption will be required to submit reports to the Commission as an 
exempt reporting adviser and to include the SBICs that it advises on 
its Form ADV, consistent with the current requirement for advisers 
relying on the private fund adviser exemption.\29\
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    \26\ For purpose of Advisers Act section 203(m), assets under 
management means the regulatory assets under management as 
determined under Item 5.F of Form ADV. Advisers Act rule 203(m)-
1(d)(1). Instruction 5.b. to Part 1A of Form ADV explains how to 
calculate regulatory assets under management for purposes of Item 
5.F of Part 1A of Form ADV. In general, it states that an adviser 
should include the securities portfolios for which it provides 
continuous and regular supervisory or management services. In the 
case of a private fund, advisers are instructed to determine the 
current market value (or fair value) of the private fund's assets 
and the contractual amount of any uncalled commitment pursuant to 
which a person is obligated to acquire an interest in, or make a 
capital contribution to, the private fund. See Form ADV: 
Instructions for Part 1A available at: https://www.sec.gov/about/forms/formadv-instructions.pdf at Instruction 5.b.4.
    \27\ Proposed amended Advisers Act rule 203(m)-1(d)(1).
    \28\ Amended Advisers Act rule 203(m)-1(d)(1).
    \29\ Advisers Act section 203(m)(2). See Implementing Release 
supra footnote 16 at section II.B.
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III. Effective Date

    The effective date of the amendments to rules 203(l)-1 and 203(m)-1 
is March 12, 2018.

IV. Economic Analysis

A. Introduction and Economic Justification

    The Commission is sensitive to the potential economic effects of 
the amendments to Advisers Act rules 203(l)-1 and 203(m)-1 we are 
adopting today. These effects include the benefits and costs to 
investment advisers, their funds, and the investors in their funds as 
well as the amendments' implications for efficiency, competition, and 
capital formation. We discussed these effects in our economic analysis 
of the proposed amendments to Advisers Act rules 203(l)-1 and 203(m)-1 
and we did not receive any comments on this analysis.\30\ The economic 
baseline estimates have been revised to reflect updates to industry 
figures that were utilized in the Proposing Release.

[[Page 1299]]

However, these changes are only marginally different from the proposal 
and, accordingly, the analysis of the amendments' economic effects 
remains unchanged.
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    \30\ See supra footnotes 13 and 14.
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    The amendments to Advisers Act rules 203(l)-1 and 203(m)-1 reflect 
changes made by title LXXIV, sections 74001 and 74002 of the FAST Act 
to the Advisers Act. While the FAST Act does not expressly require the 
Commission to amend the Advisers Act rules, the amendments eliminate 
any confusion that might otherwise exist if Advisers Act rules 203(l)-1 
and 203(m)-1 were not amended. As adopted, Advisers Act rule 203(l)-1 
reflects that advisers to venture capital funds and SBICs qualify for 
the venture capital fund adviser exemption from registration. As 
adopted, Advisers Act rule 203(m)-1 reflects that advisers to SBIC and 
non-SBIC private funds with less than $150 million in non-SBIC private 
fund assets under management in the United States qualify for the 
private fund adviser exemption from registration.
Economic Baseline
    To establish a baseline useful for evaluating the economic effects 
of the amendments, we briefly describe the nature of SBICs and then 
define the different classes of advisers that could be affected by the 
amendments.
    According to the Small Business Administration (the ``SBA''), SBICs 
are investment funds that make equity and debt investments in 
qualifying small businesses and are licensed and regulated by the 
SBA.\31\ SBICs have access to low-cost capital because of a guarantee 
by the SBA. According to the SBA, this funding subsidy is intended to 
promote the SBIC program's purpose of bridging the gap between the 
small business community's need for capital and traditional sources of 
financing that might otherwise be more expensive.\32\
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    \31\ SBIC Program Overview supra footnote 5.
    \32\ Id.
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    Advisers to SBICs may also advise non-SBIC private funds, including 
venture capital funds. Depending on the amount and type of assets they 
advise, SBIC advisers belong to one of three categories: (1) Registered 
investment advisers; (2) exempt reporting advisers; or (3) advisers 
exempt from registration and reporting requirements. Registered 
investment advisers are required to file Form ADV and are also subject 
to other substantive requirements including the establishment of a 
compliance program and a Code of Ethics.\33\ Exempt reporting advisers 
are required to file a subset of the information requested by Form ADV 
with the Commission but are not subject to many of the other 
substantive requirements to which registered investment advisers are 
subject. Finally, any adviser that solely advises SBICs is exempt from 
registering with the Commission under section 203(b)(7) of the Advisers 
Act and does not have an obligation to report information to the 
Commission.\34\
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    \33\ Supra footnote 10.
    \34\ See supra footnote 8.
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    Prior to the enactment of the FAST Act, an adviser to both SBICs 
and other non-SBIC private funds qualified for the private fund adviser 
exemption under Advisers Act rule 203(m)-1 if the adviser had assets 
under management in the United States, including assets of the SBICs it 
advised, of less than $150 million. Advisers to SBICs and other non-
SBIC private funds that did not qualify for the private fund adviser 
exemption were required to register with the Commission. In addition, 
advisers to both venture capital funds and SBICs were required to 
register with the Commission unless they qualified for the private fund 
adviser exemption.
    In establishing a baseline for the amendments, two additional 
classes of investment advisers that did not advise SBICs prior to the 
FAST Act are relevant: (1) Advisers solely to venture capital funds 
that rely on the venture capital fund adviser exemption from 
registration and are considered exempt reporting advisers; and (2) 
advisers solely to private funds with less than $150 million in assets 
under management in the United States that rely on the private fund 
adviser exemption from registration and are considered exempt reporting 
advisers. Prior to the FAST Act, advisers relying on the venture 
capital fund adviser exemption were required to register with the 
Commission if they added SBIC clients unless their total assets under 
management remained under $150 million, in which case they could 
instead rely on the private fund adviser exemption. In addition, prior 
to the FAST Act, advisers relying on the private fund adviser exemption 
were required to register with the Commission if they added SBIC 
clients that caused their total assets under management in the United 
States to equal or exceed $150 million.
    The FAST Act provided the classes of advisers discussed above with 
several options. First, registered investment advisers to SBICs and 
non-SBIC private funds can withdraw from registration and report to the 
Commission as exempt reporting advisers if their non-SBIC private fund 
assets under management in the United States are less than $150 
million. Second, registered investment advisers to SBICs and venture 
capital funds can withdraw from registration and report to the 
Commission as exempt reporting advisers. Finally, advisers that relied 
on either the venture capital fund adviser or private fund adviser 
exemption prior to the FAST Act can begin advising SBICs without 
changing their registration status independent of the amount of assets 
attributable to SBICs.
    For those advisers that benefit from any of the above options, it 
would have been in their best economic interest to exercise such 
options following the passage of the FAST Act, particularly after the 
Commission's Division of Investment Management issued a guidance update 
regarding the application of the FAST Act.\35\ That guidance update 
indicated that the Commission's Division of Investment Management would 
not object to advisers who exclude the assets of the SBICs they advise 
when determining whether they qualify for the private fund adviser 
exemption or advisers who consider SBICs to be venture capital funds 
for the purposes of the venture capital fund adviser exemption.\36\ We 
believe, therefore, that it is likely that advisers have already 
exercised these options if doing so was in their economic interest. 
However, inconsistencies in the definitions of venture capital funds 
and assets under management that exist between the Advisers Act rules 
and the FAST Act may be discouraging some advisers from exercising 
these options. Similarly, these inconsistencies may result in assets 
under management being calculated differently by advisers for purposes 
of the private fund adviser exemption, which could lead to similarly-
situated advisers reaching different conclusions as to their reporting 
status.
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    \35\ See Staff Guidance supra footnote 11.
    \36\ Id.
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    As of June 30, 2017, there were approximately 12,474 registered 
investment advisers reporting a total of approximately $70.1 trillion 
in regulatory assets under management.\37\ In addition, there were 
3,332 exempt reporting advisers, of whom 623 relied on the venture 
capital fund adviser

[[Page 1300]]

exemption,\38\ 2,401 relied on the private fund adviser exemption,\39\ 
and 308 qualified for both exemptions. For exempt reporting advisers 
that relied on the private fund adviser exemption, total private fund 
assets under management were approximately $235 billion.\40\ Registered 
investment advisers advise approximately 34,343 private funds, while 
exempt reporting advisers advise approximately 12,562 private funds. As 
of June 30, 2017, there were 315 SBICs licensed by the SBA managing 
approximately $30 billion in assets.\41\ We are unable to identify 
which of those 315 SBICs are managed by advisers solely to SBICs 
compared to advisers that also advise other funds because section 
203(b)(7) of the Advisers Act exempts advisers solely to SBICs from 
registration and reporting, and filers of Form ADV are not required to 
explicitly indicate whether they advise SBICs. Because filers of Form 
ADV are not required to explicitly indicate whether they advise SBICs, 
we are not able to estimate the number of advisers that have already 
taken advantage of the exemptions afforded to them by the FAST Act 
compared to the number of advisers who have not done so due to any 
inconsistencies between the Advisers Act rules and the FAST Act.
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    \37\ We calculate these estimates using the last Form ADV filing 
for each adviser in the 15 months prior to July 1, 2017. This allows 
us to exclude advisers that are technically still registered with 
the Commission but have not filed a Form ADV for their most recent 
fiscal year. We use the same approach in calculating statistics for 
exempt reporting advisers. Our estimate of assets under management 
excludes filings that did not report this value so it should be 
considered a lower bound.
    \38\ Form ADV, Part 1A, Item 2.B.(1).
    \39\ Form ADV, Part 1A, Item 2.B.(2).
    \40\ Form ADV, Schedule D, Section 2.B. We exclude filings that 
did not report this value from our calculation so it should be 
considered a lower bound. Advisers relying on the venture capital 
fund adviser exemption are not required to answer this question.
    \41\ See the SBIC Quarterly Report as of March, 31 2017, 
available at: https://www.sba.gov/sites/default/files/articles/Quarterly_Data_as_of_June_30_2017.pdf.
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    The amendments may affect the classes of investment advisers 
mentioned above, the funds they advise, and the investors in those 
funds. We discuss the potential economic effects of the amendments on 
these parties in the next two sections.

B. Costs and Benefits

    In this section, we discuss the costs and benefits that may result 
from the amendments for each affected party. The economic effects 
discussed in this section only apply to the extent that advisers have 
not already exercised the exemption options provided to them under the 
baseline due to any inconsistencies between the FAST Act and the 
Advisers Act rules. As discussed above, we believe that it is likely 
that advisers have already exercised any exemption options provided to 
them by the FAST Act under the baseline if it were in their interest to 
do so; thus, we do not expect the magnitude of these effects to be 
significant. We discuss the amendments' likely impact on efficiency, 
competition, and capital formation in the next section.
    As discussed in the Economic Baseline Section, advisers solely to 
SBICs are exempt from registering as investment advisers with the 
Commission. To the extent that any inconsistencies between the FAST Act 
and Advisers Act rules 203(l)-1 and 203(m)-1 have discouraged advisers 
solely to SBICs from taking advantage of the venture capital fund 
adviser or private fund adviser exemptions, the amendments could lead 
these advisers to take on additional venture capital or private fund 
clients. Such advisers can weigh the additional fee revenue associated 
with advising non-SBIC private funds against the costs of reporting to 
the Commission as exempt reporting advisers when determining whether to 
rely on either of the exemptions. We estimate that the annual cost of 
filing Form ADV for an exempt reporting adviser is $916.\42\ In 
addition, advisers that switch from exempt to exempt reporting status 
may incur indirect costs if the information they disclose on Form ADV, 
such as any disciplinary history, reduces investor demand for their 
advisory services. We are unable to estimate how many advisers solely 
to SBICs would choose to take on non-SBIC private funds as a result of 
the amendments because we do not have information on the demand for 
their advisory services from non-SBIC private funds or whether any 
additional business generated would offset these reporting costs. 
Furthermore, we cannot estimate the extent to which advisers solely to 
SBICs have been deterred from exercising their option to rely on the 
venture capital fund adviser and private fund adviser exemptions due to 
any inconsistencies between the FAST Act and the Advisers Act rules 
under the baseline.
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    \42\ Form ADV under the Investment Advisers Act of 1940 (Office 
of Management and Budget ``OMB'' Control No. 3235-0049) Supporting 
Statement at footnotes 37-42 and accompanying text. The total 
aggregate annual monetized burden for exempt reporting advisers is 
estimated to be $2,976,632 assuming there are 3,248 such advisers, 
resulting in an estimated cost of approximately $916 per exempt 
reporting adviser. Similarly, the total aggregate annual monetized 
burden for registered investment advisers is estimated to be 
$89,427,727 assuming there are 12,024 such advisers, resulting in an 
estimated cost of approximately $7,437 per registered investment 
adviser.
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    The amendments provide registered advisers to SBICs and non-SBIC 
private funds that have not taken advantage of the venture capital fund 
adviser and private fund adviser exemptions due to inconsistencies 
between the FAST Act and the Advisers Act rules with clarification on 
the option to switch from registered investment adviser to exempt 
reporting adviser status. This option is difficult to value, but its 
value is broadly determined by the cost reductions associated with the 
change in registration status compared to the explicit and implicit 
costs of withdrawing from registration. Advisers that elect to change 
from registered to exempt reporting adviser status should expect to 
face reduced ongoing costs associated with filing Form ADV because, as 
exempt reporting advisers, they would only be required to complete 
certain portions of Form ADV.\43\ We estimate the annual cost savings 
associated with filing Form ADV as an exempt reporting adviser instead 
of as a registered investment adviser to be $6,521.\44\ Furthermore, 
such advisers would no longer bear the costs associated with the 
substantive requirements of being an adviser registered with the 
Commission.\45\ Such advisers would incur the one-time cost of filing a 
Form ADV-W withdrawal, which we estimate to be $119 per full withdrawal 
and $13 per partial withdrawal.\46\ They may also incur one-time 
operational costs associated with switching from registered to exempt 
reporting status, such as those associated with adapting information 
technology systems to a new reporting regime. Finally, to the extent 
that advisers benefit from marketing themselves as registered 
investment advisers to client funds and investors, they will forgo this 
benefit by withdrawing from registration. Because advisers are not 
required to rely on either of the exemptions in Advisers Act

[[Page 1301]]

rules 203(l)-1 or 203(m)-1 even though they may qualify for them, we 
expect only those registered investment advisers that would experience 
a net benefit by relying on these exemptions and have not already done 
so following the FAST Act and subsequent Staff Guidance to withdraw 
from registration.\47\
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    \43\ Exempt reporting advisers that are not also registering 
with any state securities authority must complete only the following 
Items of Form ADV, Part 1A: 1, 2, 3, 6, 7, 10, and 11, as well as 
corresponding schedules. Exempt reporting advisers that are 
registering with any state securities authority must complete all of 
Form ADV. See Form ADV FAQs supra footnote 9 at section entitled: 
Reporting to the SEC as an Exempt Reporting Adviser; General 
Instructions to Form ADV supra footnote 9 at Instruction 3.
    \44\ See supra footnote 42. The estimated annual cost of filing 
Form ADV as a registered investment adviser is approximately $7,437 
and the estimated cost for an exempt reporting adviser is 
approximately $916.
    \45\ See supra footnote 10 for a more detailed list of these 
requirements.
    \46\ Rule 203-2 and Form ADV-W under the Investment Advisers Act 
of 1940 (OMB Control No. 3235-0313) Supporting Statement at 
footnotes 7 and 9 and accompanying text. An adviser would file full 
withdrawal if it was only registered with the Commission. An adviser 
would file a partial withdrawal if it was required to remain 
registered with one or more States. See Form ADV FAQs supra footnote 
9 at section entitled: Form ADV-W.
    \47\ An adviser that qualifies for one of these exemptions can 
still choose to register with the Commission if it has sufficient 
assets under management. See Exemptions Release supra footnote 8 at 
footnote 24 and accompanying text.
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    Investors in private funds, including venture capital funds and 
SBICs, may experience costs and benefits as a result of the amendments. 
If investors face fixed costs in transacting with a given adviser, for 
example in performing any necessary due diligence, they may benefit if 
the amendments encourage more advisers to advise both SBIC and non-SBIC 
private funds, allowing investors to consolidate different types of 
investments with a single adviser. We cannot quantify the extent to 
which investors prefer to use a single adviser or the number of 
advisers who will expand into either SBICs or non-SBIC private funds 
because we do not have the information needed to assess investors' 
latent demand for consolidated advice services or the number of 
advisers that have been deterred from expanding their client bases 
under the baseline. We therefore cannot estimate the magnitude of this 
potential cost reduction for investors.
    In addition, to the extent that the amendments result in advisers 
changing their status from registered to exempt reporting, it may 
impose costs on investors. If investors value the transparency provided 
by complete Form ADV reporting and the safeguards associated with the 
other substantive requirements of being a registered investment 
adviser, then the amendments could impose costs on investors if they 
result in advisers changing their status from registered to exempt 
reporting. However, such investors have the option of moving their 
investments to advisers that are registered and, as noted above, we 
expect that advisers will weigh the benefits and costs associated with 
remaining registered in connection with any change in reporting status. 
The amendments could also impose costs on investors if any reduction in 
transparency or the other substantive requirements associated with 
registration reduce the ability of the Commission to protect investors 
from potentially fraudulent investment advisory schemes.

C. Efficiency, Competition, and Capital Formation

    As discussed above, because the amendments potentially reduce the 
reporting requirements for advisers to both SBICs and non-SBIC private 
funds, they could result in an increased number of advisers in both 
markets. Advisers solely to SBICs may enter the market for venture 
capital or other private fund advisory services, and current advisers 
to non-SBIC private funds may enter the market for SBIC advisory 
services. In this section, we discuss the potential effects of these 
changes on efficiency, competition, and capital formation. As was the 
case above, the economic effects discussed in this section only apply 
to the extent that advisers have not already exercised the exemption 
options provided to them under the baseline due to any inconsistencies 
between the FAST Act and the Advisers Act rules, and we do not expect 
the magnitude of these effects to be significant.
    Changes in the costs of advising both SBIC and non-SBIC private 
funds, as described above, could have several competitive effects. 
First, to the extent that non-SBIC private fund advisers find it 
profitable to enter the market for SBICs under the amendments, the 
amendments might increase competition in that market, resulting in 
reduced profits for SBIC advisers and lower advisory fees for their 
SBICs and their investors. Similarly, to the extent that SBIC advisers 
find it profitable to enter the non-SBIC private fund advisory market, 
the amendments might increase competition in that market, resulting in 
reduced profits for non-SBIC private fund advisers and lower advisory 
fees for their non-SBIC private funds and their investors. Whether the 
amendments result in such a reallocation of advisory services depends 
on whether advisers find it profitable to expand operations into new 
markets and whether they can do so without changing the quality or 
quantity of services in current markets. While we cannot precisely 
estimate the relative likelihood of the above competitive effects, the 
fact that the market for SBIC advisers is an order of magnitude smaller 
than the market for non-SBIC private fund advisers suggests that non-
SBIC private fund advisers are more likely to have benefitted from 
expanding into the SBIC market following the FAST Act's enactment, 
thereby increasing the amount of competition in that market. As 
discussed above, it is likely that most advisers would have already 
exercised this option under the baseline if it was in their economic 
interest to do so. Therefore, the competitive effects of the amendments 
are not likely to be significant.
    Any relative shift of advisory talent from one segment of the 
market to another could also have effects on efficiency and capital 
formation. To the extent that advisers who expand into new markets as a 
result of the amendments possess skill in identifying investment 
opportunities, an increase in the supply of advisers in the SBIC or 
non-SBIC private fund markets, or both, could result in more efficient 
investment decisions and market prices that more accurately reflect the 
fundamental value of assets where applicable. Also, any increase in the 
number of advisers in the SBIC market could make more capital available 
to small businesses if the increased supply of SBIC advisers attracts 
more capital to that market. In addition, to the extent that there are 
economies of scale in the provision of advisory services, advisory 
services may be provided at lower aggregate cost if the amendments 
result in an expansion of advisers in either the SBIC or non-SBIC 
private fund market. To the extent that the amendments result in 
reduced transparency into advisers because they opt to switch from 
registered to exempt reporting status, and to the extent that investors 
rely on that transparency when making investment decisions, the 
amendments might cause a reduction in the efficiency of investor 
allocations to these advisers. Any reduction in transparency could also 
reduce the aggregate amount of capital managed by investment advisers 
if investors cannot find suitable registered investment advisers as 
replacements and these investors value transparency more than any 
benefits, such as potentially lower advisory fees, of the amendments. 
Finally, if the amendments increase the supply of investment advisers 
to SBICs and non-SBIC private funds, and these advisers attract assets 
that were not already invested in other markets, they may increase the 
aggregate amount of capital investment.

V. Paperwork Reduction Act Analysis

    As discussed in the Proposing Release, we do not believe that the 
amendments to reflect changes made by the FAST Act make any substantive 
modifications to any existing collection of information requirements or 
impose any new substantive recordkeeping or information collection 
requirements

[[Page 1302]]

within the meaning of the Paperwork Reduction Act of 1995.\48\
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    \48\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The amendments to reflect the changes made by the FAST Act as 
described in Section II above may shift the number of advisers between 
each class of advisers as well as include advisers solely to SBICs that 
take on additional non-SBIC venture capital fund or private fund 
clients and therefore would become exempt reporting advisers.
    We believe that the current burden and cost estimates for the 
existing collection of information requirements remain appropriate.\49\ 
Thus, we believe that the amendments should not impose substantive new 
burdens on the overall population of respondents or affect the current 
overall burden estimates for the affected forms.\50\ Accordingly, we 
are not revising any burden and cost estimates in connection with these 
amendments.
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    \49\ The most recent Paperwork Reduction Act analysis for Form 
ADV is based upon the number of registered advisers and exempt 
reporting advisers as of May 1, 2016. Because approximately five 
months had passed between the signing of the FAST Act and May 1, 
2016, we believe that most of the advisers who wanted to change 
their registration status as a result of the FAST Act, did so in 
that five month period and are therefore included in the most recent 
Paperwork Reduction Act analysis for Form ADV. Form ADV under the 
Investment Advisers Act of 1940 (OMB Control No. 3235-0049).
    \50\ See Section IV above. In the Proposing Release, we 
requested comment on whether our belief that the amendments would 
not impose substantive new burdens on the overall population of 
respondents or affect the current over all burden estimates for the 
affected forms was correct. We did not receive any responses to our 
request for comment.
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VI. Regulatory Flexibility Act Certification

    The Commission certified, pursuant to section 605(b) of the 
Regulatory Flexibility Act of 1980 \51\ that the proposed amendments to 
Advisers Act rules 203(l)-1 and 203(m)-1, if adopted, would not have a 
significant economic impact on a substantial number of small 
entities.\52\ We included this certification in Section V of the 
Proposing Release. Although we encouraged written comments regarding 
this certification, no commenters responded to this request.
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    \51\ 5 U.S.C. 603(b).
    \52\ Under Commission rules, for the purposes of the Advisers 
Act and the Regulatory Flexibility Act, an investment adviser 
generally is a small entity if it: (i) Has assets under management 
having a total value of less than $25 million; (ii) did not have 
total assets of $5 million or more on the last day of its most 
recent fiscal year; and (iii) does not control, is not controlled 
by, and is not under common control with another investment adviser 
that has assets under management of $25 million or more, or any 
person (other than a natural person) that had total assets of $5 
million or more on the last day of its most recent fiscal year. Rule 
0-7(a) (17 CFR 275.0-7(a)).
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VII. Statutory Authority

    The Commission is amending rule 203(l)-1 under the authority set 
forth in sections 211(a) and 203(l) of the Advisers Act, (15 U.S.C. 
80b-11(a) and 80b-3(l), respectively). The Commission is amending rule 
203(m)-1 under the authority set forth in sections 211(a) and 203(m) of 
the Advisers Act (15 U.S.C. 80b-11(a) and 80b-3(m), respectively).

List of Subjects in 17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

Text of Rule Amendments

    For the reasons set forth in the preamble, the Commission amends 
title 17, chapter II of the Code of Federal Regulations as follows.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The authority citation for part 275 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless 
otherwise noted.
* * * * *

0
2. Amend Sec.  275.203(l)-1 by revising the introductory text to 
paragraph (a) to read as follows:


Sec.  275.203(l)-1   Venture capital fund defined.

    (a) Venture capital fund defined. For purposes of section 203(l) of 
the Act (15. U.S.C. 80b-3(l)), a venture capital fund is any entity 
described in subparagraph (A), (B), or (C) of section 203(b)(7) of the 
Act (15 U.S.C. 80b-3(b)(7)) (other than an entity that has elected to 
be regulated or is regulated as a business development company pursuant 
to section 54 of the Investment Company Act of 1940 (15 U.S.C. 80a-53)) 
or any private fund that:
* * * * *

0
3. Amend Sec.  275.203(m)-1 by revising paragraph (d)(1) to read as 
follows:


Sec.  275.203(m)-1   Private fund adviser exemption.

* * * * *
    (d) * * *
    (1) Assets under management means the regulatory assets under 
management as determined under Item 5.F of Form ADV (Sec.  279.1 of 
this chapter) except that the regulatory assets under management 
attributable to a private fund that is an entity described in 
subparagraph (A), (B), or (C) of section 203(b)(7) of the Act (15 
U.S.C. 80b-3(b)(7)) (other than an entity that has elected to be 
regulated or is regulated as a business development company pursuant to 
section 54 of the Investment Company Act of 1940 (15 U.S.C. 80a-53)) 
shall be excluded from the definition of assets under management for 
purposes of this section.
* * * * *

    By the Commission.

    Dated: January 5, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-00299 Filed 1-10-18; 8:45 am]
BILLING CODE 8011-01-P


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