Document ID: SEC-2010-1878-0001
Agency: sec
Document Type: Proposed Rule
Title: Rules Implementing Amendments to 1940 Investment Advisers Act
Posted Date: 2010-12-10T05:00Z

[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Proposed Rules]
[Pages 77052-77190]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29956]

[[Page 77051]]

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Part II

Securities and Exchange Commission

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31 Parts 275 and 279

Rules Implementing Amendments to the Investment Advisers Act of 1940; 
Proposed Rules

  Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / 
Proposed Rules  

[[Page 77052]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-3110; File No. S7-36-10]
RIN 3235-AK82

Rules Implementing Amendments to the Investment Advisers Act of 
1940

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing new rules 
and rule amendments under the Investment Advisers Act of 1940 to 
implement provisions of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. These rules and rule amendments are designed to give 
effect to provisions of Title IV of the Dodd-Frank Act that, among 
other things, increase the statutory threshold for registration by 
investment advisers with the Commission, require advisers to hedge 
funds and other private funds to register with the Commission, and 
require reporting by certain investment advisers that are exempt from 
registration. In addition, we are proposing rule amendments, including 
amendments to the Commission's pay-to-play rule, that address a number 
of other changes to the Advisers Act made by the Dodd-Frank Act.

DATES: Comments must be received on or before January 24, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-36-10 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-36-10. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's Web 
site (http://www.sec.gov/rules/proposed.shtml). Comments are also 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549 on official 
business days between the hours of 10 a.m. and 3 p.m. All comments 
received will be posted without change; we do not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Jennifer R. Porter, Attorney-Adviser, 
Daniele Marchesani, Senior Counsel, Melissa A. Roverts, Senior Counsel, 
Devin F. Sullivan, Senior Counsel, Matthew N. Goldin, Branch Chief, 
Daniel S. Kahl, Branch Chief, or Sarah A. Bessin, Assistant Director, 
at (202) 551-6787 or IArules@sec.gov, Office of Investment Adviser 
Regulation, Division of Investment Management, U.S. Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing rules 203A-5 and 
204-4 [17 CFR 275.203A-5 and 275.204-4] under the Investment Advisers 
Act of 1940 [15 U.S.C. 80b] (``Advisers Act'' or ``Act''),\1\ 
amendments to rules 0-7, 203A-1, 203A-2, 203A-3, 204-1, 204-2, 206(4)-
5, 222-1, and 222-2 [17 CFR 275.0-7, 275.203A-1, 275.203A-2, 275.203A-
3, 275.204-1, 275.204-2, 275.206(4)-5, 275. 222-1, and 275.222-2] under 
the Advisers Act, and amendments to Form ADV, Form ADV-H, and Form ADV-
NR [17 CFR 279.1, 279.3, and 279.4] under the Advisers Act. The 
Commission is also proposing to rescind rule 203A-4 [17 CFR 275.203A-4] 
under the Advisers Act.
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    \1\ 15 U.S.C. 80b. 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, at which the Advisers 
Act is codified, and when we refer to rule 0-7, rule 202(a)(11)-1, 
rule 203(b)(3)-1, rule 203(b)(3)-2, rule 203A-1, rule 203A-2, rule 
203A-3, rule 203A-4, rule 203A-5, rule 204-1, rule 204-2, rule 204-
4, rule 206(4)-5, rule 222-1, or rule 222-2, or any paragraph of 
these rules, we are referring to 17 CFR 275.0-7, 17 CFR 
275.202(a)(11)-1, 17 CFR 275.203(b)(3)-1, 17 CFR 275.203(b)(3)-2, 17 
CFR 275.203A-1, 17 CFR 275.203A-2, 17 CFR 275.203A-3, 17 CFR 
275.203A-4, 17 CFR 275.203A-5, 17 CFR 275.204-1, 17 CFR 275.204-2, 
17 CFR 275.204-4, 17 CFR 275.206(4)-5, 17 CFR 275.222-1, or 17 CFR 
275.222-2, respectively, of the Code of Federal Regulations, in 
which these rules are published, or would be published, if adopted.
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Table of Contents

I. Background
II. Discussion
    A. Eligibility for Registration With the Commission: Section 410
    1. Transition to State Registration
    2. Amendments to Form ADV
    3. Assets Under Management
    4. Switching Between State and Commission Registration
    5. Exemptions From the Prohibition on Registration With the 
Commission
    a. NRSROs
    b. Pension Consultants
    c. Multi-State Advisers
    6. Elimination of Safe Harbor
    7. Mid-Sized Advisers
    a. Required To Be Registered
    b. Subject to Examination
    B. Exempt Reporting Advisers: Sections 407 and 408
    1. Reporting Required
    2. Information in Reports
    3. Updating Requirements
    4. Transition
    C. Form ADV
    1. Private Fund Reporting: Item 7.B.
    2. Advisory Business Information: Employees, Clients and 
Advisory Activities: Item 5
    3. Other Business Activities and Financial Industry 
Affiliations: Items 6 and 7
    4. Participation in Client Transactions: Item 8
    5. Reporting $1 Billion in Assets: Item 1
    6. Other Amendments to Form ADV
    D. Other Amendments
    1. Amendments to ``Pay to Play'' Rule
    2. Technical and Conforming Amendments
    a. Rules 203(b)(3)-1 and 203(b)(3)-2
    b. Rule 204-2
    c. Rule 0-7
    d. Rule 222-1
    e. Rule 222-2
    f. Rule 202(a)(11)-1
III. General Request for Comment
IV. Cost-Benefit Analysis
    A. Benefits
    B. Costs
    C. Request for Comment
V. Paperwork Reduction Act Analysis
    A. Rule 203A-2(e)
    B. Form ADV
    C. Rule 203A-5
    D. Form ADV-NR
    E. Rule 203-2 and Form ADV-W
    F. Form ADV-H
    G. Rule 204-2
    H. Request for Comment
VI. Initial Regulatory Flexibility Analysis
    A. Need for the New Rules and Rule Amendments
    B. Objectives and Legal Basis
    C. Small Entities Subject to Rules and Rule Amendments
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Solicitation of Comments
VII. Effects on Competition, Efficiency and Capital Formation
VIII. Consideration of Impact on the Economy
IX. Statutory Authority
Text of Rule and Form Amendments
APPENDIX A: Form ADV: General Instructions

[[Page 77053]]

APPENDIX B: Form ADV: Instructions for Part 1A
APPENDIX C: Form ADV: Glossary of Terms
APPENDIX D: Form ADV, Part 1A
APPENDIX E: Form ADV Execution Pages
APPENDIX F: Form ADV-H
APPENDIX G: Form ADV-NR

I. Background

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'') 
which, among other things, amends certain provisions of the Advisers 
Act.\2\ Title IV of the Dodd-Frank Act includes most of the amendments 
to the Advisers Act. These amendments include provisions that 
reallocate responsibility for oversight of investment advisers by 
delegating generally to the states responsibility over certain mid-
sized advisers, i.e., those that have between $25 and $100 million of 
assets under management.\3\ This provision will require a significant 
number of advisers currently registered with the Commission to withdraw 
their registrations with the Commission and to switch to registration 
with one or more State securities authorities. In addition, Title IV 
repeals the ``private adviser exemption'' contained in section 
203(b)(3) of the Advisers Act under which advisers, including those to 
many hedge funds, private equity funds and venture capital funds, had 
relied in order to avoid registration under the Act and our 
oversight.\4\ In eliminating this provision, Congress created, or 
directed us to adopt other, in some ways narrower, exemptions for 
advisers to certain types of private funds--e.g., venture capital 
funds--which provide that the Commission shall require such advisers to 
submit reports ``as the Commission determines necessary or appropriate 
in the public interest.'' \5\ These provisions in Title IV of the Dodd-
Frank Act will be effective on July 21, 2011.\6\
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    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ See section 410 of the Dodd-Frank Act; Advisers Act section 
203A. See also National Securities Markets Improvement Act of 1996, 
Public Law 104-290, 110 Stat. 3416, Sec.  303 (1996) (``NSMIA'') 
(allocating to states responsibility for small investment advisers 
with less than $25 million in assets under management).
    \4\ See section 403 of the Dodd-Frank Act. Section 203(b)(3) 
exempts from registration any investment adviser who during the 
course of the preceding twelve months has had fewer than fifteen 
clients and who neither holds himself out generally to the public as 
an investment adviser nor acts as an investment adviser to any 
investment company registered under the Investment Company Act of 
1940 (15 U.S.C. 80a-1) (``Investment Company Act''), or a company 
which has elected to be a business development company pursuant to 
section 54 of the Investment Company Act (15 U.S.C. 80a-54). Section 
403 of the Dodd-Frank Act eliminates this ``private adviser'' 
exemption from section 203(b)(3) and replaces it with a new 
exemption for ``foreign private advisers.'' We are proposing a rule 
to clarify the definition of a ``foreign private adviser'' in a 
separate release. 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. 3111, published elsewhere in this issue of the Federal 
Register (``Exemptions Release''). Commenters wishing to address 
issues related to foreign private advisers should submit comments on 
the Exemptions Release.
    \5\ See sections 407 and 408 of the Dodd-Frank Act (``The 
Commission shall require [such advisers to] provide to the 
Commission such annual or other reports as the Commission determines 
necessary or appropriate in the public interest or for the 
protection of investors''). Section 407 of the Dodd-Frank Act, which 
adds section 203(l) to the Advisers Act, exempts advisers solely to 
one or more venture capital funds. Section 408, which added section 
203(m) to the Advisers Act, exempts advisers solely to private funds 
with assets under management in the United States of less than $150 
million.
    \6\ See section 419 of the Dodd-Frank Act. For purposes of this 
Release, when we refer to the effective date of the Dodd-Frank Act, 
we are referring to the effective date of Title IV, which is July 
21, 2011, unless we indicate otherwise.
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    We are proposing to adopt new rules and amend existing rules and 
forms to give effect to these provisions. In addition, we are proposing 
rule amendments, including amendments to the Commission's ``pay to 
play'' rule, that address a number of other changes to the Advisers Act 
made by the Dodd-Frank Act. Also, in light of our increased 
responsibility for oversight of private funds, we are proposing to 
require advisers to those funds to provide us with additional 
information about the operation of those funds. As discussed in more 
detail below, this information would permit us to provide better 
oversight of these advisers by focusing our examination and enforcement 
resources on those advisers to private funds that appear to present 
greater compliance risks. Finally, we are proposing additional changes 
to Form ADV that we believe would enhance our oversight of advisers and 
also will enable us to identify advisers that are subject to the Dodd-
Frank Act's requirements concerning certain incentive-based 
compensation arrangements.\7\
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    \7\ See section 956 of the Dodd-Frank Act.
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II. Discussion

A. Eligibility for Registration With the Commission: Section 410

    Section 203A of the Advisers Act generally prohibits an investment 
adviser regulated by the State in which it maintains its principal 
office and place of business from registering with the Commission 
unless it has at least $25 million of assets under management,\8\ and 
preempts certain State laws regulating advisers that are registered 
with the Commission.\9\ This provision, enacted in 1996 as part of the 
National Securities Markets Improvement Act (``NSMIA''), eliminated the 
duplicative regulation of advisers by the Commission and State 
securities authorities, making the states the primary regulators of 
smaller advisers and the Commission the primary regulator of larger 
advisers.\10\
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    \8\ Advisers Act section 203A(a)(1). The prohibition does not 
apply if the investment adviser is an adviser to an investment 
company registered under the Investment Company Act, or the adviser 
is eligible for one of six exemptions the Commission has adopted. 
See id.; rule 203A-2; infra section II.A.5. of this Release. Section 
403 of the Dodd-Frank Act also added exemptions to Section 203 of 
the Advisers Act for: (i) Any investment adviser that is registered 
with the Commodity Futures Trading Commission as a commodity trading 
advisor and advises a private fund; and (ii) any investment adviser, 
other than a business development company, that solely advises 
certain small business investment companies.
    \9\ An investment adviser must register with the Commission 
unless it is prohibited from registering under section 203A of the 
Advisers Act or is exempt from registration under section 203(b). 
Advisers Act section 203(a). Investment advisers that are prohibited 
from registering with the Commission are subject to regulation by 
the states, but the anti-fraud provisions of the Advisers Act 
continue to apply to them. See Advisers Act sections 203A(b), 206. 
For SEC-registered investment advisers, State laws requiring 
registration, licensing and qualification are preempted, but states 
may investigate and bring enforcement actions alleging fraud or 
deceit, may require notice filings of documents filed with the 
Commission, and may require investment advisers to pay State notice 
filing fees. See Advisers Act section 203A(b); NSMIA, supra note 3, 
at sections 307(a) and (b). The Dodd-Frank Act did not amend 
sections 203A(a)(1) or 203(a) of the Advisers Act. See section 410 
of the Dodd-Frank Act.
    \10\ See S. Rep. No. 104-293, at 4 (1996). See also Rules 
Implementing Amendments to the Investment Advisers Act of 1940, 
Investment Advisers Act Release No. 1633, section I (May 15, 1997) 
[62 FR 28112 (May 22, 1997)] (``NSMIA Adopting Release'').
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    Section 410 of the Dodd-Frank Act creates a new group of ``mid-
sized advisers'' and shifts primary responsibility for their regulatory 
oversight to the State securities authorities. It does this by 
prohibiting from registering with the Commission an investment adviser 
that is registered as an investment adviser in the State in which it 
maintains its principal office and place of business and that has 
assets under management between $25 million and $100 million.\11\ 
Unlike a small adviser, a mid-sized adviser is not prohibited from 
registering with the Commission: (i) If the adviser is not required to 
be registered as an

[[Page 77054]]

investment adviser with the securities commissioner (or any agency or 
office performing like functions) of the State in which it maintains 
its principal office and place of business; (ii) if registered, the 
adviser would not be subject to examination as an investment adviser by 
that securities commissioner; or (iii) if the adviser is required to 
register in 15 or more states.\12\ Section 203A(c) of the Advisers Act, 
which was not amended by the Dodd-Frank Act, permits the Commission to 
exempt advisers from the prohibition on Commission registration, 
including small and mid-sized advisers, if the application of the 
prohibition from registration would be ``unfair, a burden on interstate 
commerce, or otherwise inconsistent with the purposes'' of section 
203A.\13\ Under this authority, we have adopted six exemptions from the 
prohibition on registration.\14\
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    \11\ See section 410 of the Dodd-Frank Act. This amendment 
increases the threshold above which all investment advisers must 
register with the Commission from $25 million to $100 million. See 
S. Rep. No. 111-176, at 76 (2010) (``Senate Committee Report'').
    \12\ See section 410 of the Dodd-Frank Act. A mid-sized adviser 
also will be required to register with the Commission if it is an 
adviser to a registered investment company or business development 
company under the Investment Company Act. Id. As a result, mid-sized 
advisers to registered investment companies and business development 
companies will not have to withdraw their Commission registrations. 
Compare section 410 of the Dodd-Frank Act with Advisers Act section 
203A(a)(1).
    \13\ The Commission's exercise of this authority would not only 
permit registration with the Commission, but would result in the 
preemption of State law with respect to the advisers that register 
with us as a result of the exemption. See Advisers Act sections 
203(a), 203A(b) and (c).
    \14\ See rule 203A-2 (permitting the following types of advisers 
to register with the Commission: (i) Nationally recognized 
statistical rating organizations (``NRSROs''); (ii) pension 
consultants; (iii) investment advisers affiliated with an adviser 
registered with the Commission; (iv) investment advisers expecting 
to be eligible for Commission registration within 120 days of filing 
Form ADV; (v) multi-State investment advisers; and (vi) internet 
advisers).
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    As a consequence of section 410 of the Dodd-Frank Act, we estimate 
that approximately 4,100 SEC-registered advisers will be required to 
withdraw their registrations and register with one or more State 
securities authorities.\15\ We are working closely with the State 
securities authorities to assure an orderly transition of investment 
adviser registrants to State regulation. In addition, we are today 
proposing rules and rule amendments that would provide us a means of 
identifying advisers that must transition to State regulation, clarify 
the application of new statutory provisions, and modify certain of the 
exemptions from the prohibition on registration that we have adopted 
under section 203A of the Act.
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    \15\ According to data from the Investment Adviser Registration 
Depository (``IARD'') as of September 1, 2010, 4,136 SEC-registered 
advisers either: (i) Had assets under management between $25 million 
and $100 million and did not indicate on Form ADV Part 1A that they 
are relying on an exemption from the prohibition on Commission 
registration; or (ii) were permitted to register with us because 
they rely on the registration of an SEC-registered affiliate that 
has assets under management between $25 million and $100 million and 
are not relying on an exemption.
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1. Transition to State Registration
    We are proposing a new rule, rule 203A-5, which would require each 
investment adviser registered with us on July 21, 2011 to file an 
amendment to its Form ADV no later than August 20, 2011, 30 days after 
the July 21, 2011 effective date of the amendments to section 203A, and 
to report the market value of its assets under management determined 
within 30 days of the filing.\16\ This filing would be the first step 
by which an adviser no longer eligible for Commission registration 
would transition to State registration. It would require each 
investment adviser to determine whether it meets the revised 
eligibility criteria for Commission registration, and would provide the 
Commission and the State regulatory authorities with information 
necessary to identify those advisers required to transition to State 
registration and to understand the reason for the transition or basis 
for continued Commission registration.\17\ An adviser no longer 
eligible for Commission registration would have to withdraw its 
Commission registration by filing Form ADV-W no later than October 19, 
2011 (60 days after the required refiling of Form ADV).\18\ We would 
expect to cancel the registration of advisers that fail to file an 
amendment or withdraw their registrations in accordance with the 
rule.\19\ Finally, the proposed rule would permit us to postpone the 
effectiveness of, and impose additional terms and conditions on, an 
adviser's withdrawal from SEC registration if we institute certain 
proceedings before the adviser files Form ADV-W.\20\
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    \16\ Proposed rule 203A-5(a). We propose to give advisers 30 
days from the effective date of the Dodd-Frank Act to prepare and 
submit the amended Form ADV. This approach would avoid requiring an 
adviser to respond to items about its eligibility to register with 
the Commission before the statutory changes affecting that 
eligibility will be effective on July 21, 2011. The additional 30 
days would provide an adviser with the opportunity to evaluate the 
effect of the legislation (and our rules) on its eligibility and 
seek the advice of legal counsel, if necessary, before submitting an 
amendment. By permitting a 30-day period we also seek to avoid a 
large volume of filings on a single day (i.e., July 21).
    \17\ Proposed amended Item 2.A. of Form ADV, Part 1A would 
reflect the requirements of the Advisers Act (as amended by the 
Dodd-Frank Act) and the related rules, and would require an 
investment adviser to mark Item 2.A.(13) if the adviser is no longer 
eligible to remain registered with the Commission. For a discussion 
of the proposed rules, see infra sections II.A.5. and II.A.7. of 
this Release, and for a discussion of Item 2.A, see infra section 
II.A.2. of this Release.
    \18\ Proposed rule 203A-5(b).
    \19\ See Advisers Act section 203(h). As provided in the 
Advisers Act, an adviser would be given appropriate notice and 
opportunity for hearing to show why its registration should not be 
cancelled. Advisers Act section 211(c).
    \20\ Proposed rule 203A-5(c) (``If, prior to the effective date 
of the withdrawal from registration of an investment adviser on Form 
ADV-W, the Commission has instituted a proceeding pursuant to 
section 203(e) * * * to suspend or revoke registration, or pursuant 
to section 203(h) * * * to impose terms or conditions upon 
withdrawal, the withdrawal from registration shall not become 
effective except at such time and upon such terms and conditions as 
the Commission deems necessary or appropriate in the public interest 
or for the protection of investors.''). This language largely is 
consistent with rule 203A-5 adopted after NSMIA. See NSMIA Adopting 
Release, supra note 10.
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    We propose to use our exemptive authority under section 203A(c) 
\21\ to provide for a transitional process with two ``grace periods,'' 
the first providing 30 days from the July 21, 2011 effective date of 
the Dodd-Frank Act for an adviser to determine whether it is eligible 
for Commission registration and to file an amended Form ADV, and the 
second providing an additional 60 days (following the end of the first 
30-day period) for an adviser to register in the states and to arrange 
for its associated persons to qualify for investment adviser 
representative registration, which may include preparing for and 
passing an examination, before withdrawing from Commission 
registration.\22\ We are proposing a 90-day transition process, which 
is shorter than the 180-day transition period that our rules currently 
provide for advisers switching from SEC to State registration, in order 
to promptly implement this Congressional mandate and accommodate the 
processing of renewals and fees for State registration and licensing 
via the IARD system, while allowing for an orderly transition.\23\
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    \21\ See supra note 13 and accompanying text.
    \22\ Proposed rule 203A-5. We would also amend the instructions 
on Form ADV to explain this process. See proposed Form ADV: General 
Instructions (special one-time instruction for Dodd-Frank transition 
filing for SEC-registered advisers).
    \23\ Our current rule provides an SEC-registered adviser that 
has to switch to State registration a period of 180 days after its 
fiscal year end to file an annual amendment to Form ADV and to 
withdraw its SEC registration after reporting to us that it is no 
longer eligible to remain registered with us. See rule 203A-1(b)(2); 
cf. rule 204-1(a) (requiring an adviser to file an annual amendment 
90 days after its fiscal year end).
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    We request comment on proposed rule 203A-5. Specifically, we 
request comment on the proposed transition process, including the 
amount of time we propose for advisers to transition to State 
registration by filing an amended

[[Page 77055]]

Form ADV within 30 days after July 21, 2011 and withdrawing from 
Commission registration within 60 days after the required Form ADV 
filing. We request comment on whether a transition process is necessary 
(e.g., whether we should require advisers that do not meet the new 
eligibility requirements to withdraw from Commission registration as of 
July 21, 2011), whether two grace periods are necessary (e.g., whether 
we should require the Form ADV filing and withdrawal of an adviser's 
registration to occur within the same period), or whether we should 
provide for a longer period (e.g., whether we should provide 180 days 
to parallel our current switching rule).\24\ Further, should the rule 
permit us to postpone the effectiveness of, and impose additional terms 
and conditions on, an adviser's withdrawal from SEC registration?
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    \24\ See rule 203A-1(b)(2); cf. 204-1(a).
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    Our ability to effect the timely transition to State regulation of 
advisers no longer eligible to register with the Commission may also be 
affected by our need to re-program the IARD system, through which 
advisers will file their amendments to Form ADV. We are working closely 
with the Financial Industry Regulatory Authority (``FINRA''), our IARD 
contractor, to make the needed modifications, but the programming may 
not be completed until after we adopt these rules. If IARD is unable to 
accept filings of Form ADV, including the proposed revisions discussed 
below to Item 2 of Part 1A, we may need to use our exemptive authority 
to further delay implementation of the increased threshold for mid-
sized adviser registration until the system can accept electronic 
filing of the revised form. Should we instead require an alternative 
procedure, such as a paper filing, for advisers to indicate their 
eligibility for registration or lack thereof? \25\
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    \25\ See Custody of Funds or Securities of Clients by Investment 
Advisers, Investment Advisers Act Release No. 2968, n. 53 (Dec. 30, 
2009) [75 FR 1456 (Jan. 11, 2010)] (requiring paper filing of Form 
ADV-E until IARD was upgraded to accept the form electronically); 
NSMIA Adopting Release at section II.A. (requiring advisers to file 
a separate paper form (Form ADV-T) to indicate whether they were 
eligible for SEC registration).
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    Since the enactment of the Dodd-Frank Act, our staff has received 
inquiries from State-registered advisers and advisers registering for 
the first time expressing concern that they might be required to 
register with the Commission (because their assets under management are 
more than $30 million) only to have to withdraw their registration next 
year when we implement section 410 of the Dodd-Frank Act (raising the 
threshold for Commission registration to $100 million of assets under 
management). To avoid such regulatory burdens, we will not object if 
any State-registered or newly registering adviser is not registered 
with us if, on or after January 1, 2011 until the end of the transition 
process (which would be October 19, 2011 under proposed rule 203A-5), 
the adviser reports on its Form ADV that it has between $30 million and 
$100 million of assets under management, provided that the adviser is 
registered as an investment adviser in the State in which it maintains 
its principal office and place of business, and it has a reasonable 
belief that it is required to be registered with, and is subject to 
examination as an investment adviser by, that State.\26\ Such advisers 
should remain registered with, or in the case of a newly registering 
adviser, apply for registration with, the State securities 
authorities.\27\
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    \26\ For a discussion of these requirements, see infra section 
II.A.7. of this Release.
    \27\ As discussed above, the Dodd-Frank Act amendments to 
Advisers Act section 203A(a) will not be effective until July 21, 
2011. See supra note 6 and accompanying text. Until that date, 
section 203A continues to apply, and all investment advisers 
registered with the Commission that remain eligible for registration 
under the current requirements must maintain their registrations and 
comply with the Advisers Act.
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2. Amendments to Form ADV
    Item 2 of Part 1A of Form ADV requires each investment adviser 
applying for registration to indicate its basis for registration with 
the Commission and to report annually whether it is eligible to remain 
registered. Item 2 reflects the current statutory threshold for 
registration with the Commission as well as our current rules. We 
propose to revise Item 2 to reflect the new statutory threshold and the 
revisions we propose to make to related rules as a result of the Dodd-
Frank Act.\28\ More specifically, we propose to amend Item 2 to require 
each adviser registered with us (and each applicant for registration) 
to identify whether, under section 203A, as amended, it is eligible to 
register with the Commission because it: (i) Is a large adviser (having 
$100 million or more of regulatory assets under management); \29\ (ii) 
is a mid-sized adviser that does not meet the criteria for State 
registration and examination; \30\ (iii) has its principal office and 
place of business in Wyoming (which does not regulate advisers) or 
outside the United States; \31\ (iv) meets the requirements for one or 
more of the exemptive rules under section 203A of the Act (as we 
propose to amend and discuss below); \32\ (v) is an adviser (or 
subadviser) to a registered investment company; \33\ (vi) is an adviser 
to a business development company and has at least $25 million of 
regulatory assets under management; \34\ or (vii) has some other basis 
for registering with the Commission.\35\ We also expect to modify IARD 
to prevent an applicant from registering with us, and an adviser from 
continuing to be registered with us, unless it represents that it meets 
the eligibility criteria set forth in the Advisers Act and our 
rules.\36\ We request comment on each of the changes we propose to make 
to Item 2. Are the requirements clearly stated? Do the proposed changes 
fairly reflect the new eligibility requirements under the Dodd-Frank 
Act and the amendments we are proposing to make to our rules?
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    \28\ We also propose to revise the terms used in the rules and 
Form ADV to refer to the securities authorities in each State with a 
single defined term, ``State securities authority.'' Compare 
proposed rules 203A-1, 203A-2(c) and (d), 203A-3(e); proposed Form 
ADV: Glossary with rules 203A-1(b)(1), 203A-2(e)(1), 203A-4; Form 
ADV: Glossary. See generally section 410 of the Dodd-Frank Act.
    \29\ Proposed Form ADV, Part 1A, Item 2.A.(1). We are proposing 
to revise Form ADV to use the term ``regulatory assets under 
management'' instead of ``assets under management.'' For a 
discussion of regulatory assets under management, see infra section 
II.A.3. of this Release.
    \30\ Proposed Form ADV, Part 1A, Item 2.A.(2). For a discussion 
of the criteria for State registration and examination for mid-sized 
advisers, see infra section II.A.7. of this Release.
    \31\ Proposed Form ADV, Part 1A, Items 2.A.(3), 2.A.(4).
    \32\ Proposed Form ADV, Part 1A, Items 2.A.(7)-2.A.(11). For a 
discussion of the exemptive rules, see infra section II.A.5. of this 
Release.
    \33\ Proposed Form ADV, Part 1A, Item 2.A.(5).
    \34\ Proposed Form ADV, Part 1A, Item 2.A.(6).
    \35\ Proposed Form ADV, Part 1A, Item 2.A.(12). We also propose 
to delete current Item 2.A.(5) for NRSROs. For a discussion of 
NRSROs, see infra section II.A.5.a. of this Release.
    \36\ We would also amend Item 2.A and the related items in 
Schedule D to reflect proposed revisions to rule 203A-2, which 
provides exemptions from the prohibition on registration with the 
Commission. See proposed Form ADV Items 2.A.(7), (10) and Section 
2.A.(10) of proposed Schedule D; infra section II.A.5. of this 
Release. Additionally, we propose to make conforming changes to the 
instructions for Form ADV. See proposed Form ADV: Instructions for 
Part 1A, instr. 2.
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3. Assets Under Management
    In most cases, the amount of assets an adviser has under management 
will determine whether the adviser must be registered with the 
Commission or the states. Section 203A(a)(2) of the Act defines 
``assets under management'' as the ``securities portfolios'' with 
respect to which an adviser provides ``continuous and regular 
supervisory or

[[Page 77056]]

management services.'' \37\ Instructions to Form ADV provide advisers 
with guidance in applying this provision, including a list of certain 
types of assets that advisers may (but are not required to) 
include.\38\ Today, we are proposing revisions to these instructions in 
order to implement a uniform method to calculate assets under 
management that can be used under the Act for purposes in addition to 
assessing whether an adviser is eligible to register with the 
Commission.\39\ We also propose to amend rule 203A-3 to continue to 
require that the calculation of ``assets under management'' for 
purposes of Section 203A be the calculation of the securities 
portfolios with respect to which an investment adviser provides 
continuous and regular supervisory or management services, as reported 
on the investment adviser's Form ADV.\40\
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    \37\ Advisers Act section 203A(a)(2). The Dodd-Frank Act 
renumbered current paragraph 203A(a)(2) as 203A(a)(3), but did not 
amend this definition. See section 410 of the Dodd-Frank Act.
    \38\ See Form ADV: Instructions for Part 1A, instr. 5.b. These 
assets include proprietary assets, assets an adviser manages without 
receiving compensation, and assets of foreign clients.
    \39\ Compare Form ADV: Instructions for Part 1A, instr. 5.b with 
proposed Form ADV: Instructions for Part 1A, instr. 5.b.
    \40\ See proposed rule 203A-3(d).
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    We provided the current instructions on calculating assets under 
management in 1997 as part of our implementation of the $25 million of 
assets threshold for registering with the Commission provided for in 
NSMIA.\41\ In that limited context, we provided some options for 
advisers in determining what assets must be included, and which are not 
mandated by the Advisers Act. In light of the additional uses of the 
term ``assets under management'' by the Dodd-Frank Act \42\ and any new 
regulatory requirements related to systemic risk that might be 
triggered by registration with the Commission,\43\ we are proposing to 
eliminate the choices we have given advisers in the Form ADV 
instructions.\44\ Our proposed change would eliminate an adviser's 
ability to opt into or out of State or Federal regulation (by including 
or excluding a class of assets such as proprietary assets) and any such 
regulatory requirements. We also would provide additional guidance to 
advisers on how to count assets managed through private funds.\45\ 
Finally, we propose to alter the terminology we use in Part 1A of Form 
ADV to refer to an adviser's ``regulatory assets under management'' in 
order to acknowledge the distinction from the amount of assets under 
management the adviser discloses to clients in Part 2 of Form ADV, 
which need not necessarily meet the requirements of section 203A.\46\
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    \41\ See NSMIA Adopting Release at section II.B.
    \42\ See sections 402(a) and 408 of the Dodd-Frank Act (adding 
section 202(a)(30) of the Act defining a foreign private adviser as 
having ``assets under management'' attributable to U.S. clients and 
private fund investors of less than $25 million, and section 203(m) 
directing the Commission to provide for an exemption for advisers 
solely to private funds with assets under management in the United 
States of less than $150 million).
    \43\ Section 404 of the Dodd-Frank Act gives the Commission 
authority to impose on investment advisers registered with the 
Commission reporting and recordkeeping requirements for systemic 
risk assessment purposes. The Commission could require registered 
advisers that meet a certain threshold of assets under management to 
submit systemic risk data pursuant to our authority in section 404 
of the Dodd-Frank Act. See also section 203(n) of the Advisers Act, 
as amended by section 408 of the Dodd-Frank Act (``In prescribing 
regulations to carry out the requirements of [Section 203 of the 
Act] with respect to investment advisers acting as investment 
advisers to mid-sized private funds, the Commission shall take into 
account the size * * * of such funds to determine whether they pose 
systemic risk, and shall provide for registration and examination 
procedures with respect to the investment advisers of such funds 
which reflect the level of systemic risk posed by such funds.'').
    \44\ See proposed Form ADV: Instructions for Part 1A, instr. 
5.b.(1).
    \45\ See proposed Form ADV: Instructions for Part 1A, instr. 
5.b.(1), (4). See also section 402 of the Dodd-Frank Act (defining 
private fund as ``an issuer that would be an investment company, as 
defined in section 3 of the Investment Company Act of 1940 (15 
U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act''); 
Exemptions Release at section II.A.8. (discussing when a fund 
qualifies as a private fund) and at section II (providing additional 
descriptions of the proposed rules and their application for 
purposes of the new exemptions available to private fund advisers).
    \46\ See proposed Form ADV: Instructions for Part 1A, instr. 
5.b.; Amendments to Form ADV, Investment Advisers Act Release No. 
3060 (July 28, 2010) [75 FR 49234 (Aug. 12, 2010)] (``Part 2 
Release'').
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    More specifically, we propose to require all advisers to include in 
their regulatory assets under management securities portfolios for 
which they provide continuous and regular supervisory or management 
services, regardless of whether these assets are proprietary assets, 
assets managed without receiving compensation, or assets of foreign 
clients, all of which an adviser currently may (but is not required to) 
exclude.\47\ In addition, we would not allow an adviser to subtract 
outstanding indebtedness and other accrued but unpaid liabilities, 
which remain in a client's account and are managed by the adviser.\48\
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    \47\ See proposed Form ADV: Instructions for Part 1A, instr. 
5.b.(1).
    \48\ See proposed Form ADV: Instructions for Part 1A, instr. 
5.b.(2). Accordingly, an adviser would not be able to deduct accrued 
fees, expenses, or the amount of any borrowing.
---------------------------------------------------------------------------

    We are proposing these changes in order to preclude some advisers 
from excluding certain assets from their calculation and thus remaining 
below the new assets threshold for registration with the Commission. 
The changes would result in some advisers reporting greater assets 
under management than they do today, but the assets we would require 
advisers to include in their assets under management are, in fact, 
assets managed by the adviser and allowing advisers to exclude such 
assets may have substantially more significant regulatory consequences 
than in 1997. The management of such assets, for example, may suggest 
that the adviser's activities are of national concern or have 
implications regarding the reporting for the assessment of systemic 
risk, a matter Congress considered important in enacting amendments to 
the Advisers Act in the Dodd-Frank Act.\49\ The Commission, moreover, 
is proposing that advisers be required to include these assets so that 
the calculations would be more consistent among advisers. The 
Commission also believes that requiring that these assets be included 
in the calculation would better achieve the objective of the Dodd-Frank 
Act regarding which advisers must register with the Commission, which 
advisers must register with the states, and which advisers are exempt 
from Commission registration.
---------------------------------------------------------------------------

    \49\ See supra note 43. Congress did not address these systemic 
risk implications when it adopted NSMIA.
---------------------------------------------------------------------------

    We also propose, as discussed below, to provide guidance regarding 
how an adviser that advises private funds determines the amount of 
assets it has under management. Form ADV currently provides no specific 
instructions applicable to this circumstance. We have designed our 
proposed instructions both to provide advisers with greater certainty 
in their calculation of regulatory assets under management, which they 
would also use as a basis to determine their eligibility for certain 
exemptions that we are proposing today in the Exemptions Release,\50\ 
as well as to prevent advisers from understating those assets to avoid 
registration. First, we would require an adviser to include in its 
regulatory assets under management the value of any private fund over 
which it exercises continuous and regular supervisory or management 
services, regardless of the nature of the assets held by the fund.\51\ 
As would be required for any other securities portfolio, a sub-adviser 
to a private fund would include in its assets under management only 
that portion of the

[[Page 77057]]

value of the portfolio for which it provides sub-advisory services.
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    \50\ See Exemptions Release at sections II.B.2. and II.C.5.
    \51\ See proposed Form ADV: Instructions for Part 1A, instr. 
5.b.(1).
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    Second, we propose to require such adviser to include in its 
calculation of regulatory assets under management the amount of any 
uncalled capital commitments made to the fund.\52\ Private funds, such 
as venture capital and private equity funds, typically make investments 
following capital calls on their investors, who are contractually 
obligated to fund their committed capital amounts.\53\ Advisers to 
these types of private funds provide supervisory or management services 
to the funds in anticipation of all investors fully funding their 
capital commitments, describe the size of their funds on the basis of 
these capital commitments and, in the early years of a fund's life, 
typically earn fees based on the total amount of capital committed.\54\
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    \52\ Id. A capital commitment is a contractual obligation of an 
investor to acquire an interest in, or provide the total commitment 
amount over time to, a private fund, when called by the fund.
    \53\ See, e.g., James Schell, Private Equity Funds: Business 
Structure and Operations Sec.  1.01 (2010) (``Schell'') (typical 
private equity fund partnership agreement requires investors to 
commit to make capital contributions to the fund, which would be 
paid as needed rather than upfront and would be used to pay expenses 
and make investments); Stephanie Breslow & Phyllis Schwartz, Private 
Equity Funds, Formation and Operation 2010, at Sec.  2:5.6 
(discussing the various remedies that may be imposed in the event an 
investor fails to fund its contractual capital commitment, 
including, but not limited to, ``the ability to draw additional 
capital from non-defaulting investors;'' ``the right to force a sale 
of the defaulting partner's interests at a price determined by the 
general partner;'' and ``the right to take any other action 
permitted at law or in equity'').
    \54\ See, e.g., Schell, supra note 53 at Sec.  1.01 (noting that 
capital contributions made by the investors are used to ``make 
investments in a manner consistent with the investment strategy or 
guidelines for the Fund.'') and at Sec.  1.03 (``Management fees in 
a Venture Capital Fund are usually an annual amount equal to a fixed 
percentage of total Capital Commitments.'').
---------------------------------------------------------------------------

    Third, we propose to add an instruction to require advisers to use 
the fair value of private fund assets in order to ensure that advisers 
value private fund assets on a more meaningful and consistent 
basis.\55\ Use of the cost basis (i.e., the value at which the assets 
were originally acquired), for example, could under certain 
circumstances grossly understate the value of appreciated assets, and 
thus result in advisers avoiding registration with the Commission. Use 
of the fair valuation method by all advisers, moreover, would result in 
more consistent asset calculations and reporting across the industry 
and, therefore, in a more coherent application of the Act's regulatory 
requirements and of our staff's risk assessment program. We understand 
that many, but not all, private funds value assets based on their fair 
value in accordance with U.S. generally accepted accounting principles 
(``GAAP'') or other international accounting standards.\56\ We 
acknowledge some private funds do not use fair value methodologies, 
which may be more difficult to apply when the fund holds illiquid or 
other types of assets that are not traded on organized markets.\57\ We 
believe, however, that for the reasons stated above it is important for 
all advisers to use the fair valuation method to calculate their 
private fund assets under management.
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    \55\ See proposed Form ADV: Instructions for Part 1A, instr. 
5.b.(4). A fund's governing documents may provide for a specific 
process for calculating fair value (e.g., that the general partner, 
rather than the board of directors, determines the fair value of the 
fund's assets). An adviser would be able to rely on such a process 
also for purposes of calculating its ``regulatory assets under 
management.''
    \56\ See, e.g., Comment Letter of National Venture Capital 
Association, dated July 28, 2009, at 2, commenting on the 
Commission's proposed custody rule (Investment Advisers Act Release 
No. 2876) (the ``vast majority of venture capital funds provide 
their LPs [i.e., investors] quarterly and audited annual financial 
reports. These reports are prepared under generally accepted 
accounting principles, or GAAP, and audited under the standards 
established for all investment companies, including the largest 
mutual fund complexes.''); Comment Letter of Managed Funds 
Association, dated July 28, 2009, at 3 (a ``substantial proportion 
of hedge fund managers, whether or not they are registered with the 
Commission, provide independently audited financial statements of 
the [hedge] fund to investors.''). Furthermore, advisers to private 
funds that prepare and distribute financial statements prepared in 
accordance with GAAP may be deemed to satisfy certain requirements 
of our custody rule. See rule 206(4)-2(b)(4) under the Advisers Act.
    \57\ Those assets include, for example, ``distressed debt'' 
(such as securities of companies or government entities that are 
either already in default, under bankruptcy protection, or in 
distress and heading toward such a condition) or certain types of 
emerging market securities that are not readily marketable. See 
Gerald T. Lins et al., Hedge Funds and Other Private Funds: Reg and 
Comp Sec.  5:22 (2009) (``At any given time, some portion of a hedge 
fund's portfolio holdings may be illiquid and/or difficult to value. 
This is particularly the case for certain types of hedge funds, such 
as those focusing on distressed securities, activist investing, 
etc.'').
---------------------------------------------------------------------------

    Advisers, as discussed below, would apply this revised method to 
calculate assets under management for various purposes under the 
Advisers Act. As they do today, advisers would calculate their assets 
under management for purposes of assessing whether they are eligible to 
register with the Commission. As a result of the proposed amendments to 
rule 203A-1, which would remove the requirement that an adviser 
determine its eligibility for registration by the assets under 
management reported on Form ADV, we are proposing a new provision, rule 
203A-3(d), to retain the requirement that the calculation of ``assets 
under management'' under section 203A and the related rules be made in 
accordance with the Form ADV calculation.\58\ Advisers would also apply 
the method for purposes of the new exemptions for foreign private 
advisers and with respect to certain private fund advisers, which we 
address in the Exemptions Release. For purposes of calculating the 
assets under management relevant under the exemptions, our proposed 
rules cross-reference the method for calculating ``regulatory assets 
under management'' under Form ADV.\59\ A uniform method of calculating 
assets under management for purposes of determining eligibility for SEC 
registration, reporting assets under management on Form ADV, and the 
new exemptions from registration under the Advisers Act would result in 
a more coherent application of the Act's regulatory requirements and 
more consistent reporting across the industry.
---------------------------------------------------------------------------

    \58\ See proposed rule 203A-3(d) (requiring advisers to 
determine ``assets under management'' by calculating the securities 
portfolios with respect to which an investment adviser provides 
continuous and regular supervisory or management services as 
reported on the investment adviser's Form ADV). This new provision 
reflects the current requirement in subsection (a) of rule 203A-1 
that we propose to eliminate to remove the $5 million buffer, which 
also requires advisers to determine their eligibility to register 
with the Commission based on the amount of assets under management 
reported on Form ADV. See rule 203A-1(a).
    \59\ See Exemptions Release at sections II.B.2. and II.C.5.; 
proposed rules 202(a)(30)-1 (definitions of foreign private adviser 
exemption terms) and 203(m)-1 (private fund adviser exemption).
---------------------------------------------------------------------------

    We request comment on our proposed changes to the instructions 
relating to the calculation of ``regulatory assets under management.'' 
Are changes to the rule and instructions necessary? Should we instead 
consider different changes? If so, in what way should we amend them? In 
particular, is our understanding that most private funds prepare 
financial statements using fair value accounting correct? Would the 
proposed approach result in advisers valuing their private fund assets 
in a generally uniform manner and in comparability of the valuations? 
We are not proposing to require advisers to determine fair value in 
accordance with GAAP. Should we adopt such a requirement? If not, 
should we specify that advisers may only determine the fair value of 
private fund assets in accordance with a body of accounting principles 
used in preparing financial statements? We understand that GAAP does 
not require some funds to fair value certain investments. Should we 
provide for an exception from the proposed fair valuation requirement 
with respect to any of those investments?

[[Page 77058]]

    Should we adopt a different approach altogether and allow advisers 
to use a method other than fair value? Are there other methods that 
would not understate the value of fund assets? Should the instructions 
permit advisers to rely on the method set forth in a fund's governing 
documents, or the method used to report the value of assets to 
investors or to calculate fees (or other compensation) for investment 
advisory services? What method should apply if a fund uses different 
methods for different purposes? Should we modify the proposed rule to 
require that the valuation be derived from audited financial statements 
or be subject to review by auditors or another independent third party?
    Advisers are currently only required to update their assets under 
management reported on Form ADV annually.\60\ Should we require more 
frequent updating? For instance, should we require an adviser to update 
its regulatory assets under management quarterly or any time the 
adviser files an other-than-annual amendment? \61\
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    \60\ See General Instruction 4 to Form ADV.
    \61\ See, e.g., Exemptions Release at section II.B.2. (proposed 
rule 203(m)-1 would require quarterly evaluation of private fund 
assets); Part 2 Release, supra note 46, at nn.46-48 and accompanying 
text (requiring advisers to update the amount of assets under 
management reported in Part 2 annually and when there are material 
changes if the adviser files an interim amendment for a separate 
reason).
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4. Switching Between State and Commission Registration
    Rule 203A-1 currently contains two means of preventing an adviser 
from having to switch frequently between State and Commission 
registration as a result of changes in the value of its assets under 
management or the departure of one or more clients.\62\ First, the rule 
provides for a $5 million buffer that permits an investment adviser 
having between $25 million and $30 million of assets under management 
to remain registered with the states and does not subject the adviser 
to cancellation of its Commission registration until its assets under 
management fall below $25 million.\63\ Second, the rule permits an 
adviser to rely on the firm's assets under management reported annually 
in the firm's annual updating amendments for purposes of determining 
its eligibility to register with the Commission, allowing an adviser to 
avoid the need to change registration status based upon fluctuations 
that occur during the course of the year.\64\ If an adviser is no 
longer eligible for Commission registration, the rule provides a 180-
day grace period from the adviser's fiscal year end to allow it to 
switch to State registration.\65\
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    \62\ See rule 203A-1(a), (b); NSMIA Adopting Release, supra note 
10, at section II.C.; Rules Implementing Amendments to the 
Investment Advisers Act of 1940, Investment Advisers Act Release No. 
1601, section II.C. (Dec. 20, 1996) [61 FR 68480 (Dec. 27, 1996)] 
(``NSMIA Proposing Release'').
    \63\ Rule 203A-1(a).
    \64\ Rule 203A-1(b). See also rule 204-1(a) (requiring annual 
amendment to Form ADV within 90 days of fiscal year end); General 
Instruction 4 (annual amendment to Form ADV must update amount of 
assets under management reported). Other criteria to determine an 
adviser's eligibility to register with the Commission must also be 
determined annually. See rule 203A-1(b)(2).
    \65\ Rule 203A-1(b)(2).
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    We propose to amend rule 203A-1 to eliminate the $5 million buffer 
for advisers having between $25 million and $30 million of assets under 
management, but to retain the ability of an adviser to avoid the need 
to change registration status based upon intra-year fluctuations in its 
assets under management for purposes of determining its eligibility to 
register with the Commission.\66\ The current buffer seems unnecessary 
in light of Congress's determination generally to require most advisers 
having between $30 million and $100 million of assets under management 
to be registered with the states.\67\ Moreover, at this time, we 
believe it is not necessary to increase the $100 million threshold in 
order to provide a similar buffer for advisers crossing that threshold 
and becoming registered with the Commission under the amended statutory 
provisions. We believe that the requirement that advisers only assess 
their eligibility for registration annually and the grace periods 
provided to switch to and from State registration will be sufficient to 
address the concern that an investment adviser with assets under 
management approaching $100 million or affected by changes in other 
eligibility requirements will frequently have to switch between State 
and Federal registration.\68\
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    \66\ See proposed rule 203A-1. In addition, the proposed rule 
would permit an adviser to rely on an affirmation of other criteria 
reported in its annual updating amendments for purposes of 
determining its eligibility to register with the Commission. See 
proposed rule 203A-1(b) (continuing to require an adviser filing an 
annual updating amendment to its Form ADV reporting that it is not 
eligible for Commission registration to withdraw its registration 
within 180 days of its fiscal year end).
    \67\ See H.R. Rep. No. 111-517, at 867 (2010) (``Conference 
Committee Report'') (discussing fact that legislation ``raise[d] the 
assets threshold for Federal regulation of investment advisers from 
$30 million to $100 million.'').
    \68\ If during the 180-day grace period to switch to State 
registration an adviser's assets under management increase, making 
the adviser eligible for Commission registration again, the adviser 
could amend its Form ADV to indicate the new amount of assets under 
management and continue to remain registered with the Commission. 
See proposed rule 203A-1(b) (adviser must withdraw from SEC 
registration within 180 days of its fiscal year end unless it then 
is eligible for registration).
---------------------------------------------------------------------------

    We request comment on our proposed elimination of the $5 million 
buffer. Do many advisers currently use this buffer? Should we retain 
the buffer given the new provisions regarding mid-sized advisers? 
Should we adopt a similar buffer for the new $100 million dollar 
threshold in amended section 203A? If so, what should be the amount of 
the buffer? Should it be $5 million, or higher or lower, and why? Do 
Item 2.A of Form ADV, Part 1A and the related instructions provide 
sufficient information to advisers about their eligibility to register 
with the Commission, or is additional guidance necessary?
5. Exemptions From the Prohibition on Registration With the Commission
    Section 203A(c) of the Advisers Act provides the Commission with 
the authority to permit investment advisers to register with the 
Commission even though they would be prohibited from doing so 
otherwise.\69\ As also noted above, under this authority, we have 
adopted six exemptions in rule 203A-2 from the prohibition on 
registration.\70\ Our authority under this provision was unchanged by 
the Dodd-Frank Act and therefore extends to the new mid-sized adviser 
category in section 203A(a)(2) of the Act, as amended.\71\ As a result, 
as currently drafted, each of these exemptions would, by its terms, 
apply to mid-sized advisers-exempting them from the prohibition on 
registering with the Commission if they meet the requirements of rule 
203A-2. We are proposing amendments to three of the

[[Page 77059]]

exemptions to reflect developments since their adoption, including the 
enactment of the Dodd-Frank Act. We request comment on whether we 
should amend the rules so that some, or all, of the exemptions should 
not be available to mid-sized advisers.\72\
---------------------------------------------------------------------------

    \69\ See Advisers Act section 203A(c). An investment adviser 
exempted from the prohibition on registration must register with the 
Commission, unless it otherwise qualifies for an exemption from 
registration under section 203(b) of the Advisers Act. Advisers Act 
section 203(a).
    \70\ See supra note 14 and accompanying text. The Commission has 
permitted six types of investment advisers to register with the 
Commission under rule 203A-2: (i) NRSROs; (ii) pension consultants; 
(iii) investment advisers affiliated with an adviser registered with 
the Commission; (iv) investment advisers expecting to be eligible 
for Commission registration within 120 days of filing Form ADV; (v) 
multi-State investment advisers; and (vi) internet advisers.
    \71\ Today, rule 203A-2 provides that advisers meeting the 
criteria for a category of advisers under the rule will not be 
prohibited from registering with us by Advisers Act section 203A(a). 
See rule 203A-2; NSMIA Adopting Release at section II.D. We are not 
proposing to amend this part of rule 203A-2. The new prohibition on 
mid-sized advisers registering with the Commission also is 
established under Advisers Act section 203A(a); therefore, mid-sized 
advisers meeting the requirements for a category of exempt advisers 
under rule 203A-2 would be eligible to register with us. See section 
410 of the Dodd-Frank Act; proposed rule 203A-2.
    \72\ We are also renumbering and making minor conforming changes 
to, rule 203A-2(c), (d) and (f) regarding investment advisers 
affiliated with an SEC-registered adviser, newly formed advisers 
expecting to be eligible for Commission registration within 120 
days, and internet advisers. See proposed rule 203A-2(b), (c) and 
(e).
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a. NRSROs
    We propose an amendment to eliminate the exemption in rule 203A-
2(a) from the prohibition on Commission registration for nationally 
recognized statistical rating organizations (``NRSROs''). Since we 
adopted this exemption, Congress amended the Act to exclude NRSROs from 
the Act \73\ and provided for a separate regulatory regime for NRSROs 
under the Securities Exchange Act of 1934 (``Exchange Act'').\74\ Only 
one NRSRO remains registered as an investment adviser under the Act and 
reports that it has more than $100 million of assets under management 
and thus would not rely on the exemption.\75\ Should we retain this 
exemption? If so, why?
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    \73\ Credit Rating Agency Reform Act of 2006, Public Law 109-
291, 120 Stat. 1327, Sec.  4(b)(3)(B) (2006) (``Credit Rating Agency 
Reform Act''). See also Advisers Act section 202(a)(11)(F) 
(excluding an NRSRO from the definition of investment adviser unless 
it issues recommendations about purchasing, selling, or holding 
securities or engages in managing assets that include securities).
    \74\ Credit Rating Agency Reform Act, supra note 73, at sections 
4(a), 5.
    \75\ Based on IARD data as of September 1, 2010.
---------------------------------------------------------------------------

b. Pension Consultants
    We propose to amend the exemption available to pension consultants 
in rule 203A-2(b) to increase the minimum value of plan assets from $50 
million to $200 million.\76\ Pension consultants typically do not have 
``assets under management,'' but we have required these advisers to 
register with us because their activities have a direct effect on the 
management of large amounts of pension plan assets.\77\ We had set the 
threshold at $50 million of plan assets for these advisers to ensure 
that, in order to register with us, a pension consultant's activities 
are significant enough to have an effect on national markets.\78\ We 
propose to increase this threshold to $200 million in light of 
Congress's determination to increase from $25 million to $100 million 
the amount of ``assets under management'' that requires all advisers to 
register with the Commission.\79\ This threshold would maintain a ratio 
to the statutory threshold that is the same as the ratio of the $50 
million plan asset threshold and $25 million assets under management 
threshold currently in place. As a result, advisers currently relying 
on the pension consultant exemption advising plan assets of less than 
$200 million may be required to register with one or more states.\80\
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    \76\ See proposed rule 203A-2(a).
    \77\ See NSMIA Adopting Release at section II.D.2.; NSMIA 
Proposing Release at section II.D.2. Pension consultants provide 
services to pension and employee benefit plans and their 
fiduciaries, including assisting them to select investment advisers 
that manage plan assets. See rule 203A-2(b)(2), (3); NSMIA Adopting 
Release at section II.D.2. The exemption does not apply to pension 
consultants that solely provide services to plan participants. See 
NSMIA Adopting Release at section II.D.2.
    \78\ See NSMIA Adopting Release at n. 60 (the $50 million 
``higher threshold is necessary to demonstrate that a pension 
consultant's activities have an effect on national markets.''). The 
higher asset requirement also reflects that a pension consultant has 
substantially less control over client assets than an adviser that 
has ``assets under management.'' Id. To determine the aggregate 
value of plan assets, a pension consultant may only include the 
portion of the plan's assets for which the consultant provided 
investment advice. Rule 203A-2(b)(3).
    \79\ See section 410 of the Dodd-Frank Act.
    \80\ We note, however, that a pension consultant required to 
register in 15 or more states would be eligible to register with the 
SEC pursuant to proposed rule 203A-2(d). See infra section II.A.5.c. 
of this Release.
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    We request comment on our proposed amendment. Does an adviser 
advising plan assets of $200 million or more have an impact on national 
markets? Should we use another amount instead? Does an adviser advising 
a smaller amount of plan assets also have an impact on national 
markets? Should we instead increase the threshold by the same amount 
that Congress increased the statutory threshold of assets under 
management, which would be $125 million of plan assets?
c. Multi-State Advisers
    We propose to amend the multi-state adviser exemption to align the 
rule with the multi-State exemption Congress built into the mid-sized 
adviser provision under section 410 of the Dodd-Frank Act.\81\ Under 
rule 203A-2(e), the prohibition on registration with the Commission 
does not apply to an investment adviser that is required to register in 
30 or more states. Once registered with the Commission, the adviser 
remains eligible for Commission registration as long as it would be 
obligated, absent the exemption, to register in at least 25 states.\82\ 
The Dodd-Frank Act provides that a mid-sized adviser that otherwise 
would be prohibited may register with the Commission if it would be 
required to register with 15 or more states.\83\
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    \81\ See proposed rule 203A-2(d).
    \82\ Rule 203A-2(e)(1). An investment adviser relying on this 
exemption also must: (i) include a representation on Schedule D of 
Form ADV that the investment adviser has concluded that it must 
register as an investment adviser with the required number of 
states; (ii) undertake to withdraw from registration with the 
Commission if the adviser indicates on an annual updating amendment 
to Form ADV that it would be required by the laws of fewer than 25 
states to register as an investment adviser with the State; and 
(iii) maintain a record of the states in which the investment 
adviser has determined it would, but for the exemption, be required 
to register. Rule 203A-2(e)(2)-(4). Advisers relying on rule 203A-
2(e) may not include in the number of states those in which they are 
not required to register because of applicable State laws or the 
national de minimis standard of section 222(d) of the Advisers Act. 
See 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, Investment Advisers Act 
Release No. 1733, n. 17 (July 17, 1998) [63 FR 39708 (July 24, 
1998)] (``Multi-State Adviser Adopting Release'').
    \83\ See section 410 of the Dodd-Frank Act (``* * * if by effect 
of this paragraph an investment adviser would be required to 
register with 15 or more States, then the adviser may register under 
section 203.''). Section 203A(a)(1) of the Advisers Act does not 
include a similar exemption from the prohibition on Commission 
registration for small advisers required to register in a particular 
number of states.
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    We believe that this provision of the Dodd-Frank Act reflects a 
Congressional view on the number of states with which an adviser must 
be required to be registered before the regulatory burdens associated 
with such regulation warrant registration solely with the Commission 
and application of the preemption provision.\84\ Thus, we are 
reconsidering the threshold of our multi-State exemption, and propose 
to amend rule 203A-2(e) to permit all investment advisers required to 
register as an investment adviser with 15 or more states to register 
with the Commission.\85\ We also propose to eliminate the provision in 
the rule that permits advisers to remain registered until the number of 
states in which they must register falls below 25 states, and we are 
not proposing a similar cushion for the 15-State threshold.\86\ The 
Dodd-Frank Act contains no such cushion for mid-sized advisers.\87\ We 
also believe that the requirement that advisers only assess their 
eligibility for registration annually and the grace periods provided

[[Page 77060]]

to switch to and from State registration may be sufficient to address 
the concern that an investment adviser required to register in 15 
states would frequently have to switch between State and Federal 
registration.\88\
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    \84\ See Conference Committee Report, supra note 67, at 867 
(bill ``raises the assets threshold for Federal regulation of 
investment advisers from $30 million to $100 million. Those advisers 
who qualify to register with their home State must register with the 
SEC should the adviser operate in more than 15 states.'').
    \85\ See proposed rule 203A-2(d)(1).
    \86\ See proposed rule 203A-2(d).
    \87\ See section 410 of the Dodd-Frank Act.
    \88\ See supra notes 66-68 and related text. We also note that 
proposed rule 203A-2(d) would permit an adviser to choose to 
maintain its State registrations and not switch to SEC registration. 
See proposed rule 203A-2(d)(2) (adviser elects to rely on the 
exemption by making the required representations on Form ADV).
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    We request comment on whether the 15-State threshold should be 
applied to small advisers as well as mid-sized advisers. If not, should 
the threshold of 30 or more states continue to apply to small advisers? 
Should we, as proposed, eliminate the ``cushion'' that permits advisers 
to remain registered with us even if they are no longer registered in 
five of the states in which they were initially registered? Should we 
retain that provision or, alternatively, include a different number of 
states? Does the grace period currently provided in rule 203A-1 prevent 
the transient registration problems that the five-State cushion was 
designed to address? \89\
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    \89\ See proposed rule 203A-1; supra notes 66-68 and related 
text; Multi-State Adviser Adopting Release at section II.A. (five-
State provision creates a cushion to prevent an adviser from having 
to de-register and then re-register with the Commission frequently 
as a result of a change in registration obligations in one or a few 
states).
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6. Elimination of Safe Harbor
    Rule 203A-4 provides a safe harbor from Commission registration for 
an investment adviser that is registered with the State securities 
authority of the State in which it has its principal office and place 
of business, based on a reasonable belief that it is prohibited from 
registering with the Commission because it does not have sufficient 
assets under management.\90\ Advisers have not, in our experience, 
asserted, as a defense, the availability of this safe harbor, which 
protects only against enforcement actions by us and not any private 
actions, and we are not proposing to extend it to the higher threshold 
established by the Dodd-Frank Act. This rule was designed for smaller 
advisory businesses with assets under management of less than $30 
million,\91\ which may not employ the same tools or otherwise have a 
need to calculate assets as precisely as advisers with greater assets 
under management. We view it as unlikely that an adviser would be 
reasonably unaware that it has more than $100 million of regulatory 
assets under management when it is required to report its regulatory 
assets under management on Form ADV.\92\ Commenters are requested to 
address whether advisers do, in fact, rely on this safe harbor today. 
We also request comment on whether we should, as we propose, rescind 
this safe harbor or, alternatively, extend its availability to the 
higher registration threshold of the Dodd-Frank Act.
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    \90\ Rule 203A-4.
    \91\ See rule 203A-4; NSMIA Adopting Release at section II.B.3.
    \92\ We believe that whether an adviser has $100 million of 
assets under management is unlikely to be determined by whether non-
discretionary assets could be treated as assets under management or 
whether the adviser provides continuous and regular supervisory or 
management services with respect to certain assets, which was the 
basis for the safe harbor. See NSMIA Adopting Release at section 
II.B.3.; NSMIA Proposing Release at section II.B.4.
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7. Mid-Sized Advisers
    As discussed above, section 203A(a)(2) of the Advisers Act, as 
amended by the Dodd-Frank Act, will prohibit mid-sized advisers from 
registering with the Commission, but only if: (i) the adviser is 
required to be registered as an investment adviser with the securities 
commissioner (or any agency or office performing like functions) of the 
State in which it maintains its principal office and place of business; 
and (ii) if registered, the adviser would be subject to examination as 
an investment adviser by such commissioner, agency, or office.\93\ The 
Dodd-Frank Act does not explain how to determine whether a mid-sized 
adviser is ``required to be registered'' or is ``subject to 
examination'' by a particular State securities authority.\94\ We 
propose to incorporate into Form ADV an explanation of how we construe 
these provisions.\95\
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    \93\ See section 410 of the Dodd-Frank Act.
    \94\ The Advisers Act defines the term ``State'' to include any 
U.S. State, the District of Columbia, Puerto Rico, the Virgin 
Islands, or any other possession of the United States. Advisers Act 
section 202(a)(19). For purposes of section 203A of the Advisers Act 
and the rules thereunder, rule 203A-3(c) defines ``principal office 
and place of business'' to mean the executive office of the 
investment adviser from which its officers, partners, or managers 
direct, control, and coordinate its activities. We are not proposing 
changes to this definition. See rule 203A-3(c). For a discussion of 
amendments we propose to make to the calculation of assets under 
management, see supra section II.A.3. of this Release.
    \95\ See proposed Form ADV: Instructions for Part 1A, instr. 
2.b.
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a. Required To Be Registered
    Under section 203A(a)(1) of the Act, an adviser that is not 
regulated or required to be regulated as an investment adviser in the 
State in which it has its principal office and place of business must 
register with the Commission regardless of the amount of assets it has 
under management.\96\ We have interpreted ``regulated or required to be 
regulated'' to mean that a State has enacted an investment adviser 
statute, regardless of whether the adviser is actually registered in 
that State.\97\ This interpretation has two relevant consequences. 
First, advisers with a principal office and place of business in 
Wyoming, or in foreign countries, must register with the Commission 
regardless of whether they have assets under management and would not 
otherwise be eligible for one of our exemptive rules.\98\ Second, some 
smaller advisers exempt from State registration are not subject to 
registration with either the Commission or any of the states.\99\
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    \96\ Advisers Act section 203A(a)(1). See also Advisers Act 
section 203(a).
    \97\ See NSMIA Adopting Release at section II.E.1.
    \98\ See NSMIA Adopting Release at section II.E.; NSMIA 
Proposing Release at section II.E. Currently, all U.S. states except 
Wyoming require certain investment advisers to register. See 
Transition Rule for Ohio Investment Advisers, Investment Advisers 
Act Release No. 1794, n. 4 (Mar. 25, 1999) [64 FR 15680 (Apr. 1, 
1999)].
    \99\ See, e.g., Advisers Act section 203A(a)(1); Uniform 
Securities Act Sec. Sec.  102(15), 403(b) (2002) (``Uniform 
Securities Act'') (defining ``investment adviser'' and providing 
exemptions from State registration as an investment adviser).
---------------------------------------------------------------------------

    We believe that Congress was concerned with the latter consequence 
when it passed this provision of the Dodd-Frank Act. The bills 
originally introduced and passed in the House and Senate increased up 
to $100 million the threshold for Commission registration under the 
``regulated or required to be regulated'' standard that is used today 
in section 203A(a)(1).\100\ Accordingly, some advisers with a 
significant amount (more than $25 million) of assets under management 
could have escaped oversight by either the Commission or any of the 
states by taking advantage of State registration exemptions. Perhaps to 
avoid this possibility, the Conference Committee included a provision 
to prohibit a mid-sized adviser from registering with the Commission 
if, among other things, it is ``required to be registered'' as an 
adviser with the State securities authority where it maintains its 
principal office and place of business.\101\ A mid-sized adviser that 
can and does rely on an exemption under the law of the State in which 
it

[[Page 77061]]

has its principal office and place of business such that it is ``not 
required to be registered'' with the State securities authority \102\ 
must register with the Commission, unless an exemption from 
registration with the Commission otherwise is available.\103\ An 
adviser not registered under a State adviser statute in contravention 
of the statute, however, would not be eligible for registration with 
the Commission.
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    \100\ See The Wall Street Reform and Consumer Protection Act of 
2009, H.R. 4173, 111th Cong. Sec.  7418 (2009) (requiring an adviser 
with between $25 million and $100 million of assets under management 
that ``is regulated and examined, or required to be regulated and 
examined, by a State'' to register with and be subject to 
examination by such State); Restoring American Financial Stability 
Act of 2010, S. 3217, 111th Cong. Sec.  410 (2010) (prohibiting an 
investment adviser with assets under management of less than $100 
million from registering with the Commission if the adviser ``is 
regulated or required to be regulated as an investment adviser'' in 
the State where it maintains its principal office and place of 
business).
    \101\ See section 410 of the Dodd-Frank Act.
    \102\ See, e.g., Uniform Securities Act, supra note 99, at 
sections 102(15), 403(b).
    \103\ See, e.g., Advisers Act sections 203(a) and (b), 203A(b); 
rule 203A-2. Such an adviser could not voluntarily register with the 
State securities authorities to avoid SEC registration.
---------------------------------------------------------------------------

    We are proposing changes to Form ADV to require a mid-sized adviser 
filing with us to affirm, upon application and annually thereafter, 
that it is not required to be registered as an adviser with the State 
securities authority in the State where it maintains its principal 
office and place of business.\104\ An adviser reporting that it is no 
longer able to make such an affirmation thereafter would have 180 days 
from its fiscal year end to withdraw from Commission registration.\105\ 
Thus, the rule would operate to permit an adviser to rely on this 
affirmation reported in its annual updating amendments for purposes of 
determining its eligibility to register with the Commission.\106\ 
Should these requirements apply to mid-sized advisers? Are there 
alternative interpretations of ``required to be registered'' that we 
should consider and why?
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    \104\ See proposed Form ADV, Part 1A, Item 2.A.(2)(a). For a 
discussion of proposed changes to Form ADV, Part 1A, Item 2, see 
supra section II.A.2. of this Release.
    \105\ See proposed rule 203A-1(b).
    \106\ This would allow an adviser to change registration status 
based upon a change during the course of the year regarding whether 
it is required to be registered with a State.
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b. Subject to Examination
    Not all State securities authorities conduct compliance 
examinations of advisers registered with them.\107\ Congress therefore 
determined to require a mid-sized adviser to register with the 
Commission if the adviser is not subject to examination as an 
investment adviser by the State in which the adviser has its principal 
office and place of business.\108\
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    \107\ See, e.g., North American Securities Administrators 
Association, Inc., State Securities Regulators Report on Regulatory 
Effectiveness and Resources with Respect to Broker-Dealers and 
Investment Advisers, 7 (2010) (``NASAA Report''). The NASAA Report 
was submitted in connection with the Commission's study regarding 
obligations of brokers, dealers, and investment advisers, and is 
available on the Commission's Web site at http://www.sec.gov/comments/4-606/4606-2789.pdf.
    \108\ See section 410 of the Dodd-Frank Act.
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    The Commission does not intend either to review or evaluate each 
State's investment adviser examination program.\109\ Instead, we will 
correspond with each State securities commissioner (or official with 
similar authority) and request that each advise us whether an 
investment adviser registered in the State would be subject to 
examination as an investment adviser by that State's securities 
commissioner (or agency or office with similar authority).\110\ We 
believe that the states, being most familiar with their own 
circumstances, are in the best position to determine whether advisers 
in their State are subject to examination. Using the responses that we 
receive, we will identify for advisers filing on IARD the states in 
which the securities commissioner did not certify that advisers are 
subject to examination and incorporate that list into IARD to ensure 
that only mid-sized advisers with their principal office and place of 
business in one of those states (or, as discussed above, mid-sized 
advisers that are not registered with the states where they maintain 
their principal office and place of business) will register with the 
Commission.\111\ We request comment on whether the Commission should 
take additional steps to determine whether an investment adviser would 
be subject to examination in a State, as well as any alternatives the 
Commission may adopt. We also request comment on the steps the 
Commission should take if a State determines not to respond to our 
request.
---------------------------------------------------------------------------

    \109\ The bill introduced in the House included a requirement 
that we publish a list of the states that regulate and examine, or 
require regulation and examination of, investment advisers. See The 
Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 
111th Cong. Sec.  7418 (2009). Congress did not include this 
requirement in the Dodd-Frank Act. See section 410 of the Dodd-Frank 
Act.
    \110\ We also will request that each State notify the Commission 
promptly if advisers in the State will begin to be subject to 
examination or will no longer be subject to examination.
    \111\ See proposed Form ADV, Part 1A, Item 2.A.(2)(b). We will 
also make the list available on our Web site at http://www.sec.gov.
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B. Exempt Reporting Advisers: Sections 407 and 408

    As discussed above, the Dodd-Frank Act, effective July 21, 2011, 
also repealed the ``private adviser exemption'' contained in section 
203(b)(3) of the Advisers Act on which advisers to many hedge funds and 
other pooled investment vehicles had relied in order to avoid 
registration under the Act.\112\ In eliminating this provision, 
Congress amended the Act to create, or direct us to adopt, other, in 
many ways narrower, exemptions for advisers to certain types of 
``private funds.'' Both section 203(l) of the Advisers Act (which 
provides an exemption for an adviser that advises solely one or more 
``venture capital funds'') and section 203(m) of the Advisers Act 
(which instructs the Commission to exempt any adviser that acts solely 
as an adviser to private funds and has assets under management in the 
United States of less than $150 million) provide that the Commission 
shall require such advisers to maintain such records, which we have the 
authority to examine,\113\ and to submit reports ``as the Commission 
determines necessary or appropriate in the public interest.'' \114\ We 
refer to these advisers in this release as ``exempt reporting 
advisers.''
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    \112\ Section 403 of the Dodd-Frank Act. Section 203(b)(3) 
exempts from registration any investment adviser who during the 
course of the preceding twelve months has had fewer than fifteen 
clients and who neither holds himself out generally to the public as 
an investment adviser nor acts as an investment adviser to any 
investment company registered under the Investment Company Act, or a 
company which has elected to be a business development company 
pursuant to Section 54 of the Investment Company Act (15 U.S.C. 80a-
53).
    \113\ Under section 204(a) of the Advisers Act, the Commission 
has the authority to examine records, unless the adviser is 
``specifically exempted'' from the requirement to register pursuant 
to section 203(b) of the Advisers Act. Investment advisers that are 
exempt from registration in reliance on section 203(l) or 203(m) of 
the Advisers Act are not ``specifically exempted'' from the 
requirement to register pursuant to section 203(b).
    \114\ See sections 407 and 408 of the Dodd-Frank Act, adding 
Advisers Act sections 203(l) and (m). See supra note 45 for a 
discussion of the term ``private fund.'' See also Exemptions Release 
at section II. See also current section 204(a) of the Advisers Act 
and section 204(b)(5), as added by section 404 of the Dodd-Frank 
Act.
---------------------------------------------------------------------------

    To implement sections 203(l) and 203(m), we are proposing a new 
rule to require exempt reporting advisers to submit, and to 
periodically update, reports to us by completing a limited subset of 
items on Form ADV.\115\ We are also proposing amendments to Form ADV to 
permit the form to serve as a reporting, as well as a registration, 
form and to specify the seven items exempt reporting advisers must 
complete.\116\
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    \115\ Recordkeeping requirements for exempt reporting advisers 
will be addressed in a future release. See sections 407 and 408 
(providing that the Commission shall require investment advisers 
exempt from registration under either section 407 or 408 to maintain 
such records as the Commission determines necessary or appropriate 
in the public interest or for the protection of investors.).
    \116\ For a discussion of additional amendments we are proposing 
to Part 1 of Form ADV, see infra section II.C. of this Release.

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[[Page 77062]]

1. Reporting Required
    We are proposing a new rule, rule 204-4, to require exempt 
reporting advisers to file reports with the Commission electronically 
on Form ADV.\117\ Rule 204-4 would require these advisers to submit 
their reports through the IARD using the same process as registered 
investment advisers.\118\ Each Form ADV would be considered filed with 
the Commission upon acceptance by the IARD,\119\ and advisers filing 
the form would be required to pay a filing fee.\120\ As we do for IARD 
filings by registered advisers, we would approve, by order, the amount 
of the filing fee charged by FINRA.\121\ We anticipate that filing fees 
would be the same as those for registered investment advisers, which 
currently range from $40 to $200, based on the amount of assets an 
adviser has under management.\122\ The filing fees would be set at 
amounts that are designed to pay the reasonable costs associated with 
the filing and the maintenance of the IARD.
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    \117\ Proposed rule 204-4(a).
    \118\ Proposed rule 204-4(b). See General Instructions 6, 7, 8 
and 9 (providing guidance about the IARD entitlement process, 
signing the form, and submitting it for filing).
    \119\ Proposed rule 204-4(c). Cf. rule 0-4(a)(2) (``All filings 
required to be made electronically with the * * * [IARD] shall, 
unless otherwise provided by the rules and regulations in this part, 
be deemed to have been filed with the Commission upon acceptance by 
the IARD.'').
    \120\ Proposed rule 204-4(d).
    \121\ See section 204(b) of the Advisers Act.
    \122\ The current fee schedule may be found on our Web site at 
http://www.sec.gov/divisions/investment/iard/iardfee.shtml.
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    The reports filed by exempt reporting advisers would be publicly 
available on our Web site.\123\ Exempt reporting advisers unable to 
file electronically as a result of unanticipated technical difficulties 
may qualify for a temporary hardship exemption.\124\ We also are 
proposing technical amendments to Form ADV-H, the form advisers use to 
request a hardship exemption from electronic filing, and Form ADV-NR, 
used to appoint the Secretary of the Commission as an agent for service 
of process for certain non-resident advisers.\125\
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    \123\ The Investment Adviser Public Disclosure System (``IAPD'') 
allows the public to access the most recent Form ADV filing made by 
an investment adviser and is available at http://www.adviserinfo.sec.gov. We would, however, make it clear to the 
public viewing reports filed by an exempt reporting adviser on IAPD 
that the adviser is not registered with us.
    \124\ See proposed rule 204-4(e) (providing a temporary hardship 
exemption for an adviser having unanticipated technical difficulties 
that prevent submission of a filing to IARD). The temporary hardship 
exemption is based on a similar exemption for registered advisers 
contained in rule 203-3(a) under the Act [17 CFR 275.203-3(a)], 
which provides an exemption of no more than seven business days 
after the filing was due.
    \125\ See proposed amended Form ADV-H, proposed amended Form 
ADV-NR, and proposed General Instruction 18. The amendments to Form 
ADV-H and Form ADV-NR would reflect that exempt reporting advisers 
would be filing on IARD and the forms would be used in the same way 
and for the same purpose as they are currently used by registered 
investment advisers.
---------------------------------------------------------------------------

    We are proposing to require reporting on Form ADV through the IARD 
to avoid the expense and delay of developing a new form and because the 
IARD already has the capacity to accept electronic filing of the form. 
Moreover, much of the information we propose that exempt reporting 
advisers would provide is required by Form ADV. Because exempt 
reporting advisers may be required to register on Form ADV with one or 
more State securities authorities,\126\ use of the existing form and 
filing system would also permit exempt reporting advisers to satisfy 
both State and Commission requirements with a single electronic 
filing.\127\ Our proposed approach would permit an adviser to 
transition from filing reports with us to applying for registration 
under the Act by simply amending its Form ADV; the adviser would check 
the box to indicate it is filing an initial application for 
registration, complete the items it did not have to answer as an exempt 
reporting adviser, and update the pre-populated items that it already 
has on file.\128\
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    \126\ The Dodd-Frank Act exempts exempt reporting advisers from 
registration with the Commission. See sections 407 and 408 of the 
Dodd-Frank Act. It does not, however, exempt these advisers from 
registering or filing reports with State securities regulators. See 
also section 410 of the Dodd-Frank Act (re-allocating SEC and State 
jurisdiction over investment advisers); proposed rule 203A-1 
(proposing the process for switching to or from State or SEC 
registration); and proposed General Instruction 13 to Form ADV 
(noting that exempt reporting advisers who file reports with the SEC 
may continue to be subject to State registration, reporting, or 
other obligations).
    \127\ Form ADV is used by advisers both to register with the 
Commission and with State securities authorities. At the request of 
the State securities authorities, we expect to add to Form ADV a 
check box and instructions that would permit exempt reporting 
advisers to direct the filing of reports filed with the Commission 
to the State securities authorities. Because these revisions to Form 
ADV and the obligation to file the report with the State securities 
authorities would not arise from a Federal law or Commission rule, 
we are not proposing them for comment. We urge interested persons to 
submit comments directly to the North American Securities 
Administrators Association, Inc. (``NASAA'') for consideration by 
the State securities authorities at the following e-mail address: 
advcomments@nasaa.org. In addition, we understand that NASAA may 
propose a model rule that would exempt certain exempt reporting 
advisers from State registration but would require these advisers to 
submit to the States a report identical to the report an exempt 
reporting adviser would be required to submit to the SEC. Interested 
persons should visit the NASAA Web site at http://www.nasaa.org for 
the full text of any proposed rule and to respond to any request for 
comment.
    \128\ See proposed General Instruction 14 (providing procedural 
guidance to advisers that no longer meet the definition of exempt 
reporting adviser). See also infra note 140.
---------------------------------------------------------------------------

    We request comment on proposed rule 204-4 and its requirement that 
exempt reporting advisers file reports by responding to a subset of 
items on Form ADV and filing the report through IARD. Should we instead 
create a new form and/or a new filing system for exempt reporting 
advisers? Rather than use IARD or a new system, should we instead 
require exempt reporting advisers to use EDGAR? Should we not make this 
information available to the public on our Web site? Are there 
alternative approaches to reporting by exempt reporting advisers that 
we should consider? If so, please explain. Are there additional ways 
the Commission could distinguish between registered advisers and exempt 
reporting advisers?
2. Information in Reports
    We are proposing several amendments to Form ADV to facilitate 
filings by exempt reporting advisers. First, we would re-title the form 
to reflect its dual purpose as both the ``Uniform Application for 
Investment Adviser Registration,'' as well as the ``Report by Exempt 
Reporting Advisers.'' Second, we are proposing to amend the cover page 
so that exempt reporting advisers would indicate the type of report 
they are filing.\129\ Finally, we propose to amend Item 2 of Part 1A, 
which requires advisers to indicate their eligibility for SEC 
registration, by adding a new subsection C that would require an exempt 
reporting adviser to identify the exemption(s) that it is relying on to 
report, rather than register, with the Commission.\130\
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    \129\ An adviser would indicate whether it is submitting an 
initial report, an annual updating amendment, an other-than-annual-
amendment, or a final report. We also propose corresponding changes 
to General Instruction 2.
    \130\ An adviser would check that it qualifies for an exemption 
from registration: (i) As an adviser solely to one or more venture 
capital funds; and/or (ii) because it acts solely as an adviser to 
private funds and has assets under management in the United States 
of less than $150 million. See proposed Form ADV, Part 1A, Item 2.C. 
An adviser relying on the latter exemption, for private fund 
advisers, would also be required to indicate the amount of private 
fund assets it manages in Section 2.C. of Schedule D to Form ADV, 
Part 1A. Investment advisers who have their principal office and 
place of business outside of the United States, however, would need 
only to include private fund assets that they manage from a place of 
business in the United States. See Exemptions Release at section 
II.B.2.
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    Form ADV is today designed to obtain information from registered 
advisers that provide a wide variety of types of

[[Page 77063]]

advisory services, including providing advice to private funds. 
Therefore, the information that we propose to collect from exempt 
reporting advisers is for the most part currently required by Form 
ADV.\131\ We would provide an instruction to these advisers to complete 
only certain items in the form, but we do not propose to change the 
content of the items for exempt reporting advisers.\132\ As noted 
above, we propose to require exempt reporting advisers to complete a 
limited subset of Form ADV items, which would provide us and the public 
with some basic information about the adviser and its business, but is 
not all of the information we require registered advisers to submit to 
us, and which is designed to support our regulatory program. We propose 
to require exempt reporting advisers to complete the following items in 
Part 1A of Form ADV: Items 1 (Identifying Information), 2.C. (SEC 
Reporting by Exempt Reporting Advisers), 3 (Form of Organization), 6 
(Other Business Activities), 7 (Financial Industry Affiliations and 
Private Fund Reporting), 10 (Control Persons), and 11 (Disclosure 
Information). In addition, exempt reporting advisers would have to 
complete corresponding sections of Schedules A, B, C, and D. We would 
not require exempt reporting advisers to complete and file with us 
other Items in Part 1A or prepare a client brochure (Part 2).\133\
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    \131\ Some of the amendments we propose to Form ADV would apply 
to both registered and exempt reporting advisers. See infra section 
II.C. of this Release.
    \132\ We propose amending General Instruction 3 to explain which 
portions of Form ADV are applicable to exempt reporting advisers.
    \133\ Part 2 of Form ADV, which requires advisers to prepare a 
narrative, plain English client brochure, contains 18 items 
including information on the adviser's business practices, conflicts 
of interest, and background. Part 2 also requires advisers to 
prepare brochure supplements that include information about advisory 
personnel on whom clients rely for investment advice. Currently, 
only a registered adviser must deliver a brochure under rule 204-3, 
and only an adviser that must deliver a brochure must prepare and 
file one as part of its Form ADV. See rule 203-1.
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    Congress gave us broad authority to require exempt reporting 
advisers to file reports as necessary or appropriate in the public 
interest or for the protection of investors.\134\ The Dodd-Frank Act 
neither specifies the types of information we could require in the 
reports nor specifies the purpose for which we would use the 
information.\135\ We have sought information that we believe would 
assist us to identify the advisers, their owners, and their business 
models. The items that we have proposed would also provide us with 
information as to whether these advisers or their activities might 
present sufficient concerns as to warrant our further attention in 
order to protect their clients, investors, and other market 
participants. We have also considered the broader public interest in 
making this information generally available and believe there may be 
benefits of providing information about their activities to the public. 
We acknowledge that there may be costs associated with providing this 
information to us, and that the adviser may provide some or all of this 
information to private fund investors or prospective investors, however 
we believe there will be benefits, which we describe in more detail 
below.
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    \134\ See sections 407 and 408 of the Dodd-Frank Act.
    \135\ The Dodd-Frank Act does, however, specify that the reports 
are those ``the Commission determines necessary or appropriate in 
the public interest or for the protection of investors.'' Id.
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    Items 1, 3, and 10 would elicit basic identification details about 
an exempt reporting adviser such as name, address, contact information, 
form of organization, and who owns the adviser. Items 6 and 7.A. would 
provide us with details regarding other business activities that the 
adviser and its affiliates are engaged in, which would permit us to 
identify conflicts that the adviser may have with its clients that may 
suggest significant risks to those clients. Item 11 would require 
advisers to disclose the disciplinary history for the adviser and its 
employees. An exempt reporting adviser that has, for example, an 
officer that has been found guilty of fraud or other crimes or has 
committed substantial regulatory infractions would be of concern to us 
and to investors and prospective investors in funds advised by the 
exempt reporting adviser.
    Because exempt reporting advisers manage private funds, we also 
propose to require them to complete Item 7.B. and Section 7.B of 
Schedule D for the private funds they advise. As discussed in more 
detail in Section II.C. below, we are proposing significant amendments 
to Section 7.B.1. of Schedule D that are designed to provide us with a 
comprehensive overview, or census, of private funds.\136\ Exempt 
reporting advisers' responses to Item 7.B., and Section 7.B.1. of 
Schedule D, in conjunction with information provided by registered 
advisers, would provide us with important data about these funds that 
we would use to identify risks to their investors.
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    \136\ For instance, advisers who complete section 7.B.1. of 
Schedule D would have to provide identifying information about each 
private fund, such as its name and domicile, as well as information 
about its ownership, service providers, and its total and net 
assets. See proposed Form ADV, Part 1A, Schedule D, Section 7.B.1.
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    Do commenters agree with our judgments regarding the items 
applicable to exempt reporting advisers? We have not proposed to 
require exempt reporting advisers to complete Items 4, 5, 8, 9, or 12 
of Part 1 of Form ADV. We request comment on whether we should require 
exempt reporting advisers to complete any of these items to provide us 
and investors with the information required by those items.
    Part 2 of Form ADV, the client brochure, is required of registered 
advisers to provide clients and potential clients with detailed 
information about their qualifications, investment strategies, and 
business practices. Our proposal would not require exempt reporting 
advisers to prepare Part 2 of Form ADV. Should we require exempt 
reporting advisers to complete Part 2 of Form ADV, file it with us on 
IARD, and make it available to the public on our Web site? Would some 
or all of this information be helpful to clients and potential clients 
of these advisers? Should we not require exempt reporting advisers to 
complete certain items of Part 2? For example, should we exclude those 
items that would require information similar to those items of Part 1 
that we are not proposing to require exempt reporting advisers to 
complete? Are there other items we should include or not include? 
Should we require these advisers to complete brochure supplements? 
Would the information in the brochure supplements be helpful to the 
clients of these advisers? Do investors currently receive this type of 
information as a result of their investment in a private fund?
    Should the reporting requirements be identical for exempt reporting 
advisers as they are for registered advisers? Are there items that we 
have proposed to apply to exempt reporting advisers that we should not 
apply or are unnecessary, and why? Is any of the information we propose 
to require not readily available to an exempt reporting adviser? Would 
any of the items require disclosure of proprietary or competitively 
sensitive information? If so, which items, and if competitively 
sensitive, describe the competitive impact. Would any of these 
disclosure requirements, either individually or cumulatively, impose a 
significant burden? Would they require disclosure of proprietary or 
competitively sensitive information such that they could impact or 
influence business or other decisions by these advisers? Would they 
materially affect a decision by an adviser whether to form a private 
fund? If so, why?

[[Page 77064]]

3. Updating Requirements
    We are also proposing to amend rule 204-1 under the Advisers Act, 
which requires advisers to update their Form ADV filings, to require 
exempt reporting advisers to file updating amendments to reports filed 
on Form ADV.\137\ Proposed rule 204-1(a) would require an exempt 
reporting adviser, like a registered adviser, to amend its reports on 
Form ADV: (i) At least annually, within 90 days of the end of the 
adviser's fiscal year; and (ii) more frequently, if required by the 
instructions to Form ADV. Consequently, we are proposing to amend 
General Instruction 4 to Form ADV to require an exempt reporting 
adviser to update Items 1 (Identification Information), 3 (Form of 
Organization), or 11 (Disciplinary Information) promptly if they become 
inaccurate in any way, and to update Item 10 (Control Persons) if it 
becomes materially inaccurate.\138\ We are proposing the same updating 
requirements with respect to these Items as are applicable to 
registered advisers because we believe it is equally important for 
exempt reporting advisers to report information on a timely basis. We 
also believe it could create confusion to apply different updating 
standards within each item of the form depending on who completes the 
item. Consequently, we are proposing to require exempt reporting 
advisers to follow the same instructions applicable to the items they 
must complete, although they are required to complete fewer items than 
a registered adviser.
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    \137\ Proposed rule 204-1. We also propose to amend the title of 
the rule to be ``Amendments to Form ADV,'' rather than ``Amendments 
to application for registration,'' to reflect use of the Form by 
exempt reporting advisers.
    \138\ See General Instruction 4 to Form ADV.
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    We request comment on the proposed amendments to rule 204-1 to 
extend its requirements to exempt reporting advisers. Should exempt 
reporting advisers be permitted to update Form ADV, or certain items, 
less frequently? If so, what should be the updating requirements, and 
should we be concerned that, as a result, an exempt reporting adviser 
that is also registered with a State securities regulator would have to 
update its Form ADV on a different schedule than an exempt reporting 
adviser that is not also registered with a State? Would less frequent 
reporting result in information that is less useful or materially 
inaccurate? Should exempt reporting advisers be required to update 
other items more frequently than annually?
    We propose to include a provision in rule 204-4 to require an 
exempt reporting adviser to file an amendment to its Form ADV when it 
ceases to be an exempt reporting adviser.\139\ The exempt reporting 
adviser would indicate in this amendment that it is filing a final 
report pursuant to rule 204-4 in order to alert us that the adviser no 
longer will be filing reports, and allow us to distinguish such a filer 
from one that is inattentive to its filing obligations.\140\ We request 
comment on this proposed final report requirement. Is there an 
alternative approach we could take?
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    \139\ See proposed rule 204-4(f).
    \140\ Proposed rule 204-4(f). Advisers filing a final report 
would not be required to pay a filing fee. We note that failure to 
file a final report would result in a violation of the rule.
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    Finally, we propose amending the instructions to Form ADV to 
provide guidance to exempt reporting advisers who file final reports 
because they must register with the Commission. Such a transition may 
occur, for example, if an adviser relying on the ``venture capital 
exemption'' in section 203(l) of the Advisers Act accepts a client that 
is not a venture capital fund,\141\ or the value of the assets under 
management in the United States of an adviser relying on the ``private 
fund exemption'' in section 203(m) of the Advisers Act meets or exceeds 
$150 million.\142\ A transitioning adviser would file an amendment to 
its Form ADV simultaneously indicating that the filing will be its 
final ``report'' on Form ADV and applying for registration with the 
Commission.\143\ We request comment on this proposed guidance.
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    \141\ See section 407 of the Dodd-Frank Act.
    \142\ See section 408 of the Dodd-Frank Act.
    \143\ See proposed General Instruction 14. In the Exemptions 
Release we propose that an adviser relying on the private fund 
adviser exemption would have three months from the end of a calendar 
quarter at which it failed to qualify for the exemption because of a 
fluctuation in private fund assets to apply to the Commission for 
registration unless it qualifies for another exemption. See proposed 
rule 203(m)-1(d).
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4. Transition
    We propose requiring each exempt reporting adviser to file its 
initial report with us on Form ADV no later than August 20, 2011, 30 
days after the July 21, 2011 effective date of the Dodd-Frank Act.\144\ 
We believe this would provide sufficient time to enable an adviser to 
determine whether it must report to us and to take the steps necessary 
to complete and submit its initial filing. We request comment on our 
proposed transition, including the amount of time we propose for exempt 
reporting advisers to submit their initial reports.
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    \144\ See sections 403, 407, 408, and 419 of the Dodd Frank Act.
---------------------------------------------------------------------------

    As discussed above, our ability to effect this transition may be 
affected by our need to reprogram IARD.\145\ We are working closely 
with FINRA, our IARD contractor, to make the needed modifications, but 
the programming may not be completed until after we adopt these rules. 
If IARD is unable to accept filings of amended Form ADV by that time, 
we may want to delay the reporting deadline until the system can accept 
electronic filing of the revised form. Should we instead require an 
alternative procedure, such as a paper filing, for advisers to indicate 
their eligibility for this exemption from registration and to satisfy 
their reporting requirements?
---------------------------------------------------------------------------

    \145\ See supra section II.A.1. of this Release.
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C. Form ADV

    Data collected from Form ADV is of critical importance to our 
regulatory program and our ability to protect investors. We use 
information reported to us on Form ADV for a number of purposes, one of 
which is to efficiently allocate our examination resources based on the 
risks we discern or the identification of common business activities 
from information provided by advisers. The information is used to 
create risk profiles of investment advisers and permits our examiners 
to better prepare for, and more efficiently conduct, their on-site 
examinations. Moreover, the information in Form ADV allows us to better 
understand the investment advisory industry and evaluate the 
implications of policy choices we must make in administering the 
Advisers Act.
    To enhance our ability to oversee investment advisers, we are 
proposing to require advisers to provide us additional information 
about three areas of their operations.\146\ First, we are proposing to 
require advisers to provide information regarding private funds they 
advise. Second, we are proposing to expand the data advisers provide 
about their advisory business, (including data about the types of 
clients they have, their employees, and their advisory activities), as 
well as about their business practices that may present significant 
conflicts of interest (such as the use of affiliated brokers, soft 
dollar arrangements, and compensation for client referrals). Third, we 
are proposing to require additional information about advisers'

[[Page 77065]]

non-advisory activities and their financial industry affiliations. We 
are also proposing certain additional changes intended to improve our 
ability to assess compliance risks and also to identify advisers that 
are subject to the Dodd-Frank Act's requirements concerning certain 
incentive-based compensation arrangements.\147\ We understand that 
advisers would have ready access to all of the new information as part 
of their normal operations or compliance programs, and thus these new 
requirements should impose few additional regulatory burdens. We 
request comment on whether our understanding is correct. In addition to 
(or instead of) these three areas of operations, are there other areas 
about which we should require advisers to report additional 
information?
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    \146\ In addition, we are proposing several clarifying or 
technical amendments based on frequently asked questions we receive 
from advisers as well as in our experience administering the form. 
See infra section II.C.6. of this release.
    \147\ See section 956 of the Dodd-Frank Act.
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1. Private Fund Reporting: Item 7.B.
    We propose to expand the information we require advisers to provide 
us about the private funds they advise in response to Item 7.B., and 
Schedule D. Both registered and exempt reporting advisers would 
complete this Item. The information would provide us with a more 
complete understanding of the private funds advised by advisers and 
would permit us to enhance our assessment of private fund advisers for 
purposes of targeting our examinations. The information also would help 
us identify particular practices that may harm investors. We have been 
concerned that unregistered funds have been used as a vehicle for 
perpetrating fraud on investors.\148\ The private fund reporting 
requirements we are proposing would provide a level of transparency 
that we believe would help us to identify practices that may harm 
investors,\149\ and would deter advisers' fraud and facilitate earlier 
discovery of potential misconduct.\150\
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    \148\ For example, since January 2009, the Commission has 
brought more than 50 enforcement cases in which we assert hedge fund 
advisers have defrauded hedge fund investors or used the fund to 
defraud others.
    \149\ For instance, census data about a private fund's 
gatekeepers, including administrators and auditors, would be 
available on proposed Section 7.B.1. of Schedule D and would be 
verifiable by investors and the Commission. Recent enforcement 
actions suggest that the availability of such information could be 
helpful. See, e.g., SEC v. Grant Ivan Grieve, et al., Litigation 
Release No. 21402 (Feb. 2, 2010) (default judgment against hedge 
fund adviser that was alleged to have fabricated and disseminated 
false financial information for the fund that was ``certified'' by a 
sham independent back-office administrator and phony accounting 
firm); See In the Matter of John Hunting Whittier, Investment 
Advisers Act Release No. 2637 (Aug. 21, 2007) (settled action 
against hedge fund manager for, among other things, misrepresenting 
to fund investors that a particular auditor audited certain hedge 
funds, when in fact it did not).
    \150\ See, e.g., Second Amended Complaint, SEC v. Hoover, Civil 
Action No. 01-10751-RGS, (D. Mass. Mar. 20, 2002) available at 
http://www.sec.gov/litigation/complaints/complr17487.htm (adviser 
allegedly participated in a scheme to defraud clients of his 
advisory firm by, among other things, misappropriating assets and 
overbilling expenses. When he became aware that the Commission staff 
was investigating his firm, he established a separate, unregistered 
advisory firm and perpetuated his fraud through use of a hedge fund 
he created and controlled.); SEC v. Hoover, Litigation Release No. 
17981 (Feb. 11, 2003) (announcing final judgment by consent).
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    Currently, Item 7 requires each adviser to complete Section 7.B. of 
Schedule D for any ``investment-related limited partnership'' that the 
adviser or a related person advises. A separate Schedule D must be 
completed for each partnership. We propose to modify the scope of Item 
7 by requiring completion of Section 7.B. only for a private fund that 
the adviser (and not a related person) advises. This amendment would 
incorporate the new term ``private fund,'' defined in section 
202(a)(29) of the Act, the primary effect of which would be to require 
advisers to report pooled investment vehicles regardless of whether 
they are organized as limited partnerships.\151\ We would no longer 
require an adviser to report to us funds that are advised by 
affiliates, which in many cases would now be reported to us by an 
affiliate that is either registered under the Act or is now an exempt 
reporting adviser.\152\
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    \151\ See supra note 45 (discussing the definition of private 
fund). In 2004, the Commission adopted amendments to Form ADV to 
require reporting of ``private fund'' information, including a 
similar amendment to Item 7. A Federal appeals court vacated the 
2004 amendments to Item 7 that we had adopted for private funds. See 
Registration under the Advisers Act of Certain Hedge Fund Advisers, 
Investment Advisers Act Release No. 2333 (Dec. 2, 2004) [69 FR 72054 
(Dec. 10, 2004)] (``Hedge Fund Adviser Registration Release''); 
Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. 
Cir. June 23, 2006) (``Goldstein''). The amendments we propose 
would, in part, reinstate these amendments we adopted in 2004.
    \152\ Currently, a related person may be able to rely on the 
private adviser exemption from registration, which, as discussed 
above, was repealed by the Dodd Frank Act effective July 21, 2011. 
See supra at sections I, II.B. of this Release.
---------------------------------------------------------------------------

    To avoid multiple reporting for each private fund, we propose to 
permit a sub-adviser to exclude private funds for which an adviser is 
reporting on another Schedule D,\153\ and would permit an adviser 
sponsoring a master-feeder arrangement to submit a single Schedule D 
for the master fund and all of the feeder funds that would otherwise be 
submitting substantially identical data.\154\ Finally, we propose to 
permit an adviser with a principal office and place of business outside 
the United States to omit a Schedule D for a private fund that is not 
organized in the United States and that is not offered to, or owned by, 
``United States persons.'' \155\ This approach is designed to limit the 
reporting burden imposed on foreign advisers with respect to funds in 
which U.S. investors have no direct interest.
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    \153\ If an investment adviser completes section 7.B.1. of 
Schedule D for a private fund, other advisers to that fund (most of 
which are likely to be sub-advisers) would not have to complete 
section 7.B.1. for that private fund. See proposed Form ADV, Part 
1A, Note to Item 7.B.; proposed Section 7.B.2. of Schedule D. When 
filing Section 7.B.1. of Schedule D for a private fund, an adviser 
would acquire a unique identification number to the fund. The 
adviser would be required to continue to use the same identification 
number whenever it amends Section 7.B.1. for that fund. Any adviser 
that files a Section 7.B.1. for a private fund for which an 
identification number has already been acquired by another adviser 
would not be permitted to acquire a new identification number, but 
would be required to instead utilize the existing number. See 
proposed Form ADV: Instructions for Part 1A, instr. 6.b.
    \154\ See proposed Form ADV: Instructions for Part 1A, instr. 6. 
In a master-feeder arrangement, one or more funds (``feeder funds'') 
invest all or substantially all of their assets in a single fund 
(``master fund''). Advisers would report on a single Schedule D if 
their responses to certain questions of Section 7.B.1. of Schedule D 
would be identical for each master and feeder fund. Our staff 
estimates that most master-feeder arrangements involving private 
funds would meet this condition. An adviser filing a single Schedule 
D for a master-feeder arrangement would complete its Schedule D 
under the name of the master fund, following our proposed 
instructions for Section 7.B.
    \155\ Id. See also proposed Form ADV: Glossary. We propose to 
define ``United States person'' by reference to the definition in 
proposed rule 203(m)-1(e)(8), which tracks the definition of a 
``U.S. person'' under Regulation S, except that it contains a 
special rule for discretionary accounts maintained for the benefit 
of United States persons. See Exemptions Release at section II.B.4. 
As discussed in the Exemptions Release, our proposed use of the 
Regulation S definition for various purposes under the Advisers Act 
would lessen the burden imposed on advisers, which are familiar with 
the definition because they apply it for other purposes under the 
securities laws.
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    We request comment on the scope of the Schedule D filing 
requirements about private funds. Should we, as proposed, require 
exempt reporting advisers to file Section 7.B. of Schedule D? Would the 
disclosure of private fund information by exempt reporting advisers 
impact or influence business or other decisions by these advisers, such 
as whether to form additional private funds or discourage entry into 
management of private funds all together?
    Should we require advisers to report information also about other 
pooled investment vehicles they may advise, such as foreign funds not 
offered to U.S. persons? Specifically, are there sufficient investor 
protection or other concerns that the Commission should seek to require 
this information? Is information about these funds important to 
understand conduct that directly

[[Page 77066]]

involves U.S. investors? Are the instructions eliminating multiple 
filing of Section 7.B. by advisers helpful? Are there different 
approaches we might take to achieve our intended goals? We request that 
commenters review our proposed instructions and identify any 
ambiguities that we should address.
    We propose to amend Section 7.B. of Schedule D, which currently 
requires very limited information about limited partnerships 
established by an adviser, and which provides us with little data about 
the operations of the many large hedge funds and other types of private 
funds advised by a growing number of advisers registered with the 
Commission.\156\ New Section 7.B.1. would expand on the identifying 
information currently required to be reported in order to provide us 
with basic organizational, operational and investment characteristics 
of the fund; the amount of assets held by the fund; the nature of the 
investors in the fund; and the fund's service providers.\157\ Although 
we are proposing several new items of information that would be 
reported to us, much of the information should be readily available to 
private fund advisers (e.g., the amount of fund assets) and the 
responses to many of the items are unlikely to change from year to year 
(e.g., on which exclusion from the Investment Company Act the fund 
relies) and thus the additional reporting should not involve a 
significant reporting burden. As discussed in more detail below, the 
information will help us identify potential compliance risks and inform 
our regulatory activities.
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    \156\ Today, Section 7.B. of Schedule D requires an adviser to a 
private fund that is a limited partnership or limited liability 
company to identify: (1) The name of the fund; (2) the name of the 
general partner or manager; (3) whether the adviser's clients are 
solicited to invest in the fund; (4) the approximate percentage of 
the adviser's clients that have invested in the fund; (5) the 
minimum investment commitment; and (6) the current value of the 
total assets of the fund.
    \157\ We have considered the potential application of section 
210(c) of the Advisers Act (which precludes us from requiring 
advisers to disclose to us the ``identity, investments, or affairs'' 
of any of its clients) to the information about private fund clients 
of advisers and have concluded that the Dodd-Frank Act permits us to 
require this information in Form ADV. See, e.g., section 404(2) of 
the Dodd-Frank Act, adding Advisers Act section 204(b)(1)(A) 
(authorizing the Commission to require any investment adviser 
registered under the Act ``to maintain such records of, and file 
with the Commission such reports regarding, private funds advised by 
the investment adviser, as necessary and appropriate in the public 
interest and for the protection of investors * * *'').
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    Part A of the Section would require identifying information, 
including the name of the private fund. We propose to add an 
instruction to the item to permit an adviser that seeks to preserve the 
anonymity of a private fund client by maintaining its identity in code 
in its records to identify the private fund in Schedule D using the 
same code.\158\ We request comment on this new instruction.
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    \158\ Rule 204-2(d) permits any books and records required to be 
maintained by the rule ``in such manner that the identity of any 
client to whom such investment adviser renders investment 
supervisory services is indicated by numerical or alphabetical code 
or some similar designation.'' We included the provision in the rule 
in 1961 to reconcile our then new examination authority (the 
exercise of which has required us to examine client records) with 
section 210(c) of the Act. See Notice of Proposed Rule to Require 
Investment Advisers to Maintain Specified Books and Records Under 
the Investment Advisers Act of 1940, Investment Advisers Act Release 
No. 111 (Jan. 25, 1961) [26 FR 987 (Feb. 1, 1961)]. We are proposing 
to add the instruction to permit the few advisers that in our 
experience have sought to encode the identity of their clients to do 
so.
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    We also propose to revise Part A to require an adviser to identify 
the State or country where the private fund is organized, and the name 
of its general partner, directors, trustees or persons occupying 
similar positions.\159\ The item would ask information about the 
organization of the fund, including whether it is a master or a feeder 
fund, and some information about the regulatory status of the fund and 
its adviser, including the exclusion from the Investment Company Act on 
which it relies, whether the adviser is subject to a foreign regulatory 
authority, and whether the fund relies on an exemption from 
registration of its securities under the Securities Act of 1933.\160\ 
The Item also would contain questions regarding whether the adviser is 
a subadviser to the private fund and would require the adviser to 
identify by name and SEC file number any other advisers to the 
fund.\161\ We are proposing several questions to help us better 
understand the private fund's investment activities and other areas of 
potential investor protection concerns. For example, we would ask about 
the size of the fund, including both its gross and net assets, from 
which we could better understand the scope of its operations and the 
extent of leverage it employs.\162\ We would ask the adviser to 
identify within seven broad categories (which the applicable 
instruction would define) the type of investment strategy employed by 
the adviser,\163\ and to break down the assets and liabilities held by 
the fund by class and categorization in the fair value hierarchy 
established under U.S. generally accepted accounting principles 
(GAAP).\164\ Many private funds managed by investment advisers that 
would be reporting to us prepare financial statements in accordance 
with GAAP.\165\ Others may use international accounting standards 
requiring substantially similar information. Their adviser, therefore, 
should have access to this information from such financial statements. 
We would ask about both the number and the types of investors in the 
fund, as well as the minimum amounts required to be invested by fund 
investors to get a better idea of the types of investors the fund is 
intended to serve and to get a sense of the extent to which investors 
may themselves be in a position to exercise oversight of the 
adviser.\166\ Finally, some items would ask information about 
characteristics of the fund that may present the fund manager with 
conflicts of interest with fund investors of the sort that may 
implicate the adviser's fiduciary obligations to the fund and, in some 
cases, create risks for the fund investors. Thus we would continue to 
ask whether clients of the adviser are solicited to invest in the fund 
and what percentage of the other clients has invested in the fund.\167\
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    \159\ See proposed Form ADV, Part 1A, Section 7.B.1.A. of 
Schedule D, questions 2-3.
    \160\ Id. questions 4-7 and questions 23-24 (asking whether the 
fund relies on Regulation D and what is the fund's Form D file 
number, if any).
    \161\ Id. questions 19-20.
    \162\ Id. question 11.
    \163\ Id. question 10. The categories include: (i) Hedge fund; 
(ii) liquidity fund; (iii) private equity fund; (iv) real estate 
fund; (v) securitized asset fund; (vi) venture capital fund; and 
(vii) other private fund.
    \164\ Id. question 12. See FASB ASC 820-10-50-2b. We also 
propose to ask whether the fund invests in securities of registered 
investment companies, which is relevant to evaluating compliance 
with the fund of funds provision of the Investment Company Act, 
section 12(d)(1). See section 12(d)(1) of the Investment Company 
Act; proposed Form ADV, Part 1A, Section 7.B.1.A. of Schedule D, 
question 9.
    \165\ See supra note 56. In addition, advisers to private funds 
that prepare and distribute financial statements prepared in 
accordance with GAAP may be deemed to satisfy certain requirements 
of our custody rule. See Advisers Act rule 206(4)-2(b)(4).
    \166\ See proposed Form ADV, Part 1A, Section 7.B.1.A. of 
Schedule D, questions 13-18.
    \167\ Id. questions 21-22.
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    In Part B of the Section, we propose to require advisers to report 
information concerning five types of service providers that generally 
perform important roles as ``gatekeepers'' for private funds (i.e., 
auditors, prime brokers, custodians, administrators and 
marketers).\168\ We would require that an adviser identify them, 
provide their location, and State whether they are related persons. For 
each of these service providers, we would also require specific 
information that would clarify the services they provide and include 
certain identifying information such as

[[Page 77067]]

registration status. This information includes the following for each 
service provider. For the auditors, whether they are independent, 
registered with the Public Company Accounting Oversight Board (PCAOB) 
and subject to its regular inspection, and whether audited statements 
are distributed to fund investors.\169\ For the prime broker, whether 
it is SEC-registered and whether it acts as custodian for the private 
fund.\170\ For the custodian, whether it is a related person of the 
adviser.\171\ For the administrator, whether it prepares and sends to 
investors account statements and what percentage of the fund's assets 
are valued by the administrator or another person that is not a related 
person of the adviser.\172\ Finally, for marketers, whether they are 
related persons of the adviser, their SEC file number (if any), and the 
address of any Web site they use to market the fund.\173\ The questions 
in Part B are generally designed to improve our ability to assess 
conflicts and potential risks, identify funds with service provider 
arrangements that raise a ``red flag,'' and identify firms for 
examination. For instance, it would be relevant to us to know that a 
private fund is using a service provider that we are separately 
investigating for alleged misconduct.
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    \168\ See proposed Form ADV, Part 1A, Section 7.B.1.B. of 
Schedule D.
    \169\ See proposed Form ADV, Part 1A, Section 7.B.1.B. of 
Schedule D, question 25. We are also proposing amendments to the 
instructions contained in Item 9 to avoid having advisers reporting 
overlapping information (relevant to compliance with rule 206(4)-2, 
the ``custody rule'') under Section 9 and Section 7.B. of Schedule 
D.
    \170\ See id. question 26.
    \171\ See id. question 27. ``Related Person'' is defined in Form 
ADV: Glossary.
    \172\ See id. question 28.
    \173\ See id. question 29. For purposes of this question, 
marketers include placement agents, consultants, finders, 
introducers, municipal advisors or other solicitors, or similar 
persons.
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    The information we propose to require advisers to report on private 
funds is similar to (although less extensive than) the information that 
we understand investors in hedge funds and other private funds commonly 
seek in their due diligence questionnaires.\174\ Professional investors 
use information acquired as part of their vetting process before they 
invest. We likewise are seeking to acquire the information to help us 
identify private fund advisers that present investors with greater 
compliance or other risks. Each particular item of information may not 
itself indicate an elevated risk of a compliance failure, but could 
serve as an input to the risk metrics by which our staff identifies 
potential risk and allocates examination resources. The staff conducts 
similar analyses today, but have limited inputs, which constrains their 
effectiveness.
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    \174\ See, e.g., AIMA's Illustrative Questionnaire For Due 
Diligence of Hedge Fund Managers, available at (registration 
required) http://www.aima.org/en/knowledge_centre/index.cfm.
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    The information would be publicly available as is other information 
on Form ADV, and we expect it would be used by investors to supplement 
their due diligence efforts. We expect the use of these data could 
further help investors and other industry participants protect against 
fraud. For example, using the IARD data, auditors would be able to 
compare their list of funds they audit with those whose advisers report 
them as auditor in order to uncover false representations.\175\ 
Investors (and their consultants) would be able to compare 
representations made on Schedule D with those made in private offering 
documents or other material provided to prospective investors.
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    \175\ See In the Matter of John Hunting Whittier, Investment 
Advisers Act Release No. 2637 (Aug. 21, 2007) (settled action 
against hedge fund manager for, among other things, misrepresenting 
to fund investors that a particular auditor audited certain hedge 
funds, when in fact it did not.)
---------------------------------------------------------------------------

    We request comment on our proposed amendments to Section 7.B. of 
Schedule D. Should we modify our requests for information? Is there 
information requested in due diligence questionnaires that would yield 
additional or more relevant risk information and that we should 
require? For instance, should we require advisers to report information 
regarding their legal counsel? If so, what information? Is the 
information we request readily available to fund managers, and in 
particular to sub-advisers? If not, is there information that is 
readily available that could serve the same purpose?
    In crafting these new disclosure items, we have sought to avoid 
requiring disclosure of proprietary information that could harm the 
interests of the fund or fund investors. Have we succeeded? Commenters 
asserting that information not be reported should identify the specific 
harm asserted. Do commenters agree with our belief that reporting and 
disclosure of private fund information will be beneficial to investors 
(although they may currently receive some or all of this information) 
as well as prospective investors and other market participants?
    Will it be burdensome for registered or exempt reporting advisers 
to use for purposes of Question 12 the valuation hierarchy established 
under GAAP with respect to those funds that do not have financial 
statements prepared in accordance with GAAP? If we require all advisers 
to fair value their private fund assets under management as 
proposed,\176\ would advisers be able to rely on such a valuation for 
purposes of Question 12? Should we require that the information 
provided in response to Question 12 be part of audited financial 
statements or be subject to review by auditors or another independent 
third party? Are there additions, deletions, or changes to the 
definitions of the seven categories of private fund we would require 
advisers to use to identify a private fund that we should consider? 
Should some of the items apply only to certain types of private funds 
(e.g., hedge funds)? If so, which items and why?
---------------------------------------------------------------------------

    \176\ See supra section II.A.3.
---------------------------------------------------------------------------

2. Advisory Business Information: Employees, Clients and Advisory 
Activities: Item 5
    Item 5 of Part 1A requires an adviser to provide basic information 
regarding the business of the adviser that allows us to identify the 
scope of the adviser's business, the types of services it provides, and 
the types of clients to whom it provides those services. The item 
requires information from the adviser about the number of its 
employees, the amount of assets it manages, the number and types of its 
clients, and the types of advisory services provided. The modifications 
we are proposing today, which primarily refine or expand existing 
questions, would help us better understand the operations of advisers.
    First, we propose to seek additional information about the 
adviser's employees. Currently, Item 5 asks for the number of employees 
that are registered representatives of a broker-dealer, which we would 
expand to ask for the number of employees that are registered as 
investment adviser representatives or insurance agents.\177\ In order 
to obtain more precise data, we also propose that advisers provide a 
single numerical approximate response to the questions about employees, 
instead of checking a box corresponding to a range of numbers, as is 
currently required.\178\ This additional employee data would, for 
instance, permit us to develop ratios (e.g., number of employees to 
assets under management of clients) that we can use to identify

[[Page 77068]]

advisers to inform our risk-based examination program.
---------------------------------------------------------------------------

    \177\ Proposed Form ADV, Part 1A, Items 5.B.(3) and (5).
    \178\ For instance, proposed Item 5.B.(1) asks how many of an 
adviser's employees perform advisory functions. Under the current 
Form, an adviser with seven such employees would check a box for 
``6-10.'' We propose the adviser simply fill in a blank with the 
number ``7.''
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    Second, we propose to add some questions to help us better 
understand an adviser's business by reference to the types of clients 
the adviser services. Items 5.C. and D. currently require an adviser to 
report how many clients it has (in ranges) and to indicate the types of 
clients, e.g. high net worth individuals, investment companies. We 
propose to expand the list of types of clients provided in Item 5.D., 
to include business development companies, insurance companies, and 
other investment advisers, as well as to distinguish pension and 
profit-sharing plans subject to ERISA \179\ from those that are not. As 
amended, this Item also would require an adviser to indicate the 
approximate amount of its regulatory assets under management 
attributable to each client type.\180\ We also propose to ask 
approximately what percentage of the adviser's clients are not United 
States persons.\181\ This additional information would allow us to 
better understand the focus of an adviser's business.
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    \179\ Employee Retirement Income Security Act of 1974 (29 U.S.C. 
18).
    \180\ Proposed Form ADV, Part 1A, Item 5.D. We are also 
proposing amendments to the calculation of an adviser's regulatory 
assets under management. See supra section II.A.3. of this Release.
    \181\ Proposed Form ADV, Part 1A, Item 5.C.(2). See supra note 
155 (discussing the definition of ``United States person''). We also 
propose to add an instruction to Item 5.C., 5.D. and 5.H. to clarify 
that advisers should not count as clients the investors in a private 
fund they advise unless they have a separate advisory relationship 
with them.
---------------------------------------------------------------------------

    Third, we are proposing two amendments related to the advisory 
activities that are reported in Item 5. Item 5.G. requires an adviser 
to select from a list the advisory services that it provides, such as 
financial planning or portfolio management. We propose to expand the 
list of advisory activities to include portfolio management for pooled 
investment vehicles, other than registered investment companies, and 
educational seminars or workshops.\182\ We would also require advisers 
to provide the SEC file number for a registered investment company if 
they check the box for portfolio management for an investment company, 
which would permit our examination staff to link information reported 
on Form ADV to information reported on forms filed through our EDGAR 
system by investment companies managed by these advisers.\183\ We are 
proposing new Item 5.J. that would require advisers to select from a 
list the types of investments about which they provided advice during 
the fiscal year for which they are reporting.\184\ These changes would 
provide us with more details regarding the services an adviser 
provides, allowing us to better identify candidates if, for instance, 
we choose to do a risk-targeted examination of advisers based on the 
nature of the advice they provide.
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    \182\ Proposed Form ADV, Part 1A, Item 5.G.
    \183\ Proposed Form ADV, Part 1A, Schedule D, Section 5.G.(3).
    \184\ Advisers would also be required to indicate the types of 
investments, such as various types of swaps and variable life 
insurance, about which they provided advice. Proposed Form ADV, Part 
1A, Item 5.J.
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    We request comment on our proposed amendments to Item 5. Would 
advisers readily have access to the additional data we request? Does 
the switch from ranges to a single approximate number of employees in 
Items 5.A. and 5.B. pose any significant problems or burdens for 
advisers? If so, would providing an instruction to permit an adviser to 
round its responses up or down help? Are there additional types of 
clients, advisory activities, and investments we should add to our 
proposed lists in Items 5.D., 5.G., and 5.J., respectively?
3. Other Business Activities and Financial Industry Affiliations: Items 
6 and 7
    Items 6 and 7 of Part 1A require advisers, including exempt 
reporting advisers, to report those financial services the adviser or a 
related person is actively engaged in providing from lists of financial 
services set forth in the items. We are proposing several changes to 
these Items that would provide us with a more complete picture of the 
activities of an adviser and its related persons, which would better 
allow us to assess the conflicts of interest and risks that may be 
created by those relationships and to identify affiliated financial 
service businesses. We propose to expand the lists in both Items 6 and 
7 to include business as a trust company, registered municipal advisor, 
registered security-based swap dealer, and major security-based swap 
participant, the latter three of which are new SEC-registrants under 
the Dodd-Frank Act's amendments to the Exchange Act.\185\ We also 
propose to add accountants (or accounting firms) and lawyers (or law 
firms) to the list in Item 6, to parallel current Item 7. We are also 
proposing to move from Item 7.B. to Item 7.A. the question that asks 
whether a related person is a sponsor or the general partner or 
managing member of a pooled investment vehicle.\186\ Finally, we would 
clarify in the instruction to Item 7 that advisers are to include 
related persons that are foreign affiliates.
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    \185\ Proposed Form ADV, Part 1A, Items 6.A. and 7.A. Section 
975 of the Dodd-Frank Act amends the Exchange Act to require 
``municipal advisors'' to register with the Commission, Section 761 
of that Act amends the Exchange Act to define the terms ``security-
based swap dealer'' and ``major security-based swap participant,'' 
and section 764 amends the Exchange Act to require these entities to 
register with the Commission.
    \186\ The question we propose to ask in Item 7.A. would, 
therefore, retain information about related persons that would 
otherwise not be required as a result of our proposed changes to 
Item 7.B. As discussed above, we are proposing to require advisers 
to report in Item 7.B. and section 7.B.1. of Schedule D private fund 
information only about funds they advise, not funds advised by a 
related person. See supra section II.C.1. of this Release. We would 
also delete ``investment company'' from the list in Item 7 as 
duplicative of information we obtain in Item 5. See, e.g., Form ADV, 
Part 1A, Items 5.D., 5.G., and proposed Form ADV, Part 1A, Section 
5.G.(3) of Schedule D. See also supra note 183 and accompanying 
text.
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    We are also proposing to require additional reporting in the 
corresponding sections of Schedule D for Items 6 and 7. First, we 
propose a new Section 6.A. of Schedule D that would require an adviser 
that checks the box that it is engaged in another business under a 
different name to list those other business names and the other lines 
of business in which the adviser engages using that name.\187\ Second, 
we propose a similar modification to Item 6.B. to require advisers 
primarily engaged in another business under a different name to also 
provide that name in Section 6.B. of Schedule D. Third, we propose to 
amend Section 7.A. of Schedule D, which currently requires that 
advisers provide identifying information for related persons that are 
investment advisers or broker-dealers. We propose to require advisers 
to provide this same information with respect to any type of related 
person listed in Item 7.A. We also propose to expand the information we 
collect regarding these related persons to include more details about 
the relationship between the adviser and the related person, whether 
the related person is registered with a foreign financial regulatory 
authority, and how they share personnel and confidential 
information.\188\ This additional information on related persons would 
allow us to link disparate pieces of information that we have access to 
concerning an adviser and its affiliates as well as identifying whether 
the adviser controls the related

[[Page 77069]]

person or vice versa. It would also provide us with a tool to identify 
where there may be advisory activities by unregistered affiliates. 
Finally, we propose to relocate to this section a question currently 
under Section 9 that requires reporting of whether a related person 
bank or futures commission merchant is a qualified custodian for client 
assets under the adviser custody rule, and to ask, if the adviser is 
reporting a related person investment adviser, whether the related 
person is exempt from registration.\189\
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    \187\ For example, an adviser registered with us under the name 
``Adam Bob Charlie Advisers LLC'' that is also actively engaged in 
business as an insurance agent under the name ``ABC Insurance LLC'' 
would put the name ``ABC Insurance LLC'' in Section 6.A. of Schedule 
D and would check the box for ``Insurance broker or agent.''
    \188\ Proposed Form ADV, Part 1A, Section 7.A., questions 1, 2, 
5 and 6.
    \189\ Proposed Form ADV, Part 1A, Section 7.A., questions 3 and 
4. We are also proposing a technical change to remove the same 
question in section 9.D. of Schedule D.
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    We request comment on these proposed amendments. Should we request 
additional information about advisers' and their related persons' other 
business? Should we request less information? Are there other types of 
financial services providers we should include in the lists contained 
in Items 6 and 7? Are there other questions in Section 7.A. that we 
should ask to determine additional conflicts of interest advisers face 
through related persons? Is the information advisers need to complete 
the proposed additional questions contained in Section 7.A. readily 
available?
4. Participation in Client Transactions: Item 8
    Item 8 requires an adviser to report information about its 
transactions, if any, with clients, including whether the adviser or a 
related person engages in transactions with clients as a principal, 
sells securities to clients, or has discretionary authority over client 
assets. This item also currently requires an adviser to indicate if it 
has discretionary authority to determine the brokers or dealers for 
client transactions and if it recommends brokers or dealers to 
clients.\190\ We propose to further ask whether any of the brokers or 
dealers are related persons of the adviser.\191\ An adviser that 
indicates that it receives ``soft dollar benefits'' would also report 
whether all those benefits qualify for the safe harbor under section 
28(e) of the Exchange Act for eligible research or brokerage 
services.\192\ Finally, we would add a new question requiring an 
adviser to indicate whether it or its related person receives direct or 
indirect compensation for client referrals to complement the existing 
question concerning whether the adviser compensates any person for 
client referrals.\193\ The amendments we are proposing would enhance 
our ability to identify additional conflicts of interest that advisers 
may face that we have identified through our experience administering 
the Advisers Act.
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    \190\ Form ADV, Part 1A, Items 8.C.3. and 8.E.
    \191\ Proposed Form ADV, Part 1A, Items 8.F.
    \192\ Proposed Form ADV, Part 1A, Item 8.G.(2). Commission 
Guidance Regarding Client Commission Practices Under Section 28(e) 
of the Securities Exchange Act of 1934, Exchange Act Release No. 
54165 (July 18, 2006) [71 FR 41978 (July 24, 2006)].
    \193\ Proposed Form ADV, Part 1A, Item 8.I.
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    We request comment on our proposed amendments. Should we request 
additional information about advisers' receipt of soft dollar benefits, 
such as requiring advisers to quantify the benefits they receive or 
disclose the names of the brokers or dealers from whom the adviser 
receives soft dollar benefits? Is there other information that would 
assist us in identifying conflicts of interest?
5. Reporting $1 Billion in Assets: Item 1
    Section 956 of the Dodd-Frank Act requires us, jointly with certain 
other Federal regulators, to adopt rules or guidelines addressing 
certain excessive incentive-based compensation arrangements, including 
those of investment advisers with $1 billion or more in assets.\194\ To 
enable us to identify those advisers that would be subject to section 
956, we propose to require each adviser to indicate in Item 1 whether 
or not the adviser had $1 billion or more in assets as of the last day 
of the adviser's most recent fiscal year.\195\ We propose that for 
purposes of this reporting requirement, the amount of assets would be 
the adviser's total assets determined in the same manner as the amount 
of ``total assets'' is determined on the adviser's balance sheet for 
its most recent fiscal year end.\196\ We request comment on whether 
Form ADV generally, and the proposed requirement in particular, is the 
appropriate method to identify these investment advisers. Should we 
identify these advisers by other means, and if so, what other means? We 
also request comment on the proposed method that advisers must use to 
determine the amount of their assets.
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    \194\ See sections 956(a)-(c), (e)(2)(D), (f) of the Dodd-Frank 
Act. The other Federal regulators include the Board of Governors of 
the Federal Reserve System, the Office of the Comptroller of the 
Currency, the Board of Directors of the Federal Deposit Insurance 
Corporation, the Director of the Office of Thrift Supervision, the 
National Credit Union Administration Board, and the Federal Housing 
Finance Agency.
    \195\ See proposed Form ADV, Part 1A, Item 1.O. (adviser would 
mark ``yes'' or ``no'' to indicate whether it had $1 billion or more 
in assets).
    \196\ See proposed Form ADV: Instructions for Part 1A, instr. 
1.b. We construe section 956 as specifying, and thus propose to 
define ``assets'' to mean, the total assets of the advisory firm 
rather than the total ``assets under management,'' i.e., assets 
managed on behalf of clients.
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6. Other Amendments to Form ADV
    The proposed amendments also include a number of additional changes 
unrelated to the Dodd-Frank Act that are intended to improve our 
ability to assess compliance risks. First, we propose changes to 
improve certain identifying information we obtain from other items of 
Part 1A of Form ADV. Item 1 currently requires an adviser to provide 
contact information for an employee designated to handle inquiries 
regarding the adviser's Form ADV. We propose instead to require an 
adviser to provide contact information for its chief compliance officer 
to give us direct access to the person designated to be in charge of 
its compliance program.\197\ Advisers would have the option, in Item 
1.K., to provide an additional regulatory contact for Form ADV, neither 
of which would be viewable by the public on our Web site.\198\ We also 
propose to amend Item 1 to require an adviser to indicate whether it or 
any of its control persons is a public reporting company under the 
Exchange Act.\199\ This would provide a signal, not only to us, but to 
investors and to prospective investors, that additional public 
information is available about the adviser and/or its control persons. 
In addition, we propose to add ``Limited Partnership'' as another 
choice advisers may select to indicate how their organization is 
legally formed.\200\
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    \197\ Proposed Form ADV, Part 1A, Item 1.J. An adviser is 
currently required to provide the name of its chief compliance 
officer on Schedule A of Form ADV, but not other identifying 
information. See also 17 CFR 275.206(4)-7; Compliance Programs of 
Investment Companies and Investment Advisers, Investment Advisers 
Act Release No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] 
(adopting rule 206(4)-7 requiring registered investment advisers to 
designate a chief compliance officer). An exempt reporting adviser 
that does not have a chief compliance officer would instead provide 
a designated person's contact information in Item 1.K. Proposed Form 
ADV, Part 1A, Item 1.K. Likewise, we would not require an exempt 
reporting adviser to provide the name of a chief compliance officer 
on Schedule A of Form ADV.
    \198\ Proposed Form ADV, Part 1A, Item 1.K. We note that clients 
will be provided with a supervisory contact in brochure supplements. 
See Part 2 Release, supra note 46.
    \199\ Proposed Form ADV, Part 1A, Items 1.N., 10.B., and Section 
10.B. of Schedule D.
    \200\ Proposed Form ADV, Part 1A, Item 3.A.
---------------------------------------------------------------------------

    We are also proposing to add an additional custody question to Item 
9 to require advisers to indicate the total number of persons that act 
as qualified custodians for the adviser's clients in connection with 
advisory services the adviser provides to its clients.\201\ We recently 
modified Item 9 to elicit

[[Page 77070]]

information about the adviser or its related person(s) acting as 
qualified custodian.\202\ We did not, however, request information 
about other qualified custodians. We expect this discrete piece of 
additional data to provide us with a more complete picture of an 
adviser's custodial practices.\203\
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    \201\ Proposed Form ADV, Part 1A, Item 9.F.
    \202\ See Custody of Funds or Securities of Clients by 
Investment Advisers, Investment Advisers Act Release No. 2968 (Dec. 
30, 2009) [75 FR 1456 (Jan. 11, 2010)].
    \203\ Consistent with the updating requirements for Items 
9.A.(2), 9.B.(2), and 9.E., we propose requiring new Item 9.F. to be 
updated only annually. See proposed General Instruction 4.
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    Finally, we are proposing three technical changes with respect to 
the reporting of disciplinary events. First, we propose to add a box to 
Item 11 for advisers to check if any disciplinary information reported 
in that item and the corresponding disclosure reporting pages is being 
reported about the adviser or any of its supervised persons.\204\ This 
would enable us to easily determine if an adviser is only reporting 
disciplinary events for its affiliates, and would facilitate our 
ability to focus examination and enforcement resources on those 
advisers that appear to present the greatest compliance risks. Second, 
we propose to add a third reason to each disclosure reporting page 
(DRP) that permits an adviser to remove the DRP from its filing by 
adding a box an adviser could check if it was filed in error. Third, we 
propose to amend Item 3.D. of Part 2B, the brochure supplement, to 
correct a drafting error regarding when a brochure supplement would 
need to include disclosure regarding the revocation or suspension of a 
professional attainment, designation, or license. The amendment would 
replace ``proceeding'' in that item with ``hearing or formal 
adjudication.'' \205\ By using the term ``proceeding,'' which is 
defined in the Form ADV Glossary, this item limits the required 
disclosure to actions initiated by a government agency, self-regulatory 
organization or foreign financial regulatory authority. The item was 
intended to require disclosure of actions taken by the designating 
authority to revoke or suspend the use of the attainment, designation, 
or license that it administers, and not actions taken by regulatory 
authorities who are unlikely to bring an action to revoke or suspend a 
professional designation.
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    \204\ Proposed Form ADV, Part 1A, Item 11.
    \205\ If adopted, the revised item would State ``[A]ny other 
hearing or formal adjudication in which a professional attainment, 
designation, or license of the supervised person was revoked or 
suspended because of a violation of rules relating to professional 
conduct. If the supervised person resigned (or otherwise 
relinquished the attainment, designation, or license) in 
anticipation of such a hearing or formal adjudication (and the 
adviser knows, or should have known, of such resignation or 
relinquishment), disclose the event.''
---------------------------------------------------------------------------

    We request comment on these proposed changes. Are there additional 
items we should consider amending, and why? We are considering whether 
to add an additional reporting requirement to Item 1 that would require 
advisers to provide a unique identification code to provide additional 
uses for the data that we collect. For example, the Office of Financial 
Research (OFR) is required to publish a financial company reference 
database as part of its role in assisting the Financial Stability 
Oversight Council (FSOC) under the Dodd-Frank Act.\206\ Would a unique 
identification code assigned by, on behalf of, or otherwise used by 
FSOC or OFR that is reported on Form ADV permit cross-referencing of 
the data we collect with this future database? Is there a reason why we 
should not require an adviser to report such an identifier on Form ADV 
if one is provided?
---------------------------------------------------------------------------

    \206\ See sections 154(b)(2)(A) and 201(a)(11) of the Dodd Frank 
Act.
---------------------------------------------------------------------------

    Should we consider accelerating any of the updating requirements 
for Form ADV to improve the usefulness of the form to the Commission 
and to investors? For instance, while we have accelerated filing 
deadlines in for other types of reports,\207\ since 1979, advisers have 
had 90 days from their fiscal year ends to provide an annual update to 
Form ADV.\208\ To provide more timely information to us and the public, 
should advisers be required to file their annual amendments to Form ADV 
within 60 days of the end of the adviser's fiscal year or some other 
shorter time period?
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    \207\ See, e.g.,Acceleration of Periodic Report Filing Dates and 
Disclosure Concerning Web site Access to Reports, Exchange Act 
Release No. 46464 (Sept. 5, 2002) [67 FR 58480 (Sept. 16, 2002)], at 
nn. 22-24 and accompanying text (noting that the deadline to file 
Form 10-K within 90 days after a company's fiscal year end had not 
been changed in 32 years and accelerating it to 60 days for ``large 
accelerated filers'' and 75 days for ``accelerated filers,'' each as 
defined in rule 12b-2 under the Exchange Act, in order to modernize 
the periodic reporting system and improve the usefulness of periodic 
reports to investors).
    \208\ See Investment Adviser Requirements Concerning Disclosure, 
Recordkeeping, Applications for Registration and Annual Filings, 
Investment Advisers Act Release No. 664 (Jan. 30, 1979) [44 FR 7870 
(Feb. 7, 1979)] (adopting rule 204-1).
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D. Other Amendments

1. Amendments to ``Pay to Play'' Rule
    Adopted last July, rule 206(4)-5, generally prohibits registered 
and certain unregistered advisers from engaging directly or indirectly 
in pay to play practices identified in the rule.\209\ We are proposing 
three amendments to the rule that we believe are needed as a result of 
the enactment of the Dodd-Frank Act.
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    \209\ Political Contributions by Certain Investment Advisers, 
Investment Advisers Act Release No. 3043 (July 1, 2010) [75 FR 
41018, 41024 (July 14, 2010)] (``Pay to Play Release''). The rule 
prohibits covered advisers from (i) providing advisory services for 
compensation to a government client for two years after the adviser 
or certain of its executives or employees makes certain political 
contributions; (ii) paying any third party to solicit advisory 
business from any government entity unless the person is a 
``regulated person,'' subject to similar pay to play restrictions; 
and (iii) soliciting others, or coordinating, contributions to 
certain elected officials or candidates or payments to political 
parties where the adviser is providing or seeking government 
business. See id.
---------------------------------------------------------------------------

    First, we propose to amend the scope of the rule to make it apply 
to exempt reporting advisers and foreign private advisers.\210\ Rule 
206(4)-5 currently applies to advisers that are either registered with 
the Commission, or unregistered in reliance on the exemption under 
section 203(b)(3) of the Advisers Act.\211\ As a consequence of the 
repeal of the private adviser exemption in section 203(b)(3), many 
unregistered advisers will register under the Act and will be subject 
to rule 206(4)-5 (albeit pursuant to a different clause of the 
rule).\212\ In addition, the Dodd-Frank Act has added an exemption for 
``foreign private advisers'' in section 203(b)(3) of the Act, which 
will result in these advisers being subject to the pay to play 
rule.\213\ However, some unregistered advisers to which the rule 
currently applies because of section 203(b)(3) will remain exempt from 
registration because of the new exemptions for exempt reporting 
advisers, which we did not contemplate when we adopted rule 206(4)-5, 
and will no longer be subject to the rule. To prevent unintended 
narrowing of the application of the rule as a result of the amendments 
to the Advisers Act, we are

[[Page 77071]]

proposing to extend the rule to apply it to exempt reporting advisers, 
as well as foreign private advisers.
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    \210\ Proposed rule 206(4)-5(a).
    \211\ See rule 206(4)-5(a)(1) and (2).
    \212\ Instead of being subject to the rule as advisers 
``unregistered in reliance on the exemption available under section 
203(b)(3) of the Advisers Act,'' they will be subject to the rule as 
advisers ``registered (or required to be registered)'' under the 
Act. Rule 206(4)-5(a)(1) and (2).
    \213\ See section 402 of the Dodd-Frank Act (defining ``foreign 
private adviser''); section 403 of the Dodd-Frank Act (amending 
section 203(b)(3) of the Advisers Act to strike the current language 
exempting certain ``private advisers'' from registration and 
inserting language exempting ``foreign private advisers'' from 
registration).
    Applying rule 206(4)-5 to foreign private advisers, unlike 
exempt reporting advisers, does not require any amendment of the 
rule specifically regarding these advisers because the rule 
currently cross-references section 203(b)(3) of the Advisers Act.
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    We request comment on our proposal to make rule 206(4)-5 applicable 
to exempt reporting advisers and foreign private advisers. Should 
either of these types of unregistered advisers be excluded from the 
rule? If so, what protections should apply instead? We are not 
proposing to require advisers that will become subject to State 
registration as a result of the Dodd-Frank Act to comply with the pay 
to play rule.\214\ Should we?
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    \214\ For a discussion of the Dodd-Frank Act's reallocation of 
responsibility for regulation of investment advisers between the 
Commission and the states, see supra section II.A. of this Release.
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    Second, we propose to amend the provision of rule 206(4)-5 that 
prohibits advisers from paying persons (e.g., ``solicitors'' or 
``placement agents'') to solicit government entities unless such 
persons are ``regulated persons'' (i.e., registered investment advisers 
or broker-dealers subject to rules of a registered national securities 
association, such as the Financial Industry Regulatory Authority 
(``FINRA''), that restricts its members from engaging in pay to play 
activities).\215\ Instead, we would permit an adviser to pay any 
``regulated municipal advisor'' to solicit government entities on its 
behalf. A regulated municipal advisor under the proposed rule would be 
a person that is registered under section 15B of the Securities 
Exchange Act and subject to pay to play rules adopted by the MSRB.\216\
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    \215\ Rule 206(4)-5(a)(2)(i). FINRA is currently the only 
national securities association registered under section 19(a) of 
the Exchange Act (15 U.S.C. 78s(a)).
    \216\ Proposed rule 206(4)-5(a)(2), (f)(9). As provided in the 
proposed rule, these pay to play rules must prohibit municipal 
advisors from engaging in distribution or solicitation activities if 
certain political contributions have been made. In addition, the 
Commission must find that they both impose substantially equivalent 
or more stringent restrictions on municipal advisors than rule 
206(4)-5 imposes on investment advisers and that they are consistent 
with the objectives of rule 206(4)-5.
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    The Dodd-Frank Act creates a new category of person known as a 
``municipal advisor,'' which it defines to include persons that 
undertake ``a solicitation of a municipal entity.'' \217\ These persons 
include, among others, any third-party solicitor, including registered 
investment advisers and broker-dealers, seeking business on behalf of 
an investment adviser from a municipal entity, including a pension 
fund.\218\ These municipal advisors are subject to MSRB rules, and we 
understand that the MSRB intends to consider subjecting municipal 
advisors to pay to play rules similar to its rules governing municipal 
securities dealers.\219\ Broker-dealers acting as placement agents or 
solicitors and investment advisers acting as solicitors of municipal 
entities and obligated persons generally meet the statutory definition 
of a municipal advisor and thus would be subject to MSRB rules.\220\ 
Our proposed amendment would, like the current rule, permit advisers to 
pay persons to solicit government entities on their behalf only if such 
third parties are registered with us and subject to pay to play 
rules.\221\ Given the new regulatory regime applicable to municipal 
advisors, including solicitors of government entities that meet the 
definition of ``regulated person'' under rule 206(4)-5,\222\ broker-
dealer solicitors are expected to be subject to MSRB's pay to play 
rules, rendering it unnecessary at this time for FINRA to adopt a pay 
to play rule that would satisfy rule 206(4)-5(f)(9)(ii). We are 
proposing, therefore, to replace references in rule 206(4)-5 to FINRA's 
pay to play rules with references to MSRB rules that we find are 
consistent with the objectives of rule 206(4)-5 and impose 
substantially equivalent or more stringent pay to play restrictions.
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    \217\ Section 975 of the Dodd-Frank Act. In creating this new 
municipal advisor category, Congress expressed its intent that 
municipal advisors be permitted to solicit government clients. See 
Senate Committee Report, supra note 11, at 148 (``The SEC recently 
proposed new rules under the Investment Advisers Act of 1940 
relating to the provision by registered investment advisers of 
investment advisory services to municipal entities in which, among 
other things, the SEC proposed prohibiting investment advisers from 
making payments to unrelated persons for solicitation of municipal 
entities for investment advisory services on behalf of investment 
advisers. Rather than effectively prohibiting such third-party 
solicitation for investment advisory services, [section 975] would 
provide that activities of a municipal advisor, broker, dealer or 
municipal securities dealer to solicit a municipal entity to engage 
an unrelated investment adviser to provide investment advisory 
services to a municipal entity or to engage to undertake 
underwriting, financial advisory or other activities for a municipal 
entity in connection with the issuance of municipal securities would 
be subject to regulation by the MSRB * * *'').
    \218\ See Section 975(e) of the Dodd-Frank Act (defining: (i) 
``Municipal advisor,'' in relevant part, as ``a person * * * that * 
* * undertakes a solicitation of a municipal entity;'' (ii) 
``municipal entity,'' in relevant part, as ``any State, political 
subdivision of a State, or municipal corporate instrumentality of a 
State, including * * * any plan, program, or pool of assets 
sponsored or established by the State, political subdivision * * * 
or any agency, authority or instrumentality thereof. * * *;'' and 
(iii) ``solicitation of a municipal entity or obligated person,'' in 
relevant part, as ``a direct or indirect communication with a 
municipal entity or obligated person made by a person, for direct or 
indirect compensation, on behalf of * * * an investment adviser (as 
defined in section 202 of the Investment Advisers Act of 1940) that 
does not control, is not controlled by, or is not under common 
control with the person undertaking such solicitation for the 
purpose of obtaining or retaining an engagement by a municipal 
entity or obligated person * * * of an investment adviser to provide 
investment advisory services to or on behalf of a municipal 
entity.'').
    \219\ See MSRB, Municipal Securities Rulemaking Board Issues 
Statement on Financial Reform Legislation, Press Release, July 15, 
2010, available at http://www.msrb.org/News-and-Events/Press-Releases/2010/MSRB-Issues-Statement-on-Financial-Reform-Legislation.aspx (``The transition [to a majority public governing 
board] will be coordinated with a rulemaking program designed to 
ensure careful but prompt development of rules fulfilling the MSRB's 
expanded mission. The MSRB will develop rules in the areas of fair 
practice and fiduciary duties, pay to play and other conflicts of 
interest, gifts, disclosures, professional qualifications, 
continuing education and other areas identified by the new governing 
board.''); MSRB rule G-37. MSRB rule G-37 is available on the MSRB's 
Web site at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-37.aspx.
    \220\ See supra note 218. While section 15B(e)(4)(C) of the 
Exchange Act excludes from the definition of municipal advisor ``a 
broker, dealer, or municipal securities dealer serving as an 
underwriter (as defined in section 2(a)(11) of the Securities Act of 
1933),'' we interpret this exclusion to apply solely to a broker, 
dealer, or municipal securities dealer serving as an underwriter on 
behalf of a municipal issuer in connection with the issuance of 
municipal securities. Congress enacted section 975 of the Dodd-Frank 
Act, which added the definition of ``municipal advisor'' to Section 
15B of the Exchange Act, to subject the relationship between a 
municipal advisor and a municipal entity to regulation by the MSRB. 
See Senate Committee Report, supra note 11, at 148 (noting the need 
to subject activities such as solicitation of a municipal entity to 
engage an investment adviser to MSRB regulation). The Commission 
expects to consider a proposal for a permanent municipal advisor 
registration program, including requirements for the registration of 
municipal advisors. See Temporary Registration of Municipal 
Advisors, Exchange Act Release No. 62824 (Sept. 1, 2010) [75 FR 
54465 (Sept. 8, 2010)].
    \221\ See Pay to Play Release at section II.B.2.(b). We note 
that a person that solicits investors to invest in investment 
interests that are securities also may need to consider whether that 
person is acting as a broker. See Pay to Play Release at n. 326.
    \222\ See rule 206(4)-5(f)(9)(ii) (defining ``regulated person'' 
to include a broker-dealer that is registered with the Commission 
and is a member of a national securities association registered 
under section 15A of the Exchange Act (currently limited to FINRA)).
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    We are not proposing to amend the compliance date of rule 206(4)-
5's limitation on payments to third-party solicitors, which is 
September 13, 2011. MSRB staff has informed our staff that the pay to 
play rules it expects to consider would likely be in effect by that 
date.\223\ If rule 206(4)-5 is amended as proposed, an investment 
adviser subject to the rule would be prohibited from paying any third 
party to solicit government entities on its behalf that is not 
registered with us under Section 15B of the Securities Exchange Act and 
thus not subject to the MSRB's pay to play rules.
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    \223\ If it appears that the MSRB will not be able to adopt pay 
to play rules for municipal advisors by September 13, 2011 that 
would meet the requirements of rule 206(4)-5, we will consider 
whether to take alternative action.

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[[Page 77072]]

    We request comment on our proposal to permit investment advisers to 
hire registered municipal advisors to solicit government entities on 
their behalf, if those registered municipal advisors are subject to pay 
to play restrictions under MSRB rules. Could our proposal result in 
rule 206(4)-5's solicitation limitations applying to certain solicitors 
affiliated with an investment adviser? \224\ Should we amend rule 
206(4)-5 expressly to allow advisers to pay these investment adviser-
affiliated solicitors? Should we amend rule 206(4)-5 to provide that 
any person that controls, is controlled by, or is under common control 
with an investment adviser (and, if that person is an entity, its 
personnel) would be deemed to be a ``covered associate'' of the 
investment adviser if the investment adviser pays or agrees to pay such 
person (or such personnel) to solicit a government entity on its 
behalf?
---------------------------------------------------------------------------

    \224\ See section 15B(e)(4) of the Exchange Act (defining 
``municipal advisor'' to include ``a person (who is not a municipal 
entity or an employee of a municipal entity) that * * * undertakes a 
solicitation of a municipal entity''); section 15B(e)(9) of the 
Exchange Act (defining ``solicitation of a municipal entity or 
obligated person'' to mean ``a direct or indirect communication with 
a municipal entity or obligated person made by a person, for direct 
or indirect compensation, on behalf of * * * [an] investment adviser 
* * * that does not control, is not controlled by, or is not under 
common control with the person undertaking such solicitation for the 
purpose of obtaining or retaining an engagement by a municipal 
entity or obligated person * * * of an investment adviser to provide 
investment advisory services to or on behalf of a municipal entity'' 
(emphasis added)).
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    Finally, we are proposing a minor amendment to rule 206(4)-5's 
definition of a ``covered associate'' \225\ of an investment adviser to 
clarify that a legal entity, not just a natural person, that is a 
general partner or managing member of an investment adviser would meet 
the definition. Under the rule as adopted, ``covered associate'' 
includes any owner and personnel of an adviser and political action 
committees the owner, personnel, or adviser control for purposes of the 
rule's restrictions. Currently, the owners of an adviser included in 
the definition of ``covered associate'' are: ``[a]ny general partner, 
managing member * * * or other individual with a similar status or 
function.'' \226\ We are proposing to replace the word ``individual'' 
with the word ``person.'' Unlike the other proposed amendments to rule 
206(4)-5, this proposed amendment is not related to the Dodd-Frank Act, 
but instead is meant to clarify the rule and the Commission's original 
intent that ``covered associate'' include legal entities as well as 
natural persons, and to respond to interpretive questions our staff has 
received.
---------------------------------------------------------------------------

    \225\ See rule 206(4)-5(f)(2) (defining a ``covered associate'' 
of an investment adviser as: ``(i) Any general partner, managing 
member or executive officer, or other individual with a similar 
status or function; (ii) Any employee who solicits a government 
entity for the investment adviser and any person who supervises, 
directly or indirectly, such employee; and (iii) Any political 
action committee controlled by the investment adviser or by [any 
other covered associate].'').
    \226\ See id.
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2. Technical and Conforming Amendments
a. Rules 203(b)(3)-1 and 203(b)(3)-2
    We intend, at the adoption of rule and form amendments to implement 
provisions of the Dodd-Frank Act, to rescind rules 203(b)(3)-1 \227\ 
and 203(b)(3)-2,\228\ which specify how advisers ``count clients'' for 
purposes of determining whether the adviser is eligible for the private 
adviser exemption of section 203(b)(3) of the Advisers Act (which, as 
discussed above, Congress repealed in section 403 of the Dodd-Frank 
Act). In the Exemptions Release, we are proposing a new client counting 
rule, rule 202(a)(30)-1, for purposes of the new foreign private 
adviser exemption.\229\
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    \227\ Rule 203(b)(3)-1.
    \228\ Rule 203(b)(3)-2. We adopted rule 203(b)(3)-2 in 2004 in 
order to require certain hedge fund advisers to register under the 
Act. See Hedge Fund Adviser Registration Release. That rule, and 
certain amendments to rule 203(b)(3)-1 and other rules, were vacated 
by a Federal appeals court in Goldstein, but have remained in the 
Code of Federal Regulations.
    \229\ See Exemptions Release at section II.C.1.
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b. Rule 204-2
    We are proposing to amend rule 204-2 under the Advisers Act, the 
``books and records'' rule, to update the rule's ``grandfathering 
provision'' for investment advisers that are currently exempt from 
registration under the ``private adviser'' exemption, but will be 
required to register when the Dodd-Frank Act's elimination of the 
``private adviser'' exemption becomes effective on July 21, 2011. At 
that time, these advisers would become subject to the recordkeeping 
requirements of the Act, including the requirement to keep certain 
records relating to performance.\230\ We propose that these advisers 
would not be obligated to keep certain performance-related records so 
long as they did not actually register when they were eligible for the 
``private adviser'' exemption; however, to the extent that these 
advisers preserved these performance-related records without being 
required to do so by current rule 204-2, the proposed grandfathering 
provision would require them to continue to preserve them.\231\ In 
addition, we are proposing to amend rule 204-2(e)(3)(ii) to cross-
reference the new definition of ``private fund'' added to the Dodd-
Frank Act.\232\ Finally, we expect to rescind rule 204-2(l) \233\ 
because it was vacated by the Federal appeals court in Goldstein and 
because the Dodd-Frank Act's addition of section 204(b)(2) to the 
Advisers Act codifies this concept in the statute itself.\234\
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    \230\ See rule 204-2(a)(16).
    \231\ See proposed amendment to rule 204-2(e)(3)(ii) (stating, 
``[i]f you are an investment adviser that was, prior to July 21, 
2011, exempt from registration under section 203(b)(3) of the Act 
(15 U.S.C. 80b-3(b)(3)), as in effect on July 20, 2011, [this rule] 
does not require you to maintain or preserve books and records that 
would otherwise be required to be maintained or preserved under 
[certain sections of this rule] to the extent those books and 
records pertain to the performance or rate of return of such private 
fund (as defined in section 202(a)(29) of the Act (15 U.S.C. 80b-
2(a)(29)), or other account you advise for any period ended prior to 
July 21, 2011, provided that you were not registered with the 
Commission as an investment adviser during such period, and provided 
further that you continue to preserve any books and records in your 
possession that pertain to the performance or rate of return of such 
private fund or other account for such period.'' (emphasis added)). 
Advisers to private funds that registered with the Commission based 
on adoption of rule 203(b)(3)-2 in the Hedge Fund Adviser 
Registration Release and then withdrew their registration based upon 
the Goldstein decision would be permitted to rely on the proposed 
grandfathering provision.
    \232\ See rule 204-2(e)(3)(ii) (using the term private fund 
without reference to a definition). We are proposing to add a 
parenthetical noting that the term is defined in section 202(a)(29) 
of the Advisers Act.
    \233\ Rule 204-2(l) states that books and records of a private 
fund are, under certain circumstances, treated as books and records 
of its adviser.
    \234\ Section 404 of the Dodd-Frank Act (adding section 
204(b)(2) to the Advisers Act, which states, ``The records and 
reports of any private fund to which an investment adviser 
registered under this title provides investment advice shall be 
deemed to be the records and reports of the investment adviser.'').
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c. Rule 0-7
    Rule 0-7(a)(1) under the Advisers Act, which defines ``small 
entities'' under the Advisers Act for purposes of the Regulatory 
Flexibility Act, cross-references section 203A(a)(2) of the Advisers 
Act.\235\ The Dodd-Frank Act has renumbered section 203A(a)(2) of the 
Advisers Act to 203A(a)(3)), and thus we are proposing to amend rule 0-
7(a)(1) to cross-reference section 203A(a)(3) rather than section 
203A(a)(2).\236\
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    \235\ Rule 0-7(a)(1) (stating that the term ``small business'' 
or ``small organization'' for purposes of the Advisers Act means an 
investment advisers that: ``Has assets under management, as defined 
under Section 203(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)) and 
reported on its annual updating amendment to Form ADV [17 CFR 
279.1], of less than $25 million, or such higher amount as the 
Commission may by rule deem appropriate * * *.'').
    \236\ Proposed amendment to rule 0-7(a)(1).

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[[Page 77073]]

d. Rule 222-1
    We are proposing to replace the term ``principal place of 
business'' in rule 222-1(b) \237\ under the Advisers Act, which 
contains definitions relevant to section 222 of the Advisers Act's 
provisions regarding State regulation of investment advisers, with the 
term ``principal office and place of business'' to conform to the Dodd-
Frank Act's amendments to that section.\238\ We are not proposing to 
modify the definition.
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    \237\ Rule 222-1(b) (defining ``principal place of business'' of 
an investment adviser as ``the executive office of the investment 
adviser from which the officers, partners, or managers of the 
investment adviser direct, control, and coordinate the activities of 
the investment adviser.'').
    \238\ See section 985 of the Dodd-Frank Act (replacing the term 
``principal place of business'' each time it appears--i.e., six 
times--with the term ``principal office and place of business'' in 
section 222 of the Advisers Act).
---------------------------------------------------------------------------

e. Rule 222-2
    We are proposing technical amendments to rule 222-2 to define 
``client'' for purposes of the national de minimis standard by cross-
referencing the definition of ``client'' in proposed rule 202(a)(30)-1 
rather than the definition in rule 203(b)(3)-1 because we expect to 
rescind rule 203(b)(3)-1.\239\ We also propose to change a cross-
reference to paragraph (b)(6) of existing rule 203(b)(3)-1 to paragraph 
(b)(4) of proposed rule 202(a)(30)-1 to account for the changed 
location of that particular provision. Finally, because proposed rule 
202(a)(30)-1, unlike rule 203(b)(3)-1, does not include a ``special 
rule'' specifying that an adviser is not required to count as a client 
any person for whom the adviser provides investment advisory services 
without compensation, we are proposing to include this instruction in 
rule 222-2. We request comment on our proposed amendments to rule 222-
2. Should we preserve the instruction that an adviser is not required 
to count as a client any person for whom the adviser provides 
investment advisory services without compensation for purposes of the 
national de minimis standard?
---------------------------------------------------------------------------

    \239\ See supra section II.D.2.a. of this Release (discussing 
rescinding rule 203(b)(3)-1); Exemptions Release at section II.C.1. 
(discussing the definition of ``client'' in proposed rule 
202(a)(30)-1).
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f. Rule 202(a)(11)-1
    We intend, at the adoption of rule and form amendments to implement 
the Dodd-Frank Act, to rescind rule 202(a)(11)-1.\240\ Although the 
rule was vacated by a Federal appeals court (and is therefore not in 
effect),\241\ it has remained in the CFR.
---------------------------------------------------------------------------

    \240\ Rule 202(a)(11)-1.
    \241\ Financial Planning Association v. SEC, 482 F.3d 481 (D.C. 
Cir. 2007).
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III. General Request for Comment

    The Commission requests comment on the rules, and rule and form 
amendments proposed in this Release, suggestions for additional changes 
to the existing rules and comment on other matters that might have an 
effect on the proposals contained in this Release. Commenters should 
provide empirical data to support their views.

IV. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits of its rules. 
The new rules and rule and form amendments we are proposing would give 
effect to provisions in Title IV of the Dodd-Frank Act that: (i) 
Reallocate responsibility for oversight of investment advisers by 
delegating generally to the states responsibility over certain mid-
sized advisers; (ii) repeal the ``private adviser exemption'' contained 
in section 203(b)(3) of the Advisers Act; and (iii) provide for 
reporting by advisers to certain types of private funds that are exempt 
from registration. As part of these amendments, we are also proposing 
amendments to the Advisers Act pay to play rule, rule 206(4)-5. 
Additionally, we propose to identify the advisers that are subject to 
the Dodd-Frank Act's requirements concerning certain incentive-based 
compensation arrangements. Because many of our proposals would 
implement or clarify provisions of the Dodd-Frank Act, they would not 
create benefits and costs separate from the benefits and costs 
considered by Congress in passing the Dodd-Frank Act.\242\ However, 
certain of our proposals, if adopted, would generate costs and benefits 
independent of those generated by the Dodd-Frank Act itself. These 
costs and benefits are discussed below.
---------------------------------------------------------------------------

    \242\ See Dodd-Frank Act, supra note 2; Conference Committee 
Report, supra note 67; Senate Committee Report, supra note 11; supra 
section I. of this Release. Proposals not generating costs and 
benefits independent of those generated by the Dodd-Frank Act 
include the proposed amendments to rules 0-7, 204-2, 222-1, 222-2 
and our proposal to rescind rule 203(b)(3)-1.
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A. Benefits

1. Eligibility To Register With the Commission: Section 410
    Section 410 of the Dodd-Frank Act amends section 203A of the 
Advisers Act to create a new group of ``mid-sized advisers'' and shifts 
primary responsibility for their regulatory oversight to the State 
securities authorities.\243\ It does this by prohibiting from 
registering with the Commission an investment adviser that is required 
to be registered and subject to examination as an investment adviser in 
the State in which it maintains its principal office and place of 
business and that has assets under management between $25 million and 
$100 million.\244\ We are proposing rules and rule amendments that 
would provide us a means of identifying advisers that must transition 
to State regulation, clarify the application of new statutory 
provisions, and modify certain of the exemptions we have adopted under 
section 203A of the Act.
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    \243\ See supra section II.A.7. of this Release.
    \244\ See supra notes 11-12 and accompanying text (discussing 
section 410 of the Dodd-Frank Act, which amends Section 203A of the 
Advisers Act to increase the threshold above which all investment 
advisers must register with the Commission from $25 million to $100 
million).
---------------------------------------------------------------------------

Transition to State Registration
    We are proposing a new rule, rule 203A-5, which would require each 
investment adviser registered with us on July 21, 2011 to file an 
amendment to its Form ADV no later than August 20, 2011 (30 days after 
the July 21, 2011 effective date of the amendments to section 203A), 
and withdraw from Commission registration by October 19, 2011 (60 days 
after the required filing of Form ADV), if no longer eligible.\245\ As 
a consequence of section 410 of the Dodd-Frank Act, we estimate that 
approximately 4,100 advisers currently registered with the Commission 
will be required to withdraw their registration and register with one 
or more State securities authorities.\246\ Given this significant re-
alignment of regulatory authority over numerous advisers, our proposed 
rule would allow us to easily and efficiently identify the advisers 
that are subject to our regulatory authority after the Dodd-Frank Act's 
amendment to section 203A becomes effective, and which advisers have 
switched to State registration due to the amendment to section 203A. 
The proposed rule would confer this same benefit on State securities 
authorities. This would promptly implement the Congressional mandate, 
and accommodate the IARD processing of renewals and fees for State 
registration and licensing, while allowing for an orderly transition. 
It would also help minimize any potential uncertainty about the effects 
of the Dodd-Frank Act on the registration status of a particular 
adviser among investors and other market participants by providing a 
simple, efficient means

[[Page 77074]]

of determining the adviser's post-Dodd-Frank registration status 
through the IARD system as of a specific date. To the extent that rule 
203A-5 would minimize uncertainty among investors and other market 
participants, it could help minimize any disruption in advisory 
business that such uncertainty could provoke, and investors would know 
clearly whether an adviser that advises them is subject to State or 
Commission registration and regulation.
---------------------------------------------------------------------------

    \245\ Proposed rule 203A-5(a), (b). See supra section II.A.1. of 
this Release.
    \246\ See supra note 15 and accompanying text.
---------------------------------------------------------------------------

Switching Between State and Commission Registration
    Rule 203A-1 currently contains two means of preventing an adviser 
from having to switch frequently between State and Commission 
registration as a result of changes in its assets under management or 
the departure of one or more clients.\247\ We propose to amend rule 
203A-1 to eliminate the $5 million buffer that permits an investment 
adviser having between $25 million and $30 million of assets under 
management to remain registered with the states and that does not 
subject the adviser to cancellation of its Commission registration 
until its assets under management fall below $25 million.\248\ We are 
proposing to eliminate the current $5 million buffer because it seems 
unnecessary in light of Congress's determination generally to require 
most advisers having between $30 million and $100 million of assets 
under management to be registered with the states.\249\ Elimination of 
this portion of the rule also promotes efficiency and competition by 
making the registration requirements for advisers with assets under 
management between $25 million and $30 million consistent with the 
requirements for advisers with assets under management between $30 
million and $100 million. Moreover, we are proposing to retain the 180-
day grace period from the adviser's fiscal year end to address concerns 
about advisers frequently having to register and then de-register with 
the Commission as a result of changes in their eligibility to 
register.\250\
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    \247\ See supra note 62-65 and accompanying text.
    \248\ See supra note 66.
    \249\ See supra note 67.
    \250\ See proposed rule 203A-1(b); supra notes 66-68 and 
accompanying text.
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Exemptions From the Prohibition on Registration With the Commission
    We are proposing amendments to three exemptions from the 
prohibition on registration in rule 203A-2 to reflect developments 
since their initial adoption, including the enactment of the Dodd-Frank 
Act.\251\ First, we are proposing to eliminate the exemption in rule 
203A-2(a) from the prohibition on Commission registration for 
NRSROs.\252\ Since we adopted this exemption, Congress amended the Act 
to exclude NRSROs from the Act and provided for a separate regulatory 
regime for NRSROs under the Exchange Act.\253\ Only one NRSRO remains 
registered as an investment adviser under the Act and reports that it 
has more than $100 million of assets under management and thus would 
not need to rely on the exemption.\254\ Given that NRSROs do not 
currently rely on the exemption and that Congress has excluded NRSROs 
from the Act, we do not believe that our proposed amendment would 
generate any benefits or costs and would not impact efficiency, 
competition or capital formation, separate from the benefit of 
simplifying our rules by eliminating an unused exemption.
---------------------------------------------------------------------------

    \251\ See proposed rule 203A-2; supra section II.A.5. of this 
Release. We would also make conforming amendments to renumber rule 
203A-2(b) through (f).
    \252\ See supra section II.A.5.a. of this Release.
    \253\ See supra notes 73-74.
    \254\ Based on IARD data as of September 1, 2010.
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    Second, we are proposing to amend the exemption available to 
pension consultants in rule 203A-2(b) to increase the minimum value of 
plan assets from $50 million to $200 million.\255\ We had set the 
threshold at $50 million of plan assets for these advisers to ensure 
that a pension consultant's activities are significant enough to have 
an effect on national markets.\256\ We propose to increase this 
threshold to $200 million in light of Congress's determination to 
increase from $25 million to $100 million the amount of ``assets under 
management'' that requires advisers to register with the Commission 
without regard to State regulatory requirements.\257\ This amendment 
would maintain the same ratio of plan assets to the statutory assets 
under management requirements currently in place, and would provide the 
regulatory benefit of allowing the Commission to focus its resources on 
oversight of those pension consultants that are more likely to have an 
effect on national markets.
---------------------------------------------------------------------------

    \255\ See proposed rule 203A-2(a); supra section II.A.5.b. of 
this Release.
    \256\ See supra note 78.
    \257\ See supra note 79.
---------------------------------------------------------------------------

    Finally, we propose to amend the multi-State adviser exemption in 
rule 203A-2(e) to align the rule with the multi-State exemption 
Congress built into the mid-sized adviser provision under section 410 
of the Dodd-Frank Act.\258\ Under rule 203A-2(e), the prohibition on 
registration with the Commission does not apply to an investment 
adviser that is required to register in 30 or more states. Once 
registered with the Commission, the adviser remains eligible for 
Commission registration as long as it would be obligated, absent the 
exemption, to register in at least 25 states.\259\ We propose to amend 
rule 203A-2(e) to permit all investment advisers required to register 
as an investment adviser with 15 or more states to register with the 
Commission.\260\ We believe this reflects a Congressional view on the 
number of states with which an adviser must be required to be 
registered before the regulatory burdens associated with such 
regulation warrants registration with the Commission and application of 
the preemption provision.\261\ This amendment reduces the regulatory 
burdens on advisers required to be registered with at least 15 states, 
but less than 30, by allowing them to register with a single securities 
regulator--the Commission. Additionally, the amendment promotes 
efficiency and reduces the effect on competition between small and mid-
sized investment advisers by imposing a consistent multi-State 
exemption standard. We also propose to eliminate the provision in the 
rule that permits advisers to remain registered until the number of 
states in which they must register falls below 25 states, and we are 
not proposing a similar cushion for the 15-State threshold.\262\ We do 
not see any significant benefit of retaining the buffer and believe it 
is unnecessary as a result of our proposal to lower the number of 
states from 30 to 15 and because advisers elect to rely on the 
exemption.
---------------------------------------------------------------------------

    \258\ See proposed rule 203A-2(d); supra section II.A.5.c. of 
this Release.
    \259\ See supra note 82.
    \260\ See proposed rule 203A-1(d)(1).
    \261\ See supra note 84.
    \262\ See supra note 85-86.
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Elimination of Safe Harbor
    We are proposing to eliminate the safe harbor in rule 203A-4 from 
Commission registration for an investment adviser that is registered 
with a State securities authority of the State in which it has its 
principal office and place of business, based on a reasonable belief 
that it is prohibited from registering with the Commission because it 
does not have sufficient assets under management.\263\ Advisers have 
not, in our experience, asserted the availability of this safe harbor 
as a defense, which protects only

[[Page 77075]]

against enforcement actions by us and not any private actions, and we 
view it as unlikely that an adviser would be reasonably unaware that it 
has more than $100 million of regulatory assets under management when 
it is required to report its regulatory assets under management on Form 
ADV.\264\ We do not believe that rescinding the safe harbor would 
generate any significant benefits, other than simplifying our rules in 
general and thereby marginally reducing costs of compliance, and we 
believe it would have little, if any, other effect on efficiency, 
competition or capital formation.
---------------------------------------------------------------------------

    \263\ Rule 203A-4. See supra section II.A.6. of this Release.
    \264\ See supra notes 91-92 and accompanying text.
---------------------------------------------------------------------------

Mid-Sized Advisers
    The Dodd-Frank Act does not explain how to determine whether a mid-
sized adviser is ``required to be registered'' or is ``subject to 
examination'' by a particular State securities authority for purposes 
of section 203A(a)(2)'s prohibition on mid-sized advisers registering 
with the Commission.\265\ We propose to incorporate into Form ADV an 
explanation of how we construe these provisions.\266\ Our instructions 
are intended to clarify the meaning of these provisions, which would 
benefit advisers by promoting efficiency and competition. For example, 
as a result of our proposal to identify to advisers filing on IARD the 
states that do not subject advisers to examination, a mid-sized adviser 
would not be required to determine whether it is subject to examination 
in a particular State. Simplifying the process for mid-sized advisers 
to determine whether they are required to register with us would 
decrease any competitive disadvantages compared to smaller advisers. 
Our proposed changes to IARD also would ensure that only mid-sized 
advisers with a principal office and place of business in those states 
(or mid-sized advisers that are not registered with the states where 
they maintain a principal office and place of business) will register 
with the Commission, which would also make the registration process 
more efficient.
---------------------------------------------------------------------------

    \265\ See supra note 94.
    \266\ See proposed Form ADV: Instructions for Part 1A, instr. 
2.b. See also supra section II.A.7. of this Release (discussing 
these instructions in detail).
---------------------------------------------------------------------------

2. Exempt Reporting Advisers: Sections 407 and 408
    Congress gave us broad authority to require exempt reporting 
advisers to file reports as necessary or appropriate in the public 
interest or for the protection of investors.\267\ We have sought 
information that we believe would be useful to us to be able to 
identify the advisers, their owners, and their business models and, in 
addition, whether they might present sufficient concerns as to warrant 
our further attention in order to protect their clients and fulfill our 
regulatory responsibilities. We have also considered the broader public 
interest in making this information generally available and believe 
there may be benefits of providing information about their activities 
to the public. We acknowledge that there may be costs associated with 
providing this information to us, and that the adviser may provide some 
or all of this information to private fund investors or prospective 
investors, however, we believe these investors would benefit from the 
proposed reporting requirements.
---------------------------------------------------------------------------

    \267\ See sections 407 and 408 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    To meet the Dodd-Frank Act's reporting provisions for ``exempt 
reporting advisers,'' we are proposing a new rule, rule 204-4, to 
require exempt reporting advisers to file reports with the Commission 
electronically on Form ADV.\268\ We are also proposing amendments to 
Form ADV so that it could serve the dual purpose of both an SEC 
reporting form for exempt advisers and, as it is used today, a 
registration form for both State and SEC-registered firms.\269\ In 
addition to requiring that exempt reporting advisers use Form ADV, 
proposed rule 204-4 would require these advisers to submit reports 
through the IARD and to pay a filing fee.\270\
---------------------------------------------------------------------------

    \268\ Proposed rule 204-4(a). See supra section II.B. of this 
Release.
    \269\ See supra section II.B.1. of this Release.
    \270\ Proposed rule 204-4(b), (d).
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    We believe that using Form ADV and IARD for exempt reporting 
adviser reports would yield several benefits. For instance, using Form 
ADV and IARD would create efficiencies that benefit both us and filers 
by taking advantage of an established and proven adviser filing system, 
while avoiding the expense and delay of developing a new form and 
filing system. Additionally, the IARD contains many time-saving 
features, like the ability to pre-populate prior responses and drop-
down boxes for common responses. In addition, because exempt reporting 
advisers may be required to register on Form ADV with one or more State 
securities authorities, use of the existing form and filing system 
(which is shared with the states) should reduce regulatory burdens for 
them because they can satisfy multiple filing obligations through a 
uniform form.\271\ Similarly, regulatory burdens would be diminished 
for an exempt reporting adviser that later finds it can no longer rely 
on an exemption and would be required to register with us because the 
adviser would simply file an amendment to its current Form ADV to apply 
for Commission registration.\272\ Finally, certain items in Form ADV 
Part 1 are also linked to Form BD, which would create efficiencies if 
the exempt reporting adviser ever applies for broker-dealer 
registration.
---------------------------------------------------------------------------

    \271\ See supra note 126-127 and accompanying text.
    \272\ See proposed General Instruction 14 (providing procedural 
guidance to advisers that no longer meet the definition of exempt 
reporting adviser). See also supra note 128.
---------------------------------------------------------------------------

    Requiring that exempt reporting advisers file their reports through 
the IARD would also benefit clients, prospective clients, and members 
of the public who could readily access the information, without cost, 
through the Commission's Web site on the Investment Adviser Public 
Disclosure (IAPD) system. Investors would have access to some 
information that may have been previously unavailable or not easily 
attainable, such as whether a prospective exempt reporting adviser has 
certain disciplinary events and whether its affiliates present 
conflicts of interest or broader access to other financial services. As 
a result, investors would be in a better position to make informed 
decisions. As a secondary benefit, the easy availability of information 
about these advisers and their advisory affiliates may discourage 
advisers from engaging in certain practices (such as maintaining client 
assets with a related person custodian) or hiring certain persons (such 
as those with disciplinary history). Investors' access to information 
may also facilitate greater competition among advisers, which may in 
turn benefit clients.
    Electronic reporting by exempt reporting advisers of certain Items 
within Form ADV would give us better access to information about these 
advisers to administer our regulatory programs and to identify advisers 
whose activities suggest a need for closer scrutiny. We can easily use 
the IARD to generate reports on the industry, its characteristics and 
trends. These reports would help us anticipate regulatory problems, 
allocate and reallocate our resources, and more fully evaluate and 
anticipate the implications of various regulatory actions we may 
consider taking, which should increase both the efficiency and 
effectiveness of our programs and thus increase investor protection. In 
addition, requiring

[[Page 77076]]

exempt reporting advisers to complete Section 7.B of Schedule D for 
each private fund they manage should result in many of the same 
benefits that this information produces with respect to registered 
advisers that we address in the discussion of the proposed amendments 
to Form ADV below.
    We are also proposing to amend rule 204-1 under the Advisers Act, 
which addresses when and how advisers must amend their Form ADV, to 
require that exempt reporting advisers file updating amendments to 
reports filed on Form ADV.\273\ Proposed rule 204-1(a) would require an 
exempt reporting adviser, like a registered adviser, to amend its 
reports on Form ADV: (i) At least annually, within 90 days of the end 
of the adviser's fiscal year; and (ii) more frequently, if required by 
the instructions to Form ADV. Consequently, we are proposing to amend 
General Instruction 4 to Form ADV to require an exempt reporting 
adviser to update Items 1 (identification information), 3 (Form of 
Organization), or 11 (disciplinary information) promptly if they become 
inaccurate in any way, and to update Item 10 (Control Persons) if it 
becomes materially inaccurate.\274\
---------------------------------------------------------------------------

    \273\ Proposed rule 204-1. See supra section II.B.3. of this 
Release.
    \274\ Registered advisers are subject to the same updating 
requirements with respect to these Items. See General Instruction 4 
to Form ADV.
---------------------------------------------------------------------------

    Requiring advisers to amend their reports on Form ADV at least 
annually, and more frequently if identification or disciplinary 
information becomes inaccurate in any way, would assure that we have 
access to updated information such as knowing when an exempt reporting 
adviser has added or no longer has a private fund client, which will 
provide us with the information necessary to assess whether they might 
present sufficient concerns to warrant our further inquiry. Updated 
information would also benefit clients, prospective clients, and other 
members of the public that could use this information in evaluating, 
for example, whether to make an investment in a venture capital fund 
managed by an exempt reporting adviser.
    To accommodate their use by exempt reporting advisers, we also are 
proposing technical amendments to Form ADV-H, the form advisers use to 
request a hardship exemption from electronic filing,\275\ and Form ADV-
NR, used to appoint the Secretary of the Commission as an agent for 
service of process for certain non-resident advisers.\276\ Proposed 
rule 204-4(e) and the proposed amendments to Form ADV-H would benefit 
exempt reporting advisers by allowing them to avoid non-compliance with 
reporting requirements based purely on unanticipated technical 
difficulties. The proposed amendments to Form ADV-NR would benefit 
investors by allowing us to obtain appropriate consent to permit the 
Commission and other parties to bring actions against non-resident 
partners or agents for violations of the Federal securities laws.
---------------------------------------------------------------------------

    \275\ Proposed rule 204-4(e) would allow exempt reporting 
advisers having unanticipated technical difficulties that prevent 
submission of a filing to the IARD systems to request a temporary 
hardship exemption from electronic filing requirements.
    \276\ See proposed amended Form ADV-H, proposed amended Form 
ADV-NR, and proposed General Instruction 18. The amendments to Form 
ADV-H and Form ADV-NR would reflect that exempt reporting advisers 
use the forms in the same way and for the same purpose as they are 
currently used by registered investment advisers.
---------------------------------------------------------------------------

3. Form ADV Amendments
    As discussed above, we are proposing to require advisers to provide 
us on Form ADV additional information about (1) private funds they 
advise, (2) their advisory business and conflicts of interest, and (3) 
their non-advisory activities and financial industry affiliations.\277\ 
We are also proposing certain additional changes intended to improve 
our ability to assess compliance risks and to identify the advisers 
that are covered by section 956 of the Dodd-Frank Act addressing 
certain incentive-based compensation arrangements.
---------------------------------------------------------------------------

    \277\ See supra section II.C. of this Release.
---------------------------------------------------------------------------

Private Fund Reporting Requirements
    The private fund reporting requirements we are proposing would 
provide us with information designed to help us better understand 
private fund investment activities and the scope and potential impact 
of those activities on investors and our markets. The information would 
assist us in identifying particular practices that may harm investors 
and would allow us to conduct targeted examinations of private fund 
advisers based on these practices or other criteria. In addition the 
proposed items are designed to improve our ability to assess risk, 
identify funds with service provider arrangements that raise a ``red 
flag,'' identify firms for examination, and allow us to more 
efficiently conduct examinations. For instance, it would be relevant to 
us to know that a private fund is using a service provider that we are 
separately investigating for alleged misconduct. We propose to ask 
about both the number and the types of investors in the fund to get a 
better idea of the investors the fund is intended to serve and to get a 
sense of the extent to which investors may themselves be in a position 
to evaluate the adviser. We would ask about the size of the fund, 
including both its gross and net assets, to better understand the scope 
of its operations and the extent of leverage it employs. Responses to 
the service provider questions would, for example, allow us to identify 
those funds that do not make use of independent service providers, 
which may indicate a higher level of risk, and provide other key 
information regarding the identity and role of these private fund 
gatekeepers. Each particular item of information may not itself 
indicate an elevated risk of a compliance failure, but is designed to 
serve as an input to the risk metrics by which our staff identifies 
potential risk and allocates examination resources. The staff conducts 
similar analyses today, but with fewer inputs.
    Form ADV information that private fund advisers would report to us 
also would benefit private fund investors in evaluating potential 
managers. As amended, Form ADV would require private fund advisers to 
disclose information about their business, affiliates and owners, 
gatekeepers, and disciplinary history. This would create a publicly 
accessible foundation of basic information that could aid investors, to 
the extent they were not otherwise timely given the information, in 
conducting due diligence and could further help investors and other 
industry participants protect against fraud. For example, using the 
IARD data, auditors would be able to compare their list of funds they 
audit with those whose advisers report them as auditor. Investors (and 
their consultants) would be able to compare representations made on 
Schedule D with those made in private offering documents or other 
material provided to prospective investors.
    Private fund reporting would benefit investors and market 
participants by providing us and other policy makers with better data. 
Better data would enhance our ability to form and frame regulatory 
policies regarding the private fund industry and its advisers, and to 
evaluate the effect of our policies and programs on this sector, 
including for the protection of private fund investors. Today we 
frequently have to rely on data from other sources, when available. 
Private fund reporting would provide us with important information 
about this rapidly growing segment of the U.S. financial system.

[[Page 77077]]

Other Proposed Amendments to Form ADV
    Other amendments we are proposing today to Form ADV would refine or 
expand existing questions, which would give us a more complete picture 
of an adviser's practices, help us better understand each adviser's 
operations, business and services, and provide us with more information 
to determine advisers' risk profiles and prepare for examinations. The 
amendments would provide us with critical information to identify 
practices that may harm clients, which would assist us in identifying 
candidates for risk-targeted examinations, detecting data or patterns 
that suggest further inquiry may be warranted about a particular issue, 
and distinguishing additional conflicts of interest that advisers may 
face. For example, the additional information we propose to require 
about related persons would allow us to link disparate pieces of 
information that we have access to concerning an adviser and its 
affiliates to identify whether those relationships present conflicts of 
interest that create higher risks for advisory clients. Another example 
is the proposed switch from ranges to approximate numbers of employees 
and assets by client type. Although these changes would refine data we 
already receive, it would provide significant benefits in developing 
risk-based profiles of advisers. Our proposal to expand the list of the 
types of advisory activities an adviser might engage in and to include 
a list of the types of investments about which they provide advice 
would help us better understand the operations of advisers. 
Additionally, our proposal to require advisers to report whether they 
have $1 billion or more in assets would help us to identify the 
advisers that are covered by section 956 of the Dodd-Frank Act 
addressing certain incentive-based compensation arrangements. Overall, 
the information proposed to be collected on Form ADV is designed to 
improve our risk-assessment capabilities and help us best allocate our 
examination resources.
    Further, advisory clients and prospective clients would also 
benefit from these proposed amendments. The additional information that 
registered advisers would report to us would be publicly available, 
which would aid investors in evaluating potential managers and 
understanding their practices. For example, requiring an adviser to 
indicate whether it or any of its control persons is a public reporting 
company under the Exchange Act would provide a signal, not only to us, 
but to clients and to prospective clients, that additional public 
information is available about the adviser and/or its control persons. 
Requiring an adviser to report whether it has $1 billion or more of 
assets would help inform the adviser, its clients and the public 
whether or not the adviser is subject to section 956 of the Dodd-Frank 
Act and any rules or guidelines thereunder. The additional information 
about the adviser's related persons would assist clients to compare 
business practices, strategies, and conflicts of a number of advisers, 
which may help them to select the most appropriate adviser for them. 
Clients may also benefit indirectly because advisers may be 
incentivized to implement stronger controls and practices, particularly 
related to any conflicts of interest or business practices that may 
result in additional risks because of enhanced client awareness. Third 
parties would also be able to access the new information reported in 
filings of the amended form, which would allow academics, businesses, 
and others to access additional information about registered investment 
advisers and exempt reporting advisers, which they can use to study the 
industry.
    We anticipate that the proposed amendments to the Form ADV 
instructions would assist investment advisers in determining their 
regulatory assets under management and whether they are eligible to 
register with us, which may result in cost savings for some advisers 
because they may more readily be able to make this determination.\278\ 
Eliminating the choices we have given advisers in the Form ADV 
instructions for calculating assets under management would, for 
example, provide for a uniform method of determining assets under 
management for purposes of the form and the new exemptions from 
registration under the Advisers Act, which we expect would promote 
competition, would result in advisers' greater certainty in choosing to 
rely on an exemption from registration, and would result in consistent 
reporting across the industry.\279\ Our proposed amendments to the 
instructions relating to calculation of assets under management would 
also clarify how an adviser would determine the amount of private fund 
assets it has under management, as there are currently no specific 
instructions on this point. We expect this may provide advisers with 
greater certainty in their calculation of regulatory assets under 
management and would provide greater certainty in determining their 
eligibility for the exemptions from registration available to certain 
private fund advisers.\280\
---------------------------------------------------------------------------

    \278\ See section II.A.3.
    \279\ See id. See also Exemptions Release at section II.C. 
(discussing exemption for foreign private advisers).
    \280\ See Exemptions Release at sections II.B.2. and II.C.5.
---------------------------------------------------------------------------

4. Amendments to Pay to Play Rule
    We are proposing two amendments to rule 206(4)-5 that we believe 
are appropriate as a result of the enactment of the Dodd-Frank Act, and 
one minor amendment to clarify the rule.\281\ First, we propose to 
amend the rule to make it continue to apply to all private advisers, 
including exempt reporting advisers and foreign private advisers.\282\ 
We are proposing this amendment to prevent the narrowing of the 
application of the rule as a result of the amendments to the Act made 
by the Dodd-Frank Act.\283\ We do not believe that this amendment would 
create any benefits (or costs) beyond those created by the rule as 
originally adopted,\284\ but rather would merely assure that the rule 
continues to apply to the same advisers as we intended when we adopted 
the rule.\285\
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    \281\ See supra section II.D.1. of this Release.
    \282\ Proposed rule 206(4)-5(a). See supra section II.B. of this 
Release (discussing the definitions of exempt reporting advisers and 
foreign private advisers).
    \283\ See supra section II.D.1. of this Release.
    \284\ See section IV of the Pay to Play Release.
    \285\ Rule 206(4)-5 currently applies to ``private advisers'' 
exempt from registration with the Commission under section 203(b)(3) 
of the Advisers Act. As discussed in section II.B. of this Release, 
the Dodd-Frank Act has eliminated the ``private adviser'' exemption 
from registration with the Commission in section 203(b)(3), but has 
created new exemptions for exempt reporting advisers and foreign 
private advisers. Advisers that qualify for these new exemptions 
generally are subsets of the advisers that qualify for the existing 
section 203(b)(3) ``private adviser'' exemption.
---------------------------------------------------------------------------

    Second, we propose to amend the provision of rule 206(4)-5 that 
prohibits advisers from paying persons (e.g., ``solicitors'' or 
``placement agents'') to solicit government entities unless such 
persons are ``regulated persons'' (i.e., registered investment advisers 
or broker-dealers subject to rules of a registered national securities 
association, such as FINRA, that restrict its members from engaging in 
pay to play activities).\286\ Instead, the proposed amendments would 
permit an adviser to pay any ``regulated municipal advisor'' to solicit 
government entities on its behalf. A regulated municipal advisor under 
the proposed rule would be a municipal advisor that is registered under 
section 15B of the Exchange Act and subject to pay to play rules 
adopted

[[Page 77078]]

by the MSRB.\287\ We understand that the MSRB intends to consider 
subjecting municipal advisors to pay to play rules similar to its rules 
governing municipal securities dealers. Broker-dealers acting as 
placement agents or solicitors and investment advisers acting as 
solicitors of government entities meet the statutory definition of a 
municipal advisor and thus would be subject to MSRB rules. Our proposed 
amendment would, like the current rule, permit advisers to pay persons 
to solicit government entities on their behalf only if such third 
parties are registered with us and subject to pay to play rules of 
their own.\288\ Given the new regulatory regime applicable to municipal 
advisors, including solicitors of municipal entities that meet the 
definition of ``regulated person'' under rule 206(4)-5, broker-dealer 
solicitors are expected to be subject to MSRB's pay to play rules, 
rendering it unnecessary at this time for FINRA to adopt a pay to play 
rule that would satisfy rule 206(4)-5(f)(9)(ii). We are proposing, 
therefore, to replace references in rule 206(4)-5 to FINRA's pay to 
play rules with references to MSRB rules that we find are consistent 
with the objectives of rule 206(4)-5 and impose substantially 
equivalent or more stringent pay to play restrictions. To the extent 
that our proposed amendment would eliminate the need to subject certain 
solicitors to multiple pay to play rules, it would reduce the 
regulatory burdens on such placement agents.
---------------------------------------------------------------------------

    \286\ Rule 206(4)-5(a)(2)(i). FINRA is currently the only 
national securities association registered under section 19(a) of 
the Exchange Act (15 U.S.C. 78s(b)).
    \287\ Proposed rule 206(4)-5(a)(2), (f)(9). These pay to play 
rules must prohibit municipal advisors from engaging in distribution 
or solicitation activities if certain political contributions have 
been made. In addition, the Commission must find that they both 
impose substantially equivalent or more stringent restrictions on 
municipal advisors than rule 206(4)-5 imposes on investment advisers 
and that they are consistent with the objectives of rule 206(4)-5.
    \288\ Pay To Play Release at section II.B.2.(b).
---------------------------------------------------------------------------

    In addition, due to the fact that the definition of a municipal 
advisor includes certain registered investment advisers and broker 
dealers--the two categories of regulated persons that an adviser may 
currently use as placement agents under rule 206(4)-5--our amendment 
may increase the number of placement agents that an adviser potentially 
could hire.\289\ This could benefit advisers by increasing competition 
in the market for placement agent services and reducing the cost of 
such services. It could also benefit those placement agents that are 
not ``regulated persons'' under rule 206(4)-5, but may meet the 
municipal advisor definition, by allowing advisers to hire them.
---------------------------------------------------------------------------

    \289\ Our current ``regulated person'' definition does not 
include, for example, advisers prohibited from registering with the 
Commission under section 203A of the Advisers Act (15 U.S.C. 80b-
3A), such as State-registered advisers, or advisers unregistered in 
reliance on an exemption other than section 203(b)(3) of the Act. 
(15 U.S.C. 80b-3(b)(3)). The definition of ``municipal advisor'' 
does not exclude these advisers. See section 975 of the Dodd-Frank 
Act.
    We adopted the third-party solicitor ban to prevent advisers 
from circumventing the rule through third parties. See section 
II.B.2.(b) of the Pay To Play Release. Given the Dodd-Frank Act's 
creation of the ``municipal advisor'' category, and given that it 
requires these persons to register with the Commission and subjects 
them to MSRB rulemaking authority, we believe that expanding the 
current ``regulated person'' exception to the third party solicitor 
ban to include registered municipal advisors subject to pay to play 
rules would not undermine the ban's purpose. By potentially allowing 
advisers to choose from a broader set of potential third-party 
solicitors, we believe our proposed amendments may promote 
efficiency and competition in the market for advisory services to 
the extent third-party solicitors that are not regulated persons 
participate.
---------------------------------------------------------------------------

    Finally, we are proposing a minor amendment to rule 206(4)-5's 
definition of a ``covered associate'' \290\ of an investment adviser to 
specify that a legal entity, not just a natural person, that is a 
general partner or managing member of an investment adviser would meet 
the definition.\291\ Because the minor amendment would not change the 
meaning of the rule, we do not believe that it would generate any 
additional benefits (or costs).
---------------------------------------------------------------------------

    \290\ See rule 206(4)-5(f)(2) (defining a ``covered associate'' 
of an investment adviser as: ``(i) Any general partner, managing 
member or executive officer, or other individual with a similar 
status or function; (ii) Any employee who solicits a government 
entity for the investment adviser and any person who supervises, 
directly or indirectly, such employee; and (iii) Any political 
action committee controlled by the investment adviser or by [any 
other covered associate].'').
    \291\ See proposed rule 206(4)-5(f)(2); supra section II.D.1. of 
this Release.
---------------------------------------------------------------------------

B. Costs

1. Eligibility To Register With the Commission: Section 410
Transition to State Registration
    Proposed Rule 203A-5 would impose one-time costs on investment 
advisers registered with us by requiring them to file an amendment to 
Form ADV, and on advisers that are no longer eligible to remain 
registered with us by requiring them to file Form ADV-W to withdraw 
from Commission registration.\292\ According to IARD data, 
approximately 11,850 investment advisers are registered with us and 
would be required to file an amended Form ADV,\293\ and we estimate 
that approximately 4,100 of those advisers will be required to withdraw 
their registration and register with one or more State securities 
authorities.\294\ We believe that the proposed rule would have little 
impact on competition among advisers registered with us because they 
would all be subject to these requirements, but the rule could have a 
limited impact on competition between SEC-registered advisers who are 
subject to the rule and State-registered advisers who are not. We also 
believe that the rule would have little, if any, effect on capital 
formation.
---------------------------------------------------------------------------

    \292\ See proposed rule 203A-5; supra section II.A.1. of this 
Release.
    \293\ Based on IARD data as of September 1, 2010, 11,867 
investment advisers are registered with the Commission. We have 
rounded this number to 11,850 for purposes of our analysis.
    \294\ According to data from the IARD as of September 1, 2010, 
4,136 Commission-registered advisers, which we are rounding to 4,100 
for our analysis, either: (i) Had assets under management of between 
$25 million and $100 million and did not indicate on Form ADV Part 
1A that they are relying on an exemption from the prohibition on 
Commission registration; or (ii) were permitted to register with us 
because they rely on the registration of an SEC-registered affiliate 
that has assets under management between $25 million and $100 
million and are not relying on an exemption.
---------------------------------------------------------------------------

    For purposes of calculating the currently approved Paperwork 
Reduction Act (``PRA'') burden for Form ADV, we estimated that an 
annual updating amendment would take each adviser approximately 6 hours 
per amendment,\295\ and we estimate the one-time transition amendment 
would have similar burden. In addition, for purposes of the increased 
PRA burden for Form ADV, we estimate that the proposed amendments to 
Part 1A of Form ADV would take each adviser approximately 4.5 hours, on 
average, to complete.\296\ As a result, we estimate a total average 
time burden of 10.5 hours for each respondent completing the amendment 
to Form ADV required by proposed rule 203A-5 (excluding private fund 
information which is addressed below).\297\ We estimate that each 
adviser would incur average costs of approximately $2,646,\298\ for a 
total aggregate of $31,355,100.\299\ In addition, of these 11,850 
registered advisers, we estimate that 3,500 advise one or more private 
funds and would have to complete the private fund reporting

[[Page 77079]]

requirements we are proposing today.\300\ We expect this would take 
33,350 hours,\301\ in the aggregate, for a total cost of 
$8,404,200.\302\ As a result, the total estimated costs associated with 
filing amended Form ADV as required by proposed rule 203A-5 would be 
$39,759,300.\303\
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    \295\ See infra section V.B.2.a.3. of this Release.
    \296\ See infra sections V.B.1.a. and V.B.2.a.3. of this 
Release.
    \297\ 6 hours (Form ADV amendment) + 4.5 hours (new Form ADV 
items) = 10.5 hours.
    \298\ We expect that the performance of this function would most 
likely be equally allocated between a senior compliance examiner and 
a compliance manager. Data from the Securities Industry Financial 
Markets Association's Management & Professional Earnings in the 
Securities Industry 2009 (``SIFMA Management and Earnings Report''), 
modified to account for an 1,800-hour work-year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits and 
overhead, suggest that costs for a senior compliance examiner and a 
compliance manager are $210 and $294 per hour, respectively. [5.25 
hours x $210 = $1,102.50] + [5.25 hours x $294 = $1,543.50] = 
$2,646.
    \299\ 11,850 advisers x $2,646 = $31,355,100.
    \300\ See infra note 400.
    \301\ See infra note 403.
    \302\ [16,675 hours x $210 = $3,501,750] + [16,675 hours x $294 
= $4,902,450] = $8,404,200. As noted above, we expect that the 
performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager. See 
supra note 298.
    \303\ $31,355,100 + $8,404,200 = $39,759,300.
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    For the estimated 4,100 advisers that will be required to withdraw 
their registrations, we estimate that the average burden for each 
respondent is 0.25 hours for filing a partial withdrawal on Form ADV-
W.\304\ An adviser would likely use compliance clerks to prepare the 
filings and review the prepared Form ADV-W.\305\ We estimate that each 
adviser would incur average costs of approximately $14.75 \306\ to 
comply with the Form ADV-W filing requirements, for a total one-time 
cost of $60,475.\307\ As a result, proposed rule 203A-5 would result in 
a total one-time cost of $39,819,775.\308\
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    \304\ Form ADV-W is designed to accommodate the different types 
of withdrawals an investment adviser may file. An investment adviser 
ceasing operations would complete the entire form to withdraw from 
all jurisdictions in which it is registered (full withdrawal), while 
an adviser withdrawing from some, but not all, of the jurisdictions 
in which it is registered would omit certain items that we do not 
need from an adviser continuing in business as a State-registered 
adviser. We expect that advisers that would be required to file Form 
ADV-W if proposed rule 203A-5 is adopted would file only a partial 
withdrawal because switching to State registration only requires a 
partial withdrawal. Compliance with the requirement to complete Form 
ADV-W imposes an average burden of 0.25 hours for an adviser filing 
for partial withdrawal.
    \305\ We have assumed for purposes of the current approved PRA 
burden for rule 203-2 and Form ADV-W that advisers would use 
clerical staff to file for a partial withdrawal. Data from the 
Securities Industry Financial Markets Association's Office Salaries 
in the Securities Industry 2009 (``SIFMA Office Salaries Report'') 
modified to account for an 1,800-hour work-year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits and 
overhead, suggest that the hourly rate for a compliance clerk is 
$59.
    \306\ 0.25 hours x $59 (hourly wage for clerk) = $14.75 (total 
cost for Form ADV-W filing).
    \307\ $14.75 x 4,100 = $60,475.
    \308\ $39,759,300 (total cost for Form ADV filing) + $60,475 
(total cost for Form ADV-W filing) = $39,819,775 (total cost for 
proposed rule 203A-5).
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Switching Between State and Commission Registration
    The proposed amendment to rule 203A-1 may impose costs on advisers 
by eliminating the $5 million buffer in current rule 203A-1(a), which 
permits but does not require an adviser to register with the Commission 
if the adviser has between $25 million and $30 million of assets under 
management.\309\ Specifically, the proposed amendment may require 
advisers with between $25 million and $30 million in assets under 
management that are still eligible for registration with the Commission 
despite the Dodd-Frank Act's amendments to section 203A of the Advisers 
Act to switch their registration between the Commission and the states 
when they otherwise would not do so if the rule continued to include 
the buffer.\310\ As of September 1, 2010, approximately 530 advisers 
registered with the Commission had between $25 million and $30 million 
of assets under management.\311\ Because the Dodd-Frank Act has amended 
section 203A to prohibit most of these advisers from registering with 
the Commission,\312\ we believe that all of these advisers could see 
increased costs as a result of our proposed amendment.\313\ These costs 
include those associated with withdrawing their registration with the 
Commission and registering with the states, including filing a notice 
of withdrawal on Form ADV-W in accordance with rule 203-2 under the 
Advisers Act. We have estimated for purposes of our current approved 
hour burden under the PRA for rule 203-2 and Form ADV that a partial 
withdrawal imposes an average burden of approximately 0.25 hours for an 
adviser, and the filing (and costs associated with the filing) by these 
530 advisers are included in our discussion above of the Form ADV-W 
filing requirement under rule 203A-5.\314\ These advisers also would 
incur the costs of State registration and of compliance with State laws 
and regulations, which we expect would vary widely depending on the 
number of, and which, states with which each adviser is required to 
register. For example, individual State registration fees range from 
approximately $60 to $400 annually and some states require advisers to 
submit documentation in addition to Form ADV.\315\ We believe these 
amendments would have little, if any, effect on capital formation.
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    \309\ See proposed rule 203A-1; supra section II.A.4. of this 
Release.
    \310\ See supra section II.A.4. of this Release. Under the Dodd-
Frank Act, a mid-sized adviser is not prohibited from registering 
with the Commission if: (i) The adviser is not required to be 
registered as an investment adviser with the securities commissioner 
(or any agency or office performing like functions) of the State in 
which it maintains its principal office and place of business; (ii) 
if registered, the adviser would not be subject to examination as an 
investment adviser by that securities commissioner; or (iii) the 
adviser is required to register in 15 or more states. See section 
410 of the Dodd-Frank Act; supra section II.A. of this Release.
    \311\ Based on IARD data as of September 1, 2010.
    \312\ See supra section II.A. of this Release (discussing new 
section 203A(a)(2) of the Advisers Act, which prohibits certain mid-
sized advisers from registering with the Commission).
    \313\ For purposes of this analysis, we assume that all of these 
advisers would not remain eligible to register with the Commission 
because they would be required to be registered and subject to 
examination by securities authorities in the states where they 
maintain their respective principal offices and places of business. 
See Section 203A(a)(2); supra section II.A.7.b. of this Release 
(discussing the fact that we are writing a letter to each State 
securities commissioner (or official with similar authority) to 
request that each advise us whether investment advisers registered 
in the State would be subject to examination as an investment 
adviser by that State's securities commissioner (or agency or office 
with similar authority)). See also NASAA Report at 7.
    \314\ See supra notes 304-308 and accompanying text addressing 
the costs of filing Form ADV-W for advisers that will be required to 
withdraw their registrations.
    \315\ See, e.g., Ohio Rev. Code Sec.  1707.17(B)(3) (2010) ($100 
registration fee); Ark. Code Sec.  23-42-304(a)(3) (2010) ($300 
registration fee); Colorado Division of Securities Fee Schedule ($60 
registration fee), available at http://www.dora.State.co.us/securities/feeschedule.htm; Illinois Secretary of State, Securities 
Fees ($400 registration fee), available at http://www.sos.state.il.us/departments/securities/investment_advisers/fees.html; Texas State Securities Board Check Sheet for a Sole 
Proprietor Corporation LLC or Partnership Applying for Registration 
as an Investment Adviser (requiring copies of adviser's 
organizational documents, balance sheet, fee schedule, advisory 
contract, and brochure or disclosure document delivered to clients), 
available at http://www.ssb.state.tx.us/Dealer_And_Investment_Adviser_Registration/Check_Sheet_For_a_Sole_Proprieter_Corporation_LLC_or_Partnership_Applying_For_Registration_as_an_Investment_Adviser.php; NASAA Report at 7 (among other things, 
states review registrants' disclosure history, financial status, 
business practices, and provisions in client contracts).
---------------------------------------------------------------------------

Exemptions From the Prohibition on Registration With the Commission
    Amending the exemption from the prohibition on registration 
available to pension consultants in rule 203A-2(b) to increase the 
minimum value of plan assets from $50 million to $200 million \316\ may 
impose costs on some of the approximately 350 advisers that currently 
rely on the exemption.\317\

[[Page 77080]]

These costs, which include those associated with withdrawing their 
registration with the Commission and registering with the states, if 
required, would have a negative impact on competition for the advisers 
that no longer qualify for the exemption and potentially must register 
as an adviser with more than one State securities authority. We 
estimate that 50 of the 350 advisers relying on the exemption would 
have to file a notice of withdrawal on Form ADV-W in accordance with 
rule 203-2 under the Advisers Act and withdraw their registration based 
on the proposed amendment.\318\ We have estimated that a partial 
withdrawal imposes an average burden of approximately 0.25 hours for an 
adviser.\319\ Thus, we estimate that the proposed amendment to rule 
203A-2(b) associated with filing Form ADV-W would generate a burden of 
12.5 hours \320\ at a cost of $738.\321\ These advisers will incur the 
costs of State registration, which we expect will vary widely depending 
on the number of, and which, states with which an adviser is required 
to register.\322\ We believe the amendment would have little, if any, 
effect on capital formation.
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    \316\ See proposed rule 203A-2(a). See also supra section 
II.A.5.b. of this Release.
    \317\ Based on IARD data as of September 1, 2010, 353 SEC-
registered advisers, which we rounded to 350, indicated that they 
rely on the exemption for pension consultants by marking Item 
2.A.(6) on Form ADV Part 1A. These advisers do not report the amount 
of plan assets for which they provide investment advice, so we are 
unable to determine how many have between $50 million and $200 
million of plan assets and may have to register with the State 
securities authorities as a result of the proposed amendment. It is 
also difficult to determine whether such advisers would be 
prohibited from registering with the Commission because they are 
required to register with and are subject to examination by the 
State securities authority where they maintain a principal office 
and place of business under the Dodd-Frank Act.
    \318\ Based on IARD data as of September 1, 2010, approximately 
225 pension consultants reported assets under management of less 
than $100 million, and 202 of those advisers reported assets under 
management of less than $25 million. We believe that most pension 
consultants relying on the exemption provide advice regarding a 
large amount of plan assets, so we expect the number of advisers 
affected by the proposed amendment to be one quarter of the advisers 
with less than $25 million of assets under management. We expect 
that advisers that would be required to file Form ADV-W if our 
proposed amendment to rule 203A-2(b) is adopted would file only a 
partial withdrawal because they would be registering with the 
states. See supra note 304. Compliance with the requirement to 
complete Form ADV-W imposes an average burden of approximately 0.25 
hours for an adviser filing for partial withdrawal. See id.
    \319\ See supra note 304.
    \320\ 50 responses on Form ADV-W x 0.25 hours = 12.5 hours.
    \321\ 12.5 hours x $59 = $738.
    \322\ See, e.g., supra note 315.
---------------------------------------------------------------------------

    As discussed above, the proposed amendment to the multi-State 
adviser exemption in rule 203A-2(e) would reduce costs for advisers in 
the aggregate because more advisers would be permitted to register with 
one securities regulator--the Commission--rather than being required to 
register with multiple States.\323\ Advisers relying on the exemption, 
however, would incur costs of complying with the Advisers Act and our 
rules, and would incur the costs associated with keeping records 
sufficient to demonstrate that they would be required to register with 
15 or more states. We estimate that, in addition to the approximately 
40 advisers that rely on the exemption currently, approximately 110 
would rely on the exemption if amended as proposed.\324\ For purposes 
of the PRA, we have estimated that these advisers would incur an 
average one-time initial burden of approximately 8 hours, and an 
average ongoing burden of approximately 8 hours per year, to keep 
records sufficient to demonstrate that they meet the 15-State 
threshold.\325\ We further estimate that a senior operations manager 
would maintain the records at an hourly rate of $311, resulting in 
average initial and annual recordkeeping costs associated with our 
proposed amendments to rule 203A-2(e) of $2,488 per adviser,\326\ and 
total increased costs of approximately $273,680 per year.\327\ Advisers 
newly relying on the proposed amended exemption would also incur costs 
associated with completing and filing Form ADV for purposes of 
registration with the Commission. For purposes of the increase in our 
PRA burden for Form ADV, we have estimated that advisers newly 
registering with the Commission would incur a burden of approximately 
13.58 hours per year,\328\ resulting in costs of approximately $3,422 
per adviser \329\ and total increased costs of approximately $376,420 
per year.\330\ Additionally, we estimate that 40 of the newly 
registering advisers would use outside legal services, and 50 would use 
outside compliance consulting services, to assist them in preparing 
their Part 2 brochures, for a total cost of $176,000, and $250,000, 
respectively, resulting in a total non-labor cost among the newly 
registering advisers of $426,000.\331\ If adopted, the proposal could 
also impact competition between advisers who rely on the exemption and 
are subject to our full regulatory program, including examinations and 
our rules, and State-registered advisers who do not rely on the 
exemption. We believe these amendments would have little, if any, 
effect on capital formation.
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    \323\ See proposed rule 203A-2(d); supra section II.A.5.c. of 
this Release.
    \324\ Based on IARD data as of September 1, 2010, of the 
approximately 11,850 SEC-registered advisers, 40 checked Item 
2.A.(9) of Part 1A of Form ADV to indicate their basis for SEC 
registration under the multi-State advisers rule. Of the advisers 
that have less than $100 million of assets under management, 94 
currently file notice filings with 15 or more states. However, State 
notice filing requirements for SEC-registered advisers may differ 
from registration requirements because Form ADV does not distinguish 
between states where the registration is mandatory and where 
registration is voluntary. In addition, we estimate that 15 advisers 
currently registered with the states that are registered with 15 or 
more states could rely on the proposed exemption and register with 
us. Thus, we estimate that approximately 150 advisers will rely on 
the proposed exemption (40 currently relying on it + estimated 95 
eligible based on IARD data + 15 advisers required to be registered 
in 15 or more states that are not registered with us today).
    \325\ These estimates are based on an estimate that each year an 
investment adviser would spend approximately 0.5 hours creating a 
record of its determination whether it must register as an 
investment adviser with each of the 15 states required to rely on 
the exemption, and approximately 0.5 hours to maintain the record, 
for a total of 8 hours. See infra note 383 and accompanying text.
    \326\ 8 hours x $311 = $2,488. The $311 compensation rate used 
is the rate for a senior operations manager in the SIFMA Management 
and Earnings Report, modified by Commission staff to account for an 
1,800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits and overhead.
    \327\ 110 new advisers relying on the exemption x $2,488 = 
$273,680.
    \328\ See infra note 399 and accompanying text.
    \329\ We expect that the performance of this function would most 
likely be equally allocated between a senior compliance examiner at 
$210 per hour and a compliance manager at $294 per hour. See infra 
note 338. [6.79 hours x $210 = $1,425.90] + [6.79 hours x $294 = 
$1,996.26] = $3,422.
    \330\ 110 advisers relying on the exemption x $3,422 = $376,420.
    \331\ The currently approved burden associated with Form ADV 
already accounts for similar estimated costs to be incurred by 
current registrants. See infra notes 420-421 and accompanying text.
---------------------------------------------------------------------------

Mid-Sized Advisers
    As discussed above, the Dodd-Frank Act does not explain how to 
determine whether a mid-sized adviser is ``required to be registered'' 
or is ``subject to examination'' by a particular State securities 
authority for purposes of section 203A(a)(2)'s prohibition on mid-sized 
advisers registering with the Commission, and we propose to incorporate 
into Form ADV an explanation of how we construe these provisions.\332\ 
We do not, however, believe that they would generate costs independent 
of any costs associated with Congress' enactment of section 203A(a)(2), 
and would have little, if any, effect on capital formation.
---------------------------------------------------------------------------

    \332\ See supra notes 265-266 and accompanying text.
---------------------------------------------------------------------------

2. Exempt Reporting Advisers: Sections 407 and 408
    While we believe that our proposed approach to implementing the 
Dodd-Frank Act's reporting provisions applicable to exempt reporting 
advisers would minimize costs inherent in such reporting, we 
acknowledge that it would impose some costs on these advisers.\333\ 
Although not significant, these costs would include paying a filing fee 
to FINRA to support the IARD. We anticipate that filing fees for exempt 
reporting advisers would be the same as those for registered investment 
advisers,

[[Page 77081]]

which currently range from $40 to $200, based on the amount of assets 
an adviser has under management.\334\ In order to estimate the costs 
associated with paying filing fees, we will assume for purposes of this 
cost-benefit analysis that exempt reporting advisers will pay a fee of 
$200 per report filed on Form ADV. We estimate that approximately 2,000 
advisers would qualify as exempt reporting advisers pursuant to 
sections 407 and 408 of the Dodd-Frank Act and would have to file Form 
ADV on the IARD,\335\ which would result in total annual costs 
consisting of filing fees of approximately $400,000.\336\
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    \333\ See proposed rules 204-1 and 204-4; proposed Form ADV, 
Part 1A; supra section II.B. of this Release.
    \334\ See supra note 122 and accompanying text.
    \335\ See infra note 422. While this is an estimate of the total 
number of advisers that may file reports rather than register with 
the Commission, a number of these advisers may choose to register 
with the Commission rather than file reports. We cannot determine ex 
ante the number of these advisers that will choose to register 
rather than report. Therefore, in order to avoid under-estimating 
the costs of our proposals, we are using the total number of 
potential exempt reporting advisers in our estimates.
    \336\ 2,000 exempt reporting advisers x $200 per year = 
$400,000. Advisers pay for initial Form ADV submissions and for 
annual amendments; there is no charge for an interim amendment.
---------------------------------------------------------------------------

    In addition to filing fees, our proposals would result in internal 
costs to exempt reporting advisers associated with collecting, 
reviewing, reporting, and updating a limited subset of Form ADV items 
in Part 1A, as we propose to amend it, including Items 1, 2.C., 3, 6, 
7, 10, 11 and corresponding schedules, but exempt reporting advisers 
would not be required to complete the remainder of Part 1A or Part 2. 
The costs of completing these items would vary from one adviser to the 
next, depending in large part on the number of private funds these 
advisers manage. We believe the information required by these items 
should be readily available to any adviser, particularly the 
identifying data and control person information required by Items 1, 3, 
and 10. The check-the-box style of most of these items, as well as some 
of the features of the IARD system (such as drop-down boxes for common 
responses) should also keep the average completion time for these 
advisers to a minimum. For purposes of the PRA, we estimate that exempt 
reporting advisers, in the aggregate, would spend 14,000 hours to 
prepare and submit their initial reports on Form ADV.\337\ Based on 
this estimate, we expect that exempt reporting advisers would incur 
costs of approximately $3,528,000 to prepare and submit their initial 
report on Form ADV.\338\ Additionally, for PRA purposes, we estimate 
that exempt reporting advisers in the aggregate would spend 2,200 hours 
per year on amendments to their filings.\339\ Based on this estimate, 
we expect that exempt reporting advisers would incur costs of 
approximately $554,400 to prepare and submit annual amendments to their 
reports on Form ADV.\340\
---------------------------------------------------------------------------

    \337\ See infra note 425; infra section V. of this Release.
    \338\ We expect that the performance of this function would most 
likely be equally allocated between a senior compliance examiner and 
a compliance manager, or persons performing similar functions. Data 
from the SIFMA Management and Earnings Report, modified to account 
for an 1,800-hour work-year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits and overhead, suggest that 
costs for these positions are $210 and $294 per hour, respectively. 
[7,000 hours x $210 = $1,470,000] + [7,000 hours x $294 = 2,058,000] 
= $3,528,000. For an exempt reporting adviser that does not already 
have a senior compliance examiner or a compliance manager, we expect 
that a person performing a similar function would have similar 
hourly costs.
    \339\ See infra note 430.
    \340\ [1,100 hours x $210 = $231,000] + [1,100 hours x $294 = 
323,400] = $554,400.
---------------------------------------------------------------------------

    Completing and filing Form ADV-H and Form ADV-NR would also impose 
costs on exempt reporting advisers. For purposes of the PRA, we 
estimate that approximately 2 exempt reporting advisers would file Form 
ADV-H annually and that it would impose an average burden per response 
of 1 hour on exempt reporting advisers.\341\ Thus, proposed rule 204-4 
would result in an increase in the total hour burden associated with 
Form ADV-H of 2 hours.\342\ We further estimate that for each hour 
required by the Form, professional staff time would comprise 0.625 
hours, and clerical staff time would comprise 0.375 hours. The 
Commission staff estimates the hourly wage for compliance professionals 
to be $294 per hour,\343\ and the hourly wage for general clerks to be 
$52 per hour.\344\ Accordingly, we estimate the average cost per 
response imposed on exempt reporting advisers by proposed rule 204-4 
and amended Form ADV-H would be $203,\345\ for a total annual cost of 
$406.\346\ With regard to Form ADV-NR, we estimate that exempt 
reporting advisers would file Form ADV-NR at the same annual rate (0.17 
percent) as advisers registered with us.\347\ Thus, we estimate that 
the amendments would increase the total annual hour burden associated 
with Form ADV-NR by 1 hour.\348\ We further estimate that for each hour 
required by the Form, compliance clerk time comprises 0.75 hours and 
general clerk time comprises 0.25 hours.\349\ Therefore, we estimate 
that the proposed amendments to Form ADV-NR would impose approximately 
$57 in total additional annual costs for advisers.\350\
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    \341\ See infra section V.F. of this Release.
    \342\ 2 responses x 1 hour = 2 hours.
    \343\ Data from the SIFMA Management and Earnings Report, 
modified to account for an 1,800-hour work-year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits and 
overhead, suggest that the cost for a Compliance Manager is 
approximately $294 per hour.
    \344\ Data from the SIFMA Office Salaries Report, modified to 
account for an 1,800-hour work-year and multiplied by 2.93 to 
account for bonuses, firm size, employee benefits and overhead, 
suggest that the cost for a general clerk is approximately $52 per 
hour.
    \345\ (0.625 hours x $294) + (0.375 hours x $52) = approximately 
$203.
    \346\ $203 per response x 2 responses annually = $406.
    \347\ See infra note 450.
    \348\ 0.17% (rate of filing) x (9,150 estimated registered 
investment advisers + 2,000 estimated exempt reporting advisers) x 1 
hour per ADV-NR filing = 19.
    \349\ Data from the SIFMA Office Salaries Report, modified to 
account for an 1,800-hour work-year and multiplied by 2.93 to 
account for bonuses, firm size, employee benefits and overhead, 
suggest that the cost for a general clerk is approximately $52 per 
hour and cost for a compliance clerk is approximately $59 per hour.
    \350\ 1 hour x ((0.75 hours x $59) + (0.25 hours x $52)) = 
approximately $57.
---------------------------------------------------------------------------

    If adopted, our proposed reporting requirement would also result in 
other costs for exempt reporting advisers. For example, some of the 
information these advisers would report (and that we would make 
publicly available), such as the identification of owners of the 
adviser or disciplinary information, could impose costs on the advisers 
and, in some cases their supervised persons or owners, including the 
potential loss of business to competitors, as this information, today, 
is not typically made available to others. In addition, there may be 
other costs associated with the reporting requirements, including the 
possibility that the proposed disclosure requirements could influence 
business or other decisions by exempt reporting advisers, such as 
whether to form additional private funds or discourage entry into 
management of funds all together.
3. Form ADV Amendments
    The costs of completing these new and amended items would vary 
among advisers. We believe that the information required by these 
items, however, should be readily available to any adviser. The check-
the-box style of most of these items, as well as some of the features 
of the IARD system (such as drop-down boxes for common responses) 
should also keep costs down by reducing the average completion time.
    One-time monetary costs we expect to be borne by current 
registrants to complete the proposed amendments to

[[Page 77082]]

Form ADV in connection with the transition filing are discussed above, 
but that discussion does not take into account costs we expect to be 
borne by newly registering advisers.\351\ For purposes of the PRA, we 
estimate that 650 advisers will register with us within the next year 
as a result of normal annual growth of our population of registered 
advisers \352\ and would spend, on average, 4.5 hours to respond to the 
new and amended questions we are proposing today, other than the 
private fund reporting requirements.\353\ We expect the aggregate cost 
associated with this process would be $737,100.\354\ In our PRA 
analysis, we also project that 750 new advisers would register with us 
as a result of the Dodd-Frank Act's elimination of the private adviser 
exemption, and this group of advisers would be required to complete and 
submit to us the entire form.\355\ We expect these newly registering 
advisers would spend, in the aggregate, 30,555 hours to complete the 
form (Part 1 except for the private fund reporting requirements, and 
Part 2) as well as to periodically amend the form, prepare brochure 
supplements and deliver codes of ethics to clients,\356\ for a total 
cost of $7,699,860.\357\ In addition, of these 1,400 newly registering 
advisers,\358\ we estimate that 950 advise one or more private funds 
and would have to complete the private fund reporting requirements we 
are proposing today.\359\ We expect this would take 4,750 hours,\360\ 
in the aggregate, for a total cost of $1,197,000.\361\ The total 
estimated costs associated with our amendments for newly registering 
advisers, therefore, are $9,633,960.\362\
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    \351\ See supra section IV.B.1. of this release.
    \352\ See infra note 376 and accompanying text.
    \353\ See infra section V.B.1.a. of this Release. We are 
calculating costs only of the increased burden because we have 
previously assessed the costs of the other items of Form ADV for 
registered advisers and for new advisers attributed to annual 
growth. The amendments we are proposing today would neither increase 
the burden associated with the other items on Form ADV, nor would 
they increase the external costs associated with certain Part 2 
requirements.
    \354\ We expect that the performance of this function would most 
likely be equally allocated between a Senior Compliance Examiner and 
a Compliance Manager. Data from the SIFMA Management and Earnings 
Report, modified to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead, suggest that costs for these positions are 
$210 and $294 per hour, respectively. 650 advisers x 4.5 hours = 
2,925 hours. [1,462.5 hours x $210 = $307,125] + [1,462.5 hours x 
$294 = $429,975] = $737,100.
    \355\ See infra note 396.
    \356\ 750 advisers x 40.74 hours per adviser to complete entire 
form (except private fund reporting requirements) = 30,555 hours. 
See infra note 388.
    \357\ [15,277.5 hours x $210 = $3,208,275] + [15,277.5 hours x 
$294 = $4,491,585] = $7,699,860. As noted above, we expect that the 
performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager. See 
supra note 354.
    \358\ 650 advisers expected to register with us within the next 
year + 750 advisers expected to register with us as a result of the 
elimination of the private adviser exemption = 1,400.
    \359\ See infra text preceding note 405.
    \360\ See infra notes 407 and 408.
    \361\ [2,375 hours x $210 = $498,750] + [2,375 hours x $294 = 
$698,250] = $1,197,000. As noted above, we expect that the 
performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager. See 
supra note 354.
    \362\ $737,100 + $7,699,860 + $1,197,000 = $9,633,960.
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    Additionally, we estimate that a quarter (or 188) of the 750 new 
registered advisers no longer able to rely on the private adviser 
exemption would use outside legal services, and half (or 375) would use 
outside compliance consulting services, to assist them in preparing 
their Part 2 brochures, for a total cost of $827,200, and $1,875,000, 
respectively, resulting in a total non-labor cost among all newly 
registering advisers of $2,702,200.\363\
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    \363\ The currently approved burden associated with Form ADV 
already accounts for similar estimated costs to be incurred by 
current registrants, and it already accounts for a percentage of 
annual growth in our population of registered advisers. See also 
infra text following note 421.
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    If adopted, our proposed amendments to Form ADV would also result 
in other costs. For instance, our proposed changes to the instructions 
on calculating regulatory assets under management, and proposed rule 
203A-3(d), would result in some advisers reporting greater assets under 
management than they do today, and would preclude some advisers from 
excluding certain assets from their calculation in order to remain 
below the new asset threshold for registration with the Commission. The 
impact of these changes may result in a limited number of State-
registered advisers that report assets under management of less than 
$30 million under the current Form ADV reporting requirements to 
register with us if under the proposed revised instructions they would 
report $100 million or more in assets under management.\364\
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    \364\ A registered investment adviser that reports more than $30 
million in assets under management under the current instructions to 
Item 5 of Form ADV would be required to register with the 
Commission. These advisers would not have additional costs 
associated with registration as they would already be incurring 
those costs.
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    We have also proposed to require advisers to private funds to use 
fair value of private fund assets for determining regulatory assets 
under management.\365\ We understand that many, but not all, private 
funds value assets based on their fair value in accordance with U.S. 
generally accepted accounting principles (GAAP) or other international 
accounting standards.\366\ The advisers to private funds that do not 
use fair value methodologies would likely incur costs to comply with 
this proposed requirement. These costs would vary based on factors such 
as the nature of the asset, the number of positions that do not have a 
market value, and whether the adviser has the ability to value such 
assets internally or would rely on a third party for valuation 
services. We do not believe, however, that these costs would be 
significant. We understand that private fund advisers, including those 
that may not use fair value methodologies for reporting purposes, 
perform administrative services, including valuing assets, internally 
as a matter of business practice.\367\ Commission staff estimates that 
such an adviser would incur $1,224 in internal costs to conform its 
internal valuations to a fair value standard.\368\ In the event a fund 
does not have an internal capability for valuing specific illiquid 
assets, we expect that it could obtain pricing or valuation services 
from an outside administrator or other service provider. Staff 
estimates that the cost of such a service would range from $250 to 
$75,000 annually.\369\ We request

[[Page 77083]]

comment on these estimates. Do advisers that do not use fair value 
methodologies for reporting purposes have the ability to fair value 
private fund assets internally? If not, what would be the costs to 
retain a third party valuation service? Are there certain types of 
advisers (e.g., advisers to real estate private funds) that would 
experience special difficulties in performing fair value analyses? If 
so, why?
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    \365\ See proposed Form ADV: Instructions for Part 1A, inst. 
5.b.(4).
    \366\ See supra note 56.
    \367\ For example, a hedge fund adviser may value fund assets 
for purposes of allowing new investments in the fund or redemptions 
by existing investors, which may be permitted on a regular basis 
after an initial lock-up period. An adviser to private equity funds 
may obtain valuation of portfolio companies in which the fund 
invests in connection with financing obtained by those companies. 
Advisers to private funds also may value portfolio companies each 
time the fund makes (or considers making) a follow-on investment in 
the company. Private fund advisers could use these valuations as a 
basis for complying with the fair valuation requirement we propose 
with respect to private fund assets.
    \368\ This estimate is based upon the following calculation: 8 
hours x $153/hour = $1,224. The hourly wage is based on data for a 
fund senior accountant from the SIFMA Management and Earnings 
Report, modified by Commission staff to account for an 1800-hour 
work-year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
    \369\ These estimates are based on conversations with providers 
of valuation services. We understand that the cost of valuation for 
illiquid fixed income securities generally ranges from $1.00 and 
$5.00 per security, depending on the difficulty of valuation, and is 
performed for clients on weekly or monthly basis. Appraisals of 
privately placed equity securities may cost from $3,000 to $5,000 
(with updates to such values at much lower prices). As proposed, an 
adviser only has to calculate regulatory assets under management for 
purposes of reporting on Form ADV annually. For purposes of this 
cost benefit analysis, we are estimating the range of costs for (i) 
a private fund that holds 50 illiquid fixed income securities at a 
cost of $5.00 to price and (ii) a private fund that holds privately 
placed securities of 15 issuers that each cost $5,000 to value. We 
believe that costs for funds that hold both fixed-income and 
privately placed equity securities would fall within the maximum of 
our estimated range. We note that funds that have significant 
positions in illiquid securities are likely to have the in-house 
capacity to value those securities or already subscribe to a third 
party service to value them. We note that many private funds are 
likely to have many fewer fixed income illiquid securities in their 
portfolios, some or all of which may cost less than $5.00 to value. 
Finally, we note that obtaining valuation services for a small 
number of fixed income positions on an annual basis may result in a 
higher cost for each security or require a subscription to the 
valuation service for those that do not already purchase such 
services. The staff's estimate is based on the following 
calculations: (50 x $5.00 = $250; 15 x $5,000 = $75,000).
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    Requiring advisers to report whether they have $1 billion or more 
in assets also may have costs for advisers that are not publicly traded 
or otherwise do not publicly disclose the amount of their own assets as 
it would be easy to identify the very largest advisers in terms of 
assets. These proposals may provide limited efficiency improvements as 
a result of the uniformity in calculating and reporting managed assets, 
and there may also be, as discussed below, competitive effects of these 
changes and other proposed amendments to Form ADV. We believe these 
proposals would have little, if any, effect on capital formation.
    In addition, some of the proposed amendments also could impose 
costs including potential competitive effects with other advisers as 
certain information we are proposing to be disclosed may not typically 
be provided to others. This would be the case, for example, for 
advisers that currently disclose only to certain clients and 
prospective clients, or only upon request, such information as census 
data about the private funds and the amount of private fund assets that 
the adviser manages, information about the State registrations of the 
adviser's employees, the types of investments about which the adviser 
provides advice, and the service providers to each private fund that 
the adviser manages. This could create benefits as well as costs. While 
exempt reporting advisers may be subject to a lower regulatory burden, 
investors may have greater confidence in advisers that provide more 
fulsome disclosure and are subject to our oversight.
4. Amendments to Pay to Play Rule
    Our proposal to permit an adviser to pay any municipal advisor that 
is registered with the Commission under section 15B of the Exchange Act 
\370\ and subject to pay to play rules adopted by the MSRB to solicit 
government entities on its behalf may result in limited additional 
costs to comply with rule 206(4)-5.\371\ Specifically, advisers that 
have created compliance programs in anticipation of rule 206(4)-5's 
compliance date may have to make adjustments to those programs to 
account for the fact that our proposed amendment would permit them to 
hire placement agents that are registered municipal advisors.\372\ But, 
as explained above, our proposed amendments would allow them greater 
latitude in hiring placement agents.
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    \370\ 15 U.S.C. 78o-4.
    \371\ See proposed rule 206(4)-5(a)(2), (f)(9). As discussed in 
section II.D.1. of this Release, we believe that our proposed 
amendment to rule 206(4)-5 to make it apply to exempt reporting 
advisers and foreign private advisers and our proposed technical 
amendment to the definition of ``covered associate'' would not 
generate new costs.
    \372\ See section III.B of the Pay to Play Release (requiring 
advisers to comply with the rule's prohibition on making payments to 
third parties to solicit government entities for investment advisory 
services on September 13, 2011).
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C. Request for Comment

     The Commission requests comments on all aspects of the 
cost-benefit analysis, including the accuracy of the potential costs 
and benefits identified and assessed in this release, as well as any 
other costs or benefits that may result from the proposals.
     We encourage commenters to identify, discuss, analyze, and 
supply relevant data regarding these or additional costs and benefits.

V. Paperwork Reduction Act Analysis

    Certain provisions of our proposal contain ``collection of 
information'' requirements within the meaning of the PRA, and we are 
submitting the proposed collections of information to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507 and 5 CFR 1320.11. The titles for the collections of information 
we are proposing or proposing to amend are: (i) ``Form ADV''; (ii) 
``Rule 203-2 and Form ADV-W under the Investment Advisers Act of 
1940;'' (iii) ``Rule 204-2 under the Investment Advisers Act of 1940;'' 
(iv) ``Exemption for Certain Multi-State Investment Advisers (Rule 
203A-2(e));'' (v) ``Rule 203A-5;'' (vi) ``Form ADV-H;'' \373\ and (vii) 
``Rule 0-2 and Form ADV-NR under the Investment Advisers Act of 1940.'' 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid OMB control number.
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    \373\ The current title for the collection of information on 
Form ADV-H is ``Rule 203-3 and Form ADV-H under the Investment 
Advisers Act of 1940'' because currently only registered advisers 
file Form ADV-H under rule 203-3. However, because we are proposing 
to amend Form ADV-H to allow exempt reporting advisers to apply for 
a temporary hardship exemption on Form ADV-H under rule 204-4, we 
are proposing to re-title the collection of information simply 
``Form ADV-H.''
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    While our proposed rules and rule and form amendments would impose 
new collection of information burdens for certain advisers and change 
existing burdens on advisers under our rules, the Dodd-Frank Act also 
will impact our total burden estimates for certain of our rules, 
principally by changing the numbers of advisers subject to these rules. 
Specifically, we estimate the Dodd-Frank Act's amendments to section 
203A to reallocate regulatory responsibility over numerous registered 
advisers to the states will result in about 4,100 registered advisers 
switching from Commission to State registration.\374\ At the same time, 
we estimate that the Dodd-Frank Act's elimination of the private 
adviser exemption in section 203(b)(3) of the Advisers Act will result 
in approximately 750 additional private fund advisers registering with 
the Commission.\375\ Based on IARD data as of September 1, 2010, we 
estimate that approximately 11,850 advisers are currently registered 
with the Commission. We further estimate that approximately 650 
additional advisers register with the Commission each year.\376\ 
Therefore, for purposes of

[[Page 77084]]

calculating the burdens of our proposed rules and amendments under the 
PRA, we estimate that the number of advisers registering with the 
Commission after the Dodd-Frank Act's amendments to sections 203A and 
203(b)(3) become effective will be approximately 9,150.\377\
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    \374\ See supra section II.A. of this Release (discussing the 
Dodd-Frank Act's amendments to section 203A). Based on IARD data as 
of September 1, 2010, we estimate that approximately 4,050 will 
switch registration because they have assets under management of 
less than $100 million. We also estimate that approximately 50 
additional advisers will switch to State registration because they 
are relying on the registration of an affiliated adviser with the 
same principal office and place of business that will be switching 
to State registration.
    \375\ See Exemptions Release at section I. (discussing 
elimination of the private adviser exemption in section 203(b)(3)).
    \376\ Over the past several years, approximately 1,000 new 
advisers have registered with us annually. Due to the Dodd-Frank 
Act's reallocation of regulatory responsibility for advisers with 
assets under management of less than $100 million, we estimate that 
about 650 new advisers will register with us annually based on 
reducing the current growth rates by the gross reduction in the 
number of advisers due to the Dodd-Frank Act. (4,100 (SEC advisers 
withdrawing)/11,850 (total SEC advisers)) x 1000 (number of new 
advisers each year) = 0.35 x 1000 = 350 (number of additional new 
advisers registering with the states, not the SEC). 1000-350 = 650.
    \377\ 11,850 (total SEC advisers)-4,100 (SEC advisers 
withdrawing) + 750 (private advisers registering with the SEC) + 650 
(new SEC advisers each year) = 9,150.
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A. Rule 203A-2(e)

    Rule 203A-2(e) exempts certain multi-State investment advisers from 
section 203A's prohibition on registration with the Commission. We are 
proposing to renumber and amend rule 203A-2(e) to permit investment 
advisers required to register as an investment adviser with 15 or more 
states, instead of 30 or more states under the current rule, to 
register with the Commission.\378\ An investment adviser relying on 
this exemption would be required to maintain 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.\379\ We have submitted this collection of information to OMB 
for review.
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    \378\ See proposed rule 203A-2(d). Under rule 203A-2(e) an 
adviser, once registered with the Commission, is not required to 
withdraw its registration as long as it would be required to 
register with at least 25 states.
    \379\ See proposed rule 203A-2(d)(3). An investment adviser 
relying on this exemption also would continue to be required to: (i) 
Include a representation on Schedule D of Form ADV that the 
investment adviser has reviewed applicable law and concluded that it 
must register as an investment adviser with 15 or more states; and 
(ii) undertake on Schedule D to withdraw from registration with the 
Commission if the adviser indicates on an annual updating amendment 
to Form ADV that the investment adviser would be required by the 
laws of fewer than 15 states to register as an investment adviser 
with the State. See proposed rule 203A-2(d)(2). The proposed 
increase in the PRA burden for Form ADV reflects these requirements. 
See infra section V.B. of this Release.
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    Respondents to this collection of information would be investment 
advisers who are required to register in 15 or more states absent the 
exemption from the prohibition on Commission registration. This 
collection of information is mandatory for those advisers relying on 
the exemption provided by rule 203A-2(e) (proposed rule 203A-2(d)). The 
records kept by investment advisers in compliance with the rule would 
be necessary for the Commission staff to use in its examination and 
oversight program, and the information in these records generally would 
be kept confidential.\380\
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    \380\ See section 210(b) of the Advisers Act.
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    As of September 1, 2010, there were approximately 40 advisers 
relying on the exemption under rule 203A-2(e).\381\ Although it is 
difficult to estimate the number of advisers that would rely on the 
exemption if amended as proposed because such reliance is entirely 
voluntary, we estimate that approximately 150 advisers would rely on 
the exemption.\382\ These advisers would incur an average one-time 
initial burden of approximately 8 hours, and an average ongoing burden 
of approximately 8 hours per year, to keep records sufficient to 
demonstrate that they meet the 15-State threshold. These estimates are 
based on an estimate that each year an investment adviser would spend 
approximately 0.5 hours creating a record of its determination whether 
it must register as an investment adviser with each of the 15 states 
required to rely on the exemption, and approximately 0.5 hours to 
maintain these records.\383\
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    \381\ Based on IARD data as of September 1, 2010, of the 
approximately 11,850 SEC-registered advisers, 40 checked Item 
2.A.(9) of Part 1A of Form ADV to indicate their basis for SEC 
registration under the multi-State advisers rule.
    \382\ Based on IARD data as of September 1, 2010, 94 of the 
advisers that have less than $100 million of assets under management 
currently file notice filings with 15 or more states. This number 
may overestimate the number of advisers required to be registered 
with 15 or more states, and therefore eligible for the proposed 
multi-State exemption, because notice filing requirements may differ 
from registration requirements. In addition, we are unable to 
determine the number of advisers currently registered with the 
states that are registered with 15 or more states that may rely on 
the proposed exemption and register with us. We expect this number 
to be small based on the scope of business of an adviser that has 
less than $25 million in assets under management and because section 
222(d) of the Advisers Act provides a de minimis exemption for 
limited State operations without registration. For purposes of this 
analysis, we estimate the number is 15. As a result, we estimate 
that approximately 150 advisers would rely on the proposed exemption 
(40 currently relying on it + estimated 95 eligible based on IARD 
data + 15 advisers required to be registered in 15 or more states 
that are not registered with us today).
    \383\ 0.5 hours x 15 states = 7.5 hours + 0.5 hours = 8 hours.
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B. Form ADV

    Form ADV (OMB Control No. 3235-0049) is the two-part investment 
adviser registration form. Part 1 of Form ADV contains information 
designed for use by Commission staff, and Part 2 is the client 
brochure. We use the information to determine eligibility for 
registration with us and to manage our regulatory and examination 
programs. Clients use certain of the information to determine whether 
to hire or retain an adviser. Rule 203-1 requires every person applying 
for investment adviser registration with the Commission to file Form 
ADV. Rule 204-1 requires each registered adviser to file amendments to 
Form ADV at least annually, and requires advisers to submit electronic 
filings through the IARD. These collections of information are found at 
17 CFR 275.203-1, 275.204-1, and 279.1 and are mandatory, although the 
paperwork burdens associated with rules 203-1 and 204-1 are included in 
the approved annual burden associated with Form ADV and thus do not 
entail separate collections of information. Responses are not kept 
confidential. The respondents to this information collection are 
investment advisers registered or applying for registration with us, 
and as discussed below, would include exempt reporting advisers.
    The current total annual burden for all advisers completing, 
amending, and filing Form ADV (Part 1 and Part 2) with the Commission, 
approved recently in connection with amendments we adopted to Part 
2,\384\ is 268,457 hours.\385\ This burden is based on an average total 
collection of information burden of 36.24 hours per adviser for the 
first year that an adviser completes Form ADV. The currently approved 
burden also includes a total annual cost burden of $22,775,400, which 
includes costs associated with outside legal assistance and outside 
consulting services that vary based on the size of the adviser.\386\
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    \384\ See section VI of Part 2 Release, supra note 46 at nn. 341 
and 342 and accompanying text. This estimate includes the annual 
burden associated with advisers' obligations to deliver to clients 
copies of their codes of ethics upon request.
    \385\ The approved burden is comprised of 11,658 advisers 
preparing an initial filing of Form ADV at 36.24 hours, which is 
amortized over a three-year period (the estimated period that 
advisers are expected to use Form ADV) for an annual burden of 
152,909 hours. The burden also includes two amendments to Form ADV 
annually, one annual amendment and one other than annual amendment, 
for an annual burden of 87,435 hours; an annual burden of 11,658 
hours to account for new brochure supplements that advisers are 
required to prepare; and 16,455 hours attributable to the obligation 
to deliver to clients codes of ethics upon request.
    \386\ For outside legal services, ($4,400 x 535 medium advisers) 
+ ($3,200 x 2,370 small advisers)) + ($10,400 x 36 large advisers) = 
$ 10,312,400. For compliance consulting services, ($3,000 x 2,371 
small advisers) + ($5,000 x 1,070 medium advisers) = $12,463,000. 
$10,312,400+$12,463,000 = $22,775,400. See Part 2 Release, supra 
note 46, for a discussion of these estimates.
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    As discussed above, in order to give effect to provisions in Title 
IV of the Dodd-Frank Act, we are proposing amendments to Part 1A of 
Form ADV to reflect the new statutory threshold for registration with 
the Commission and to restructure it to accommodate filings by exempt 
reporting advisers. Additionally, to enhance our ability to oversee 
investment advisers, we are proposing amendments to Part 1A of Form ADV 
to require advisers to provide us additional

[[Page 77085]]

information regarding: (i) Private funds they advise; (ii) their 
advisory business and business practices that may present significant 
conflicts of interest; and (iii) advisers' non-advisory activities and 
their financial industry affiliations.\387\ We are also proposing 
certain additional changes intended to improve our ability to assess 
compliance risks and to enable us to identify the advisers that are 
covered by section 956 of the Dodd-Frank Act addressing certain 
incentive-based compensation arrangements.
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    \387\ See supra section II.C of this Release. In addition, we 
are proposing several clarifying or minor amendments based on 
frequently asked questions we receive from advisers as well as in 
our experience administering the form.
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    We expect that an increase in the information requested in Form ADV 
Part 1A as a result of these amendments would increase the currently 
approved collection of information associated with Form ADV. In 
addition, the annual burden also would increase as a result of an 
increase in the number of respondents attributable to new investment 
adviser registrations and the proposed use of the form for reporting by 
exempt reporting advisers. We discuss below, in three sub-sections, the 
estimated revised collection of information requirements for Form ADV: 
First, we address the change to the collection as a result of our 
proposed amendments to Part 1A of Form ADV excluding those related to 
private fund reporting for registered advisers; second, we discuss the 
proposed amendments related to private fund reporting for registered 
advisers; and third, we address the proposed amendments to Part 1A of 
Form ADV for its use as a reporting form by exempt reporting advisers.
1. Changes in Average Burden Estimates and New Burden Estimates
a. Estimated Change in Burden Related to Proposed Part 1A Amendments 
(Not Including Private Fund Reporting)
    We are proposing amendments to many Items in Part 1A, some that are 
merely technical changes or very simple in nature, and others that 
would require more of an adviser's time to respond. The paperwork 
burdens of filing an amended Form ADV, Part 1A would, however, vary 
among advisers, depending on factors such as the size of the adviser, 
the complexity of its operations, and the number or extent of its 
affiliations. Although burdens would vary among advisers, we believe 
that the proposed revisions to Part 1A would impose few additional 
burdens on advisers in collecting information as advisers should have 
ready access to all the information necessary to respond to the 
proposed items in their normal course of operations. We also are 
working with FINRA, as our IARD contractor, to implement measures 
intended to minimize the burden for advisers filing proposed amended 
Form ADV on IARD (e.g., pre-populating fields and drop-down boxes for 
common responses). We anticipate, moreover, that the responses to many 
of the questions are unlikely to change from year to year, minimizing 
the ongoing reporting burden associated with these questions.
    In large part, the amendments we propose to Form ADV, Part 1A, 
including those to account for the statutory changes in the threshold 
for SEC registration, primarily refine or expand existing questions or 
request information advisers already have for compliance purposes. For 
instance, some of the proposed changes to Item 5 would require advisers 
to provide numerical responses to certain questions about their 
employees. An adviser would likely already have this information in 
order to respond to those questions today by checking boxes that 
correspond to a range of numbers. Likewise, the proposed amendments to 
Item 8 require advisers to expand on information they provide in 
response to existing Item 8, such as whether the broker-dealers that 
advisers recommend or have discretion to select for client transactions 
are related persons of the adviser. Other questions expand upon 
existing requirements to elicit information advisers would already have 
available for compliance purposes, such as whether the soft dollar 
benefits they currently report receiving under Item 8 qualify for the 
safe harbor under section 28(e) of the Exchange Act for eligible 
research or brokerage services. As amended, Item 2 would require an 
adviser to report to us its basis for registration or reporting, as 
already determined for compliance purposes. Other proposed amendments 
to Items 5, 6 and 7 expand existing lists of information advisers 
already provide to us on Form ADV, such as types of advisory activities 
the advisers perform and other types of business engaged in by advisers 
and their related persons. We believe several of the new questions we 
propose would merely require advisers to provide readily available or 
easily accessible information, such as Chief Compliance Officer contact 
information and whether the adviser has $1 billion or more in assets in 
Item 1, form of organization in Item 3, or types of investments about 
which they provided advice during the fiscal year for which they are 
reporting in Item 5.
    We anticipate other proposed questions may take longer for advisers 
to complete, even with readily available information, such as 
calculating regulatory assets under management according to our revised 
instruction. Other proposed new items may present greater burdens for 
some advisers, but not others, depending on the nature and complexity 
of their businesses, such as the proposed requirement to provide a list 
of the SEC file numbers of investment companies they advise, or 
providing expanded information about related person financial industry 
affiliates.
    We estimate these proposed amendments to Part 1A of Form ADV would 
take each adviser approximately 4.5 hours, on average, to complete. We 
have based this estimate, in part, by comparing the relative complexity 
and availability of the information elicited by the proposed items and 
the nature of the response required (i.e., checking a box as opposed to 
providing a narrative response) to the current form and its approved 
burden. As a result, we estimate the average total collection of 
information burden would increase to 40.74 hours per adviser for the 
first year that an adviser completes Form ADV (Part 1 and Part 2).\388\
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    \388\ Current approved per adviser total (36.24) + estimated per 
adviser increase (4.5) = 40.74.
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b. New Estimated Burden Related to Proposed Private Fund Reporting 
Requirements
    The amendments that we propose to Item 7.B. and Section 7.B. of 
Schedule D to collect new data on private funds managed by advisers 
would provide us with basic census data on private funds and would 
permit us to conduct a more robust risk assessment of private fund 
advisers for purposes of targeting our examinations. The information 
would include fund data such as basic organizational, operational, and 
investment characteristics of the fund; the amount of assets held by 
the fund; and the fund's service providers or gatekeepers. We believe 
much of the information we are proposing to be reported to us should be 
readily available to private fund advisers because, among other things, 
it is information that private fund investors commonly seek in their 
due diligence questionnaires or it is information that would often be 
included in a private placement memorandum offering fund shares.
    Although we understand that the information we are proposing to 
require

[[Page 77086]]

for private funds typically would be readily available to advisers to 
these funds, we expect that these amendments could require advisers, 
particularly those with many private funds, to be subject to a 
significantly increased paperwork burden. We are proposing certain 
measures to minimize the increase in burden associated with this 
proposed reporting requirement. We propose to permit a sub-adviser to 
exclude private funds for which an adviser is reporting on another 
Schedule D, and would permit an adviser sponsoring a master-feeder 
arrangement to submit a single Schedule D for the master fund and all 
of the feeder funds that would otherwise be submitting substantially 
identical data.\389\ We also propose to permit an adviser with a 
principal office and place of business outside the United States to 
omit a Schedule D for a private fund that is not organized in the 
United States and that does not have any investors who are ``United 
States persons.'' \390\ And as discussed above, we are working with 
FINRA to implement measures intended to minimize the burden for 
advisers filing proposed amended Form ADV, such as the ability to 
automatically populate private fund service provider information 
provided for other funds advised by the same adviser. Finally, we note 
that as proposed, Item 7.B. would no longer require advisers to report 
the funds that their related persons advise on Schedule D, which we 
expect would decrease the burden on private fund advisers. Taking into 
account, as discussed above, the scope of the information we propose to 
request and our understanding that much of the information is readily 
available, as well as the technology upgrades we expect to be 
incorporated into the IARD, we estimate advisers to private funds would 
each spend, on average, one hour per private fund to complete these 
questions.
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    \389\ See supra notes 153-154 and accompanying text.
    \390\ See supra note 155 and accompanying text.
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c. New Estimated Burden Related to Proposed Exempt Reporting Adviser 
Reporting Requirements
    Exempt reporting advisers would be required to complete a limited 
number of items in Part 1A of Form ADV (consisting of Items 1, 2.C., 3, 
6, 7, 10, 11 and corresponding schedules), and are not required to 
complete Part 2. We believe the information required by these items 
should be readily available to any adviser, particularly the 
identifying data and control person information required by Items 1, 3, 
and 10. The check-the-box style of most of these items, as well as some 
of the features of the IARD system (such as drop-down boxes for common 
responses) should also keep the average completion time for these 
advisers to a minimum. Moreover, in our staff's experience, the types 
of advisers that would meet the criteria for exempt reporting advisers 
are unlikely to have significantly large numbers of affiliations, nor 
do we expect them to have to report disciplinary events at a greater 
rate than currently registered advisers.\391\ We estimate that these 
items, other than Item 7.B., would take each exempt reporting adviser 
approximately two hours to complete. We anticipate that, like 
registered advisers, exempt reporting advisers would each spend an 
additional hour per private fund to complete Item 7.B. and Schedule 
7.B.
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    \391\ As of September 1, 2010, approximately 13% of SEC-
registered investment advisers reported a disclosure in Item 11 of 
Form ADV.
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2. Annual Burden Estimates
a. Estimated Annual Burden Applicable to All Registered Investment 
Advisers
i. Estimated Initial Hour Burden (Not Including Burden Applicable to 
Private Funds)
    As a result of the transition filing discussed above,\392\ we 
expect the total number of registered adviser respondents to this 
collection of information would be 9,150.\393\ Approximately 11,850 
investment advisers are currently registered with the Commission.\394\ 
We expect 4,100 will withdraw from registration.\395\ We expect about 
750 advisers who currently rely on the private adviser exemption to 
apply for registration with us, and we estimate that approximately 650 
new advisers will register with us each year beginning in 2011.\396\
---------------------------------------------------------------------------

    \392\ See supra section IV.B.1. of this Release.
    \393\ See supra note 377.
    \394\ Based on IARD data as of September 1, 2010.
    \395\ See supra section IV.B.1. of this Release.
    \396\ (4,100 (SEC advisers expected to withdraw from 
registration)/11,850 (total SEC advisers)) x 1000 (average number of 
new advisers registered with the Commission each year) = 0.35 x 1000 
= 350 (number of additional new advisers registering with the 
states, not the SEC). 1000 - 350 = 650. See also infra note 422.
---------------------------------------------------------------------------

    The estimated total annual burden applicable to these advisers, 
including new registrants, but excluding private fund reporting 
requirements, is 372,771 hours.\397\ We believe that most of the 
paperwork burden would be incurred in advisers' initial submission of 
the new and amended items of Form ADV Part 1A, and that over time this 
burden would decrease substantially because the paperwork burden will 
be limited to updating information. Amortizing this total burden 
imposed by Form ADV over a three-year period to reflect the anticipated 
period of time that advisers would use the revised Form would result in 
an average burden of an estimated 124,257 hours per year,\398\ or 13.58 
hours per year for each new applicant \399\ and for each adviser 
currently registered with the Commission that would re-file through the 
IARD.
---------------------------------------------------------------------------

    \397\ 40.74 per-adviser burden x 9,150 = 372,771 hours.
    \398\ 372,771/3 = 124,257.
    \399\ 124,257/9,150 = 13.58.
---------------------------------------------------------------------------

ii. Estimated Initial Hour Burden Applicable to All Registered Advisers 
to Private Funds
    The amount of time each of the registered advisers to private funds 
would incur to complete Item 7.B. and Section 7.B. of Schedule D would 
vary depending on the number of funds the advisers manage. Of the 9,150 
advisers currently registered with us, approximately 3,500 indicate 
that they are advisers to private funds.\400\ Due to the assets under 
management these advisers report on Form ADV,\401\ and considering that 
today these advisers either do not qualify for the private adviser 
exemption or choose not to rely on it, we expect these advisers to 
remain registered with us. Based on Form ADV filings by these advisers, 
we estimate that 50% of these advisers, or 1,800, currently advise an 
average of 3 private funds each; 45%, or 1,550 advisers, currently 
advise an average of 10 private funds each, and the remaining 5%, or 
150 advisers, manage an average of 83 private funds each.\402\ As we 
discussed above, we estimate that private fund advisers would spend, on 
average, one hour per private fund to complete Item 7.B. and Section 
7.B. of Schedule D. As a result, the private fund reporting 
requirements that would be applicable to registered investment advisers 
would add 33,350 hours to the overall annual

[[Page 77087]]

burden applicable to registered advisers.\403\
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    \400\ 3,500 advisers indicate by reporting a fund in Schedule D, 
Section 7.B. that they, or a related person, advise private funds or 
investment related funds. Based on IARD data as of September 1, 
2010.
    \401\ Approximately 71% of the advisers to private funds or 
investment related funds report assets under management over $100 
million.
    \402\ Based on IARD data as of September 1, 2010. Form ADV 
currently asks for an adviser to report about investment-related 
partnerships and limited liability companies advised by the adviser 
and its related persons. As a result, the data we have obtained from 
IARD over-estimates the average number of funds as a result of 
reporting of the same fund multiple times by affiliated registered 
advisers.
    \403\ (1,800 advisers x 3 hours (3 funds x 1 hour per fund)) + 
(1,550 advisers x 10 hours (10 funds x 1 hour per fund)) + (150 
advisers x 83 hours x 1 hour per fund)) = 5,400 + 15,500 + 12,450 = 
33,350.
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    In addition to the registered advisers that advise private funds 
today, we estimate that about 200 of the 650 new advisers that will 
register with us annually will manage private funds,\404\ and an 
estimated 750 new private fund advisers will register with us that 
previously relied on the private adviser exemption. We believe that 
these 950 advisers that would be required to register will generally be 
similar to the 50% of our current registrants that advise, on average, 
3 private funds, but believe that some portion of them may advise a 
greater number of funds, as the estimated 750 currently exempt private 
advisers rely on the private adviser exemption, which permits up to 14 
private fund clients.\405\ In addition, with respect to the 650 new 
registrants we estimate annually, the elimination of the private 
adviser exemption will require them, unless they are eligible for 
another exemption, to register even if they have only a single private 
fund client. To account for the addition of these two groups of 
advisers to the registrant pool, but taking into account the 
demographics of our current registrant pool (with 50% having on average 
3 private fund clients), we estimate that each registered private fund 
adviser, on average, will advise five private funds.\406\ Accordingly, 
private fund reporting requirements attributable to the estimated 750 
new registrants because of the elimination of the private adviser 
exemption would add 3,750 hours to the overall annual burden applicable 
to registered advisers.\407\ We also estimate that private fund 
reporting requirements applicable to new registered investment advisers 
would add 1,000 hours to the overall annual burden applicable to 
registered advisers.\408\
---------------------------------------------------------------------------

    \404\ About 30% of current registrants report that they advise 
one or more private funds. (3,500 advisers to private funds/11,850 
registered advisers). Applying the same proportion to new 
registrants results in approximately 200 additional advisers to 
private funds each year. (650 x .30 = 195).
    \405\ Section 203(b)(3).
    \406\ Approximately 65% of advisers that reported a fund in 
Schedule D, Section 7.B. listed five or fewer funds and 72% of 
advisers that registered since September 1, 2009 and reported a fund 
reported five or fewer private funds. The average number of private 
funds reported is about five funds for the new registrants in the 
past year.
    \407\ 750 newly registering advisers x 5 private funds on 
average x 1 hour/private fund = 3,750.
    \408\ 200 new advisers x 5 private funds on average x 1 hour/
private fund = 1,000.
---------------------------------------------------------------------------

    The total annual burden related to private fund reporting that is 
applicable to registered advisers would be 38,100 hours.\409\ We 
believe that most of the paperwork burden would be incurred in 
connection with advisers' initial submission of private fund data, and 
that over time this burden would decrease substantially because the 
paperwork burden will be limited to updating information. Amortizing 
this total burden imposed by Form ADV over a three-year period, as we 
did above with respect to the initial filing or re-filing of the rest 
of the form, would result in an average burden of an estimated 12,700 
hours per year,\410\ or 2.85 hours per year for each new private fund 
adviser \411\ and for each private fund adviser currently registered 
with the Commission.
---------------------------------------------------------------------------

    \409\ 33,350 for existing registered advisers + 3,750 for no 
longer exempt advisers + 1,000 for estimated new registrants due to 
growth = 38,100.
    \410\ 38,100/3 = 12,700.
    \411\ 12,700/[3,500 + 200 + 750] = 2.85.
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iii. Estimated Annual Burden Associated With Amendments, New Brochure 
Supplements and Delivery Obligations
    The current approved collection of information burden for Form ADV 
has three additional elements: (1) The annual burden associated with 
annual and other amendments to Form ADV, (2) the annual burden 
associated with creating new Part 2 brochure supplements for advisory 
employees throughout the year, and (3) the annual burden associated 
with delivering codes of ethics to clients as a result of the offer of 
such codes contained in the brochure. Although we do not anticipate 
that our proposed amendments to Form ADV would affect the per adviser 
burden imposed by these three elements, the Dodd-Frank Act's amendments 
to sections 203A and 203(b)(3) will change our estimates of the number 
of advisers subject to them, which will result in a change to the total 
annual burden associated with these elements of the collection of 
information for Form ADV.\412\
---------------------------------------------------------------------------

    \412\ We anticipate that the clarification we are proposing to 
make to the brochure supplement (Part 2B) would not affect this cost 
burden estimate. See note 205 and accompanying text for a discussion 
of this proposed clarifying amendment.
---------------------------------------------------------------------------

    We continue to estimate that, on average, each adviser filing Form 
ADV through the IARD will likely amend its form two times during the 
year.\413\ We estimate, based on IARD data, that advisers, on average, 
make one interim updating amendment (at an estimated 0.5 hours per 
amendment) and one annual updating amendment (at an estimated 6 hours 
per amendment) each year. We also expect advisers, on average, to 
continue to incur one hour annually to prepare new brochure supplements 
as required by Part 2 of the form,\414\ and to continue to spend 1.3 
hours annually to meet obligations to deliver codes of ethics to 
clients.\415\ These obligations would add 80,520 hours annually to the 
collection of information. These 80,520 hours consist of 59,475 hours 
attributable to amendments,\416\ 9,150 hours attributable to the 
creation of new brochure supplements,\417\ and 11,895 hours for 
delivery of codes of ethics.\418\
---------------------------------------------------------------------------

    \413\ Based on IARD system data regarding the number of filings 
of Form ADV amendments.
    \414\ See section VI of Part 2 Release, supra note 46.
    \415\ Id.
    \416\ (9,150 advisers x .5 hours/other than annual amendment) + 
(9,150 advisers x 6 hours/annual amendment) = 59,475.
    \417\ 9,150 advisers x 1 hour = 9,150.
    \418\ 9,150 advisers x 1.3 hours = 11,895.
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iv. Estimated Annual Cost Burden
    The current approved collection of information burden for Form ADV 
has a one-time initial cost for outside legal and compliance consulting 
fees in connection with the initial preparation of Part 2 of Form ADV. 
Although we do not anticipate that our proposed amendments to Form ADV 
would affect the per adviser cost burden estimates, the Dodd-Frank 
Act's amendments to sections 203A and 203(b)(3) of the Adviser's Act 
will result in a significant change to our estimates of the number of 
advisers subject to these costs. The current approved collection is 
based on an estimate that 2,941 advisers will elect to obtain outside 
legal assistance and 3,441 advisers will elect to obtain outside 
consulting services, for a total cost among all respondents of 
$22,775,400 for a one-time initial cost to draft the new narrative 
brochure.
    By the time the amendments to Form ADV that we are proposing today 
would become effective, substantially all SEC-registered advisers will 
have completed their initial filing of the narrative brochure required 
by our recent amendments to Part 2 of Form ADV and will have already 
incurred these estimated one-time costs.\419\ As a result, the only 
respondents that we expect would incur legal and consulting costs for 
the initial drafting of Part 2 of Form ADV, subsequent to the effective 
date of the amendments to Part 2, would consist of the estimated 650 
new advisers that we expect to register annually and the estimated 750 
advisers that will have to register as a result of

[[Page 77088]]

the elimination of the private adviser exemption.
---------------------------------------------------------------------------

    \419\ See section V. of Part 2 Release, supra note 46.
---------------------------------------------------------------------------

    The current approved burden estimates that the initial per adviser 
cost for legal services related to preparation of Part 2 of Form ADV 
would be $3,200 for small advisers, $4,400 for medium-sized advisers, 
and $10,400 for larger advisers.\420\ The current approved burden also 
contains an initial per adviser cost for compliance consulting services 
related to initial preparation of the amended Form ADV that ranges from 
$3,000 for smaller advisers to $5,000 for medium-sized advisers.\421\ 
We estimate that the 750 new registered advisers no longer able to rely 
on the private adviser exemption will be medium-sized. The current 
approved burden anticipates that a quarter of medium-sized advisers 
would seek the help of outside legal services and half would seek the 
help of compliance consulting services. Accordingly, we estimate that 
188 of these advisers would use outside legal services, for a total 
cost burden of $827,200, and 375 advisers would use outside compliance 
consulting services, for a total cost burden of $1,875,000, resulting 
in a total cost burden among all respondents of $2,702,000.
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    \420\ For purposes of this estimate, we categorize small 
advisers as advisers with 10 or fewer employees, medium advisers as 
having between 11 and 1,000 employees, and large advisers as those 
with 1,000 or more employees. See Part 2 Release, supra note 46, at 
nn. 301 and 324.
    \421\ Id. at n. 325.
---------------------------------------------------------------------------

b. Estimated Annual Burden Applicable to Exempt Reporting Advisers
i. Estimated Initial Hour Burden
    Based on publications, reports, and general information publicly 
available from trade organizations, financial research companies, and 
news organizations as well as safe harbor filings with the SEC, we 
expect approximately 2,000 investment advisers will qualify for an 
exemption from registration, but will be required to submit reports to 
us on Form ADV.\422\ The paperwork burden applicable to these new 
exempt reporting advisers would consist of the burden attributable to 
completing a limited number of items in Part 1A as well as the burden 
attributable to the private fund reporting requirements of Item 7.B. 
and Section 7.B. of Schedule D. We estimated the burden to complete the 
subset of items in Part 1A applicable to exempt reporting advisers, 
above, to be two hours, which would result in an annual burden of 
approximately 4,000 hours.
---------------------------------------------------------------------------

    \422\ This estimate was collectively derived from various 
sources including the National Venture Capital Association's 
Yearbook 2010 (http://www.nvca.org), First Research reports (http://www.firstresearch.com), Preqin reports (http://www.preqin.com), 
Bloomberg (http://www.bloomberg.com), the Managed Funds Association 
(http://www.managedfunds.org), PerTrac data (http://www.pertrac.com), and Form D data. Specific data relevant to the 
number or types of advisers that would be exempt reporting advisers 
was not available, but the information located did inform the staff 
to the probable number of exempt reporting advisers.
---------------------------------------------------------------------------

    As discussed above, we estimate the private fund reporting 
requirements of the form to be one hour per private fund. We assume 
that each exempt reporting adviser currently relies on the private 
adviser exemption and, therefore, has 14 or fewer private fund clients. 
Based on reporting by registered advisers to private funds and industry 
publications and reports, we expect each of these advisers, on average, 
advises five private funds.\423\ Accordingly, we would attribute an 
additional 10,000 burden hours to exempt reporting advisers' private 
fund reporting requirements.\424\
---------------------------------------------------------------------------

    \423\ Id. Based upon the reported general number of private 
funds and the estimated number of advisers to these private funds, 
it is estimated that each adviser advises five private funds on 
average. (approximately 10,000 private funds/estimated 2,000 
advisers = 5 private funds per adviser.
    \424\ 2,000 exempt reporting advisers x 5 private funds/adviser 
x 1 hour/private fund = 10,000. See Id. for 5 funds estimate.
---------------------------------------------------------------------------

    The estimated total annual hour burden applicable to exempt 
reporting advisers is 14,000 hours.\425\ We believe that most of the 
paperwork burden would be incurred in advisers' initial submission of 
private fund data, and that over time this burden would decrease 
substantially because the paperwork burden would be limited to updating 
information. Amortizing this total burden imposed by Form ADV over a 
three-year period, as we did above with respect to the initial filing 
for registered advisers, would result in an average burden of an 
estimated 4,667 hours per year,\426\ or 2.33 hours per year, on 
average, for each exempt reporting adviser.\427\
---------------------------------------------------------------------------

    \425\ 4,000 + 10,000 = 14,000.
    \426\ 14,000/3 = 4,667.
    \427\ 4,667/2,000 = 2.33.
---------------------------------------------------------------------------

ii. Estimated Annual Burden Associated With Amendments
    In addition to the burdens associated with initial completion and 
filing of the portion of the form that exempt reporting advisers would 
be required to prepare, we estimate that, on average, each exempt 
reporting adviser would prepare an annual updating amendment and 20% of 
these advisers would file an interim updating amendment.\428\ With 
respect to an exempt reporting adviser's annual updating amendment of 
Form ADV, we expect that advisers would not have to spend a significant 
amount of time entering responses into the electronic version of the 
form to file their annual updating amendments because IARD will 
automatically pre-populate their prior responses. Based on this 
consideration, we estimate that the average exempt reporting adviser 
will spend 1 hour per year completing its annual updating amendment to 
Form ADV. This estimate is based on our estimate for registered 
advisers, but it is 85% shorter because exempt reporting advisers would 
be required to complete and update only a limited number of items in 
the form, not including Part 2. The other amendment that we estimate 
20% of the exempt reporting advisers would file is an interim updating 
amendment to Items 1, 3, 10 or 11 of Form ADV,\429\ and we estimate 
that this amendment would require 0.5 hours per amendment. We 
therefore, estimate that the total paperwork burden on exempt reporting 
advisers of amendments to Form ADV would be 2,200 hours per year.\430\
---------------------------------------------------------------------------

    \428\ Approximately 20% of advisers with a fiscal year end of 
December that filed an other-than-amendment changed Item 1 or 11 
between April 1, 2009 and December 31, 2009 (period between annual 
amendment filing time).
    \429\ See General Instruction 4 to Form ADV.
    \430\ [(2,000 advisers x .20) x 0.5 hours] = 200 hours per year 
for interim amendments. 2,000 advisers x 1 hour = 2,000 hours per 
year for annual amendments. 200 + 2,000 = 2,200 hours. Exempt 
reporting advisers would not incur any burden to prepare new 
brochure supplements, however, as is required of registered 
advisers; nor would they be required to meet obligations to deliver 
codes of ethics to clients, as is also required of registered 
advisers. Similarly, we have not prepared an estimated annual cost 
burden to be incurred by exempt reporting advisers because the cost 
burden attributed to registered advisers is associated with Part 2 
obligations to which exempt reporting advisers are not subject.
---------------------------------------------------------------------------

3. Total Revised Burdens
    The revised total annual collection of information burden for 
registered advisers to file and complete the revised Form ADV (Parts 1 
and 2), including the initial burden for both existing and anticipated 
new registrants, including private fund advisers, plus the burden 
associated with amendments to the form, preparing brochure supplements 
and delivering codes of ethics to clients is estimated to be 
approximately 217,477 hours per year.\431\ This burden represents an 
decrease of 50,980 hours

[[Page 77089]]

from the current approved burden.\432\ This decrease is attributable 
primarily to the 4,100 advisers that we expect to withdraw from SEC 
registration.
---------------------------------------------------------------------------

    \431\ 124,257 hours per year attributable to initial preparation 
of Form ADV + 12,700 hours per year attributable to initial private 
fund reporting requirements + 59,475 hours per year for amendments 
to Form ADV + 9,150 hours per year for brochure supplements for new 
employees + 11,895 hours per year to meet code of ethics delivery 
obligations = 217,477 hours.
    \432\ Current approved burden of 268,457 hours--revised burden 
217,477 hours = 50,980 decrease in hours.
---------------------------------------------------------------------------

    Registered investment advisers are also expected to incur an annual 
cost burden of $2,702,000, a reduction from the current approved cost 
burden of $22,775,400. The decrease in annual cost burden is attributed 
to the nature of the costs, which are one-time initial costs to draft 
the narrative brochure. As the transition to the narrative brochure 
will have substantially been completed, the on-going costs arise from 
new registrants.
    The total annual collection of information burden for exempt 
reporting advisers to file and complete the required Items of Part 1A 
of Form ADV, including the burden associated with amendments to the 
form, would be 6,867 hours.\433\
---------------------------------------------------------------------------

    \433\ 4,667 hours per year attributable to initial preparation 
of Form ADV + 2,200 hours per year for amendments = 6,867 hours.
---------------------------------------------------------------------------

    We estimate that, if the amendments to Form ADV are adopted, the 
total annual hour burden for the form would decrease by 44,113 hours to 
224,344.\434\ The resulting blended average per adviser amortized 
burden for Form ADV would be 20.12 hours,\435\ which would consist of 
an average annual amortized burden of 23.77 hours for the estimated 
9,150 registered advisers and 3.43 hours for the estimated 2,000 exempt 
reporting advisers.\436\
---------------------------------------------------------------------------

    \434\ 217,477 + 6,867 = 224,344.
    \435\ 224,344/11,150 = 20.12.
    \436\ Registered advisers (217,477/9,150 = 23.77), exempt 
reporting advisers (6,867/2,000 = 3.43).
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C. Rule 203A-5

    Proposed rule 203A-5 would require each investment adviser 
registered with us on July 21, 2011 to file an amendment to its Form 
ADV no later than August 20, 2011, and withdraw from Commission 
registration by October 19, 2011, if no longer eligible.\437\ The 
amendment to Form ADV would, among other things, require each adviser 
to declare whether it remains eligible for Commission 
registration.\438\ The likely respondents to this information 
collection are all investment advisers registered with the Commission 
on July 21, 2011, and the investment advisers that withdraw their 
registration. Compliance with this collection of information is 
mandatory, and the information collected on Form ADV and Form ADV-W is 
not kept confidential. We have submitted this collection of information 
to OMB for review.
---------------------------------------------------------------------------

    \437\ Proposed rule 203A-5(a), (b). See supra section II.A.1. of 
this Release.
    \438\ See supra section II.A.2. of this Release.
---------------------------------------------------------------------------

    We estimate that there would be approximately 11,850 respondents to 
this collection of information filing an amendment to Form ADV \439\ 
and 4,100 respondents filing Form ADV-W.\440\ Each respondent would 
respond once. For purposes of the collection of information burden for 
Form ADV, we estimate that the amendment would take each adviser 
approximately 6 hours per amendment, on average,\441\ and that the 
proposed amendments to Part 1A of Form ADV would take each adviser 
approximately 4.5 hours, on average, to complete.\442\ We also estimate 
the average burden for each respondent to be 0.25 hours for filing Form 
ADV-W.\443\
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    \439\ Based on IARD data as of September 1, 2010, 11,867 
investment advisers are registered with the Commission. We have 
rounded this number to 11,850 for purposes of our analysis.
    \440\ See supra note 294.
    \441\ We anticipate that the hour burden for the refiling of 
Form ADV for purposes of rule 203A-5 would be the same as an 
adviser's annual amendment filing, which has an approved burden of 6 
hours.
    \442\ See supra sections V.B.1.a., V.B.2.a.3. of this Release.
    \443\ See supra note 304.
---------------------------------------------------------------------------

    We estimate that the burdens associated with the Form ADV amendment 
required by rule 203A-5 would be more like an annual amendment with 
respect to the burden to complete than an other-than-annual amendment, 
as a result of our proposed changes to Part 1A. Consequently, we 
estimate the total one-time burden for completing the Form ADV 
amendments to be 124,425 hours,\444\ and for completing Form ADV-W to 
be 1,025 hours,\445\ for a total one-time burden of 125,450 hours.\446\
---------------------------------------------------------------------------

    \444\ [6 hours (annual amendment) + 4.5 hours (new items)] x 
11,850 = 124,425.
    \445\ 0.25 hours x 4,100 = 1,025.
    \446\ 124,425 + 1,025 = 125,450.
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D. Form ADV-NR

    We are proposing minor amendments to Form ADV-NR (OMB Control No. 
3235-0238), the form used to appoint the Secretary of the Commission as 
an agent for service of process for certain non-resident advisers.\447\ 
Non-resident general partners or managing agents of SEC-registered 
investment advisers must make a one-time filing of Form ADV-NR with the 
Commission. Form ADV-NR requires these non-resident general partners or 
managing agents to furnish us with a written irrevocable consent and 
power of attorney that designates the Commission as an agent for 
service of process, and that stipulates and agrees that any civil suit 
or action against such person may be commenced by service of process on 
the Commission. The amendments we are proposing reflect that exempt 
reporting advisers would be filing reports on IARD, and that they would 
use Form ADV-NR in the same way and for the same purpose as it is 
currently used by registered investment advisers. The collection of 
information is necessary for us to obtain appropriate consent to permit 
the Commission and other parties to bring actions against non-resident 
partners or agents for violations of the Federal securities laws. This 
collection of information is found at 17 CFR 279.4. The collection of 
information is mandatory, and the information provided in response to 
the collection is not kept confidential. The currently approved 
collection of information in Form ADV-NR is 18 hours.
---------------------------------------------------------------------------

    \447\ See proposed amended Form ADV-NR; proposed General 
Instruction 18.
---------------------------------------------------------------------------

    We estimate that approximately 9,150 \448\ investment advisers will 
be registered with the Commission and that approximately 2,000 \449\ 
exempt reporting advisers would file reports with the Commission, and 
that these advisers would file Form ADV-NR at the same annual rate 
(0.17 percent) as advisers registered with us.\450\ Accordingly, we 
estimate that as a result of the amendments to Form ADV-NR and the 
change in the number of filers after the effectiveness of the Dodd-
Frank Act the annual aggregate information collection burden for Form 
ADV-NR would be 19 hours, an increase of 1 hour over the currently 
approved burden.\451\
---------------------------------------------------------------------------

    \448\ See supra note 377 and accompanying text.
    \449\ See supra note 422 and accompanying text.
    \450\ From September 1, 2009 through September 1, 2010, 20 Form 
ADV-NRs were filed with us for an annual rate for all SEC-registered 
advisers of 0.17%. (20 Form ADV-NR filings/11,850 advisers 
registered as of Sept. 1, 2010)
    \451\ 0.17% (rate of filing) x (9,150 estimated registered 
investment advisers + 2,000 estimated exempt reporting advisers) x 1 
hour per ADV-NR filing = 19.
---------------------------------------------------------------------------

E. Rule 203-2 and Form ADV-W

    We are proposing amendments to rule 203A-2(b), the exemption from 
the prohibition on registration for certain pension consultants. The 
proposed amendments would raise the amount of plan assets that an 
adviser must consult on from $50 to $200 million annually.\452\ If we 
adopt the proposed amendment to rule 203A-2(b), an investment adviser 
would have to be a pension consultant with respect to assets of plans 
having an aggregate value of $200 million or more to be able to

[[Page 77090]]

register with the Commission. Those pension consultants providing 
consulting services to plans of less than $200 million would be 
required to file a notice of withdrawal of their registration in 
accordance with rule 203-2 on Form ADV-W (OMB Control No. 3235-0313). 
The collection of information on Form ADV-W is mandatory and is not 
kept confidential. The currently approved collection of information for 
Form ADV-W is 500 hours for 1,000 responses.
---------------------------------------------------------------------------

    \452\ See proposed rule 203A-2(a)(1).
---------------------------------------------------------------------------

    Based on IARD data as of September 1, 2010, there are 353 advisers 
relying on the pension consultant exemption from registration. We 
estimate that approximately 15%, or 50, of the current advisers relying 
on this exemption from the prohibition on registration would no longer 
be eligible to rely on the exemption if adopted as proposed. This 
estimate is based on our understanding that a typical pension 
consultant would have plan assets far in excess of the proposed higher 
threshold, in light of the fact that most pension plans contain a 
significant amount of assets.
    The estimated 50 advisers no longer eligible to rely on the 
exemption, however, would have to file a notice of withdrawal on Form 
ADV-W in accordance with rule 203-2 under the Advisers Act and withdraw 
their registration based on the proposed amendment to rule 203A-
2(b).\453\ In addition, as noted above, we estimate that approximately 
4,100 advisers also will have to withdraw their Commission registration 
as a result of the Dodd-Frank Act. Because these advisers are 
registered today, we further anticipate that these advisers will be 
switching from SEC to State registration, and as a result will be 
filing a ``partial'' Form ADV-W. We have estimated for purposes of our 
current approved burden under the PRA for rule 203-2 and Form ADV-W, 
that a partial withdrawal imposes an average burden of approximately 
0.25 hours for an adviser.\454\ Thus, we estimate that the proposed 
amendment to rule 203A-2(b) associated with filing Form ADV-W would 
generate a burden of 1,038 additional hours \455\ in addition to the 
approved burden of 500 hours for a total of 1,538 hours.
---------------------------------------------------------------------------

    \453\ See supra note 318 (discussing the fact that advisers 
filing Form ADV-W due to our proposed amendment to rule 203A-2(b) 
would likely file partial withdrawals).
    \454\ See supra note 304.
    \455\ (4,100 + 50) responses on Form ADV-W x 0.25 hours = 1,038 
hours.
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F. Form ADV-H

    Proposed rule 204-4(e) would provide a temporary hardship exemption 
for an exempt reporting adviser having unanticipated technical 
difficulties that prevent submission of a filing to the IARD 
system.\456\ Currently, rule 203-3(a) provides a similar temporary 
hardship exemption for registered advisers that file an application on 
Form ADV-H (OMB Control No. 3235-0538).\457\ Like rule 203-3(a), 
proposed rule 204-4(e) would require advisers relying on the temporary 
hardship exemption to file an application on Form ADV-H in paper format 
no later than one business day after the filing that is the subject of 
the Form ADV-H was due, and submit the filing on Form ADV in electronic 
format with IARD no later than seven business days after the filing was 
due.\458\ If rule 204-4 is adopted as proposed, respondents to the 
collection of information on Form ADV-H would be exempt reporting 
advisers, in addition to registered advisers, who are currently 
respondents to this collection of information. The collection of 
information on Form ADV-H is mandatory for registered advisers relying 
on a temporary hardship exemption and would be mandatory for exempt 
reporting advisers relying on a temporary hardship exemption if rule 
204-4 is adopted as proposed. The information collected on Form ADV-H 
is not kept confidential.
---------------------------------------------------------------------------

    \456\ Proposed rule 204-4(e).
    \457\ Rule 203-3(a); 17 CFR 279.3 (Form ADV-H). See supra note 
125 and accompanying text.
    \458\ Proposed rule 204-4(e).
---------------------------------------------------------------------------

    To estimate the currently approved total burden associated with 
Form ADV-H, we estimated that registered advisers file approximately 11 
responses to Form ADV-H per year, which, given the estimated 11,850 
advisers currently registered with the Commission, means that 
approximately 1 response is filed per 1,000 advisers.\459\ We further 
estimated that the average burden per response is approximately 1 hour. 
Therefore the total approved burden for Form ADV-H is approximately 11 
hours per year.\460\ Based on the proportion of annual responses to the 
number of registered advisers, we estimate that exempt reporting 
advisers would file approximately 2 responses to Form ADV-H annually if 
rule 204-4 is adopted.\461\ We also estimate that Form ADV-H would 
impose the same average burden per response of 1 hour on exempt 
reporting advisers. Thus, proposed rule 204-4 would result in an 
increase in the total hour burden associated with Form ADV-H of 2 
hours.\462\ However, as discussed above, the number of registered 
advisers will decrease due to the Dodd-Frank Act's amendments to 
sections 203A and 203(b)(3) from 11,850 to 9,150.\463\ Given the 
reduction in registered advisers, we estimate that Form ADV-H will 
receive 9 annual responses from registered advisers, for a total annual 
burden for registered advisers of 9 hours.\464\ Thus, if rule 204-4 is 
adopted as proposed, the total burden associated with Form ADV-H would 
continue to be 11 hours.\465\
---------------------------------------------------------------------------

    \459\ 11,850 registered advisers / 11 responses = approximately 
1 response per 1,000 registered advisers)
    \460\ 11 responses x 1 hour = 11 hours.
    \461\ We estimate that approximately 2,000 exempt reporting 
advisers would file reports on Form ADV in accordance with proposed 
rule 204-4. Thus, we estimate 2 responses to Form ADV-H in 
accordance with proposed rule 204-4 (2,000 exempt reporting advisers 
x 1 response per 1000 advisers = 2 responses).
    \462\ 2 responses x 1 hour = 2 hours.
    \463\ See supra note 377.
    \464\ 9,150 registered advisers x 1 response per 1,000 advisers 
= 9 responses. 9 responses x 1 hour = 9 hours.
    \465\ 9 hours for registered advisers + 2 hours for exempt 
reporting advisers = 11 hours.
---------------------------------------------------------------------------

G. Rule 204-2

    Rule 204-2 (OMB Control No. 3235-0278) requires investment advisers 
registered, or required to be registered under section 203 of the Act, 
to keep certain books and records relating to their advisory 
business.\466\ The collection of information under rule 204-2 is 
necessary for the Commission staff to use in its examination and 
oversight program, and the information is generally kept 
confidential.\467\ The collection of information is mandatory.
---------------------------------------------------------------------------

    \466\ Rule 204-2.
    \467\ See section 210(b) of the Advisers Act.
---------------------------------------------------------------------------

    We are proposing to amend rule 204-2 to update the rule's 
``grandfathering provision'' for investment advisers that are currently 
exempt from registration under the ``private adviser'' exemption, but 
will be required to register when the Dodd-Frank Act's elimination of 
the ``private adviser'' exemption becomes effective on July 21, 
2011.\468\ Under the proposed amended grandfathering provision, an 
adviser that was exempt from registration under section 203(b)(3) of 
the Advisers Act prior to July 21, 2011 would not be required to 
maintain

[[Page 77091]]

certain books and records concerning performance or rate of return of a 
private fund or other account for any period prior to July 21, 2011, 
provided the adviser was not registered with the Commission.\469\ Most, 
if not all, advisers likely gather the records and documents necessary 
to support the calculation of performance or rate of return as those 
records or documents are produced or at the time a calculation is made. 
Thus, we do not believe that the proposed amendment to the 
grandfathering provision would reduce our current approved average 
annual hourly burden per adviser under rule 204-2.
---------------------------------------------------------------------------

    \468\ See proposed rule 204-2(e)(3)(ii); supra section II.D.2.b 
of this Release. In addition, we are proposing to amend rule 204-
2(e)(3)(ii) to cross-reference the new definition of ``private 
fund'' added to the Advisers Act by the Dodd-Frank Act where that 
term is used in rule 204-2. However, this proposed amendment is 
technical, and would not increase or decrease the collection burden 
on advisers. We also intend to rescind rule 204-2(l) because that 
section was vacated by the Federal appeals court in Goldstein.
    \469\ Proposed rule 204-2(e)(3)(ii). Rule 204-2 requires 
registered advisers to make and keep books and records necessary to 
support the calculation of the performance or rate of return of any 
or all managed accounts or securities recommendations in any notice, 
circular, advertisement, newspaper article, investment letter, 
bulletin or other communication that the investment adviser 
circulates or distributes, directly or indirectly, to 10 or more 
persons. Rule 204-2(a)(16). It requires that advisers maintain and 
preserve these records in an easily accessible place for a period of 
not less than five years from the end of the fiscal year during 
which the last entry was made on such records, the first two years 
in an appropriate office of the investment adviser. Rule 204-
2(e)(1). Our proposed grandfathering provision would assure that 
advisers newly subject to the rule due to elimination of the 
``private adviser'' exemption in existing section 203(b)(3) do not 
face a retroactively-imposed recordkeeping requirement. However, the 
proposed grandfathering provision would require these advisers to 
continue to preserve any books and records in their possession that 
pertain to the performance or rate of return of a private fund or 
other account for the two and five year periods.
---------------------------------------------------------------------------

    Although we do not anticipate that our proposed amendments to rule 
204-2 would affect the per adviser burden imposed by the rule, the 
Dodd-Frank Act's amendments to sections 203A and 203(b)(3) will change 
our estimates of the total annual burden associated with the rule.\470\ 
The current approved burden for rule 204-2 is based on an estimate of 
11,607 registered advisers subject to rule 204-2 and an estimated 
average burden of 181.45 burden hours each year per adviser, for a 
total of 2,106,046 hours.\471\ We estimate that the Dodd-Frank Act will 
reduce the number of registered advisers to 9,150.\472\ Thus, we 
estimate that the total burden under rule 204-2 will be 1,660,268,\473\ 
a reduction of 445,778 hours.\474\
---------------------------------------------------------------------------

    \470\ Exempt reporting advisers are not subject to rule 204-2, 
and therefore there is no offsetting increase in the number of 
advisers subject to the rule.
    \471\ In the Pay to Play Release, we estimated that the average 
burden for advisers imposed by rule 204-2 to be 181.45 hours. See 
section V.A. of the Pay to Play Release.
    \472\ See supra note 377 and accompanying text.
    \473\ 9,150 registered advisers x 181.45 hours = approximately 
1,660,268.
    \474\ 2,106,046 hours - 1,660,268 hours = 445,778 hours.
---------------------------------------------------------------------------

    The reduction in the number of advisers subject to the rule will 
also reduce the total non-labor cost burden of the rule. The current 
approved non-labor cost burden associated with rule 204-2 is 
$14,581,509, or an average of approximately $1,256 per adviser.\475\ 
Due to the reduction in the number of advisers subject to rule 204-2, 
we estimate that the new total non-labor cost burden will be 
$11,492,400,\476\ a reduction of $3,089,109. \477\
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    \475\ $14,581,509 / 11,607 advisers = approximately $1,256.
    \476\ 9,150 x $1,256 = $11,492,400.
    \477\ $14,581,509 - $11,492,400 = $3,089,109.
---------------------------------------------------------------------------

H. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to: (i) Evaluate whether the proposed amendments to the 
collection of information are necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collection of information; (iii) 
determine whether there are ways to enhance the quality, utility, and 
clarity of the information to be collected; and (iv) determine whether 
there are ways to minimize the burden of the collection of information 
on those who are to respond, including through the use of automated 
collection techniques or other forms of information technology.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Room 10102, 
New Executive Office Building, Washington, DC 20503, and also should 
send a copy of their comments to Elizabeth M. Murphy, Secretary, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-1090 with reference to File No. S7-36-10. Requests for materials 
submitted to OMB by the Commission with regard to this collection of 
information should be in writing, refer to File No. S7-36-10, and be 
submitted to the Securities and Exchange Commission, Office of Investor 
Education and Advocacy, 100 F Street, NE., Washington, DC 20549-0213. 
OMB is required to make a decision concerning the collections of 
information between 30 and 60 days after publication of this Release. A 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days after publication of this release.

VI. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') regarding our proposed rules and rule 
amendments to give effect to the Dodd-Frank Act's amendments to the 
Advisers Act in accordance with section 3(a) of the Regulatory 
Flexibility Act.\478\ It relates to proposed new rules 203A-5 and 204-
4, proposed amendments to rules 0-7, 203A-1, 203A-2, 203A-3, 203A-4, 
204-1, 204-2, 206(4)5, 222-1, 222-2, and proposed amendments to Form 
ADV, Form ADV-NR and Form ADV-H under the Advisers Act.
---------------------------------------------------------------------------

    \478\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Need for the New Rules and Rule Amendments

    The proposed new rules and rule amendments are necessary to give 
effect to provisions of the Dodd-Frank Act which, among other things, 
amend certain provisions of the Advisers Act, and to respond to a 
number of other changes to the Advisers Act made by the Dodd-Frank Act, 
including the Commission's pay to play rule. In addition, in light of 
our increased responsibility for oversight of private fund advisers, we 
are proposing to require advisers to those funds to provide us with 
additional information about the operation of those funds, which would 
permit us to provide better oversight of these advisers by focusing our 
examination and enforcement resources on those advisers to private 
funds that appear to present greater compliance risks. We also are 
proposing to require all registered advisers to provide us with 
additional information on their operations to allow us to more 
efficiently allocate our examination resources, to better prepare for 
on-site examinations, and to provide us with a better understanding of 
the investment advisory industry to assist our evaluation of the 
implications of policy choices we must make in administering the 
Advisers Act.

B. Objectives and Legal Basis

    The primary objective of the proposed new rules and rule amendments 
is to give effect to provisions of Title IV of the Dodd-Frank Act that: 
(i) Reallocate responsibility for oversight of investment advisers by 
delegating generally to the states responsibility over certain mid-
sized advisers; (ii) repeal the ``private adviser exemption'' contained 
in section 203(b)(3) of the

[[Page 77092]]

Advisers Act; and (iii) provide for reporting from advisers to certain 
types of private funds that are exempt from registration.\479\ Proposed 
new rule 203A-5 and amendments to rules 203A-1, 203A-2, 203A-3, and 
203A-4 are intended to provide us a means of identifying advisers that 
must transition to State regulation, clarify the application of the new 
statutory provisions under the Dodd-Frank Act, and extend certain of 
the exemptions we have adopted under section 203A of the Act to mid-
sized advisers. Proposed new rule 204-4 and amendments to rule 204-1 
are intended to require exempt reporting advisers to submit, and to 
periodically update, reports to us by completing several items on Form 
ADV. The proposed amendments to rule 204-2 are intended to account for 
the Dodd-Frank Act's elimination of the ``private adviser'' exemption 
under section 203(b)(3) of the Advisers Act and its addition of a 
definition of ``private fund'' to the Advisers Act.\480\ The proposed 
amendments to Form ADV would permit the form to serve as a reporting, 
as well as a registration, form and to specify the seven items exempt 
reporting advisers must complete. The proposed amendments to Form ADV 
would also provide additional information on the operations of 
registered investment advisers. The proposed amendments to Forms ADV-NR 
and ADV-H would revise the forms for use by exempt reporting advisers. 
Additionally, we are proposing amendments to the Advisers Act pay to 
play rule, rule 206(4)-5.\481\
---------------------------------------------------------------------------

    \479\ See supra section I of this Release.
    \480\ See supra section II.D.2.b. We also intend to rescind 
section 204-2(l), which was vacated by the Federal appeals court in 
Goldstein.
    \481\ See proposed rule 206(4)-5; supra section II.D.1. of this 
Release.
---------------------------------------------------------------------------

    The Commission is proposing new rule 203A-5 and amendments to rules 
203A-1, 203A-2, 203A-3, and 203A-4 under the Advisers Act pursuant to 
the authority set forth in sections 203A(c), and 211(a) of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-3A(c) and 80b-11(a)]; 
new rule 204-4 and amendments to rules 204-1 and 204-2 pursuant to the 
authority set forth in sections 204 and 211(a) of the Advisers Act [15 
U.S.C. 80b-4 and 80b-11(a)]; amendments to rule 206(4)-5 pursuant to 
authority set forth in sections 206(4) and 211(a) of the Advisers Act 
[15 U.S.C. 80b-6(4) and 80b-11(a)]; amendments to rules 0-7, 222-1, and 
222-2 pursuant to authority set forth in section 211(a) of the Advisers 
Act [15 U.S.C. 80b-11(a)]; and to amend Form ADV under section 19(a) of 
the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 
28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and 
78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 
U.S.C. 77sss(a)], section 38(a) of the Investment Company Act of 1940 
[15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, and 211(a) of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)]; Form ADV-NR under section 19(a) of the Securities Act of 1933 
[15 U.S.C. 77s(a)], section 23(a) of the Securities Exchange Act of 
1934 [15 U.S.C. 78w(a)], section 319(a) of the Trust Indenture Act of 
1939 [15 U.S.C. 77sss(a)], section 38(a) of the Investment Company Act 
of 1940 [15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, and 211(a) 
of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, 
and 80b-11(a)]; and Form ADV-H pursuant to the authority set forth in 
sections 203(c)(1), 204, and 211(a) of the Advisers Act [15 U.S.C. 80b-
3(c)(1), 80b-4, 80b-11(a)]. Section 203A(c) gives us authority to 
permit registration with the Commission of any person or class of 
persons to which the application of section 203A(a) would be unfair, a 
burden on interstate commerce, or otherwise inconsistent with the 
purposes of section 203A. Section 206(4) gives us authority to 
prescribe means reasonably designed to prevent fraudulent, deceptive, 
or manipulative acts or practices. Section 211 gives us authority to 
classify, by rule, persons and matters within our jurisdiction and to 
prescribe different requirements for different classes of persons, as 
necessary or appropriate to the exercise of our authority under the 
Act. Section 204 gives us authority to prescribe, by rule, such records 
and reports that an adviser must make, keep for prescribed periods, or 
disseminate, as necessary or appropriate in the public interest or for 
the protection of investors.

C. Small Entities Subject to Rules and Rule Amendments

    In developing these proposals, we have considered their potential 
impact on small entities that would be subject to the proposed rule and 
form amendments. The proposed rule and form amendments would affect all 
advisers registered with the Commission and exempt reporting advisers, 
including small entities. 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.\482\
---------------------------------------------------------------------------

    \482\ Rule 0-7(a) [17 CFR 275.0-7(a)].
---------------------------------------------------------------------------

    Our rule and form amendments would not affect most advisers that 
are small entities (``small advisers'') because they are generally 
registered with one or more State securities authorities and not with 
us. Under section 203A of the Advisers Act, most small advisers are 
prohibited from registering with the Commission and are regulated by 
State regulators.\483\ We estimate that as of September 1, 2010, 
approximately 620 advisers that were small entities were registered 
with the Commission.\484\ Because these advisers are registered, they 
would be subject to proposed new rule 203A-5 and amendments to rules 0-
7, 204-2, 203A-1, 203A-2, 203A-3, and 203A-4, and Forms ADV and ADV-NR. 
In addition, we estimate that due to the Dodd-Frank Act's elimination 
of the ``private adviser'' exemption in section 203(b)(3), an 
additional 2 advisers that are small entities will become subject to 
these rules.\485\ Further, as a result of our proposed amendments to 
rule 203A-2, we estimate that 15 additional multi-State advisers would 
register with us and be subject to these rules,\486\ and 21 pension 
consultants that are small entity advisers would be required to 
withdraw from registration with us and would no longer be subject to 
these rules.\487\ We

[[Page 77093]]

estimate that 6 exempt reporting advisers that are small entities would 
be subject to proposed rule 204-4, and the proposed amendments to rule 
204-1, Form ADV, Form ADV-NR and Form ADV-H to give effect to the Dodd-
Frank Act's reporting requirements by exempt reporting advisers.\488\ 
We also estimate that 6 exempt reporting advisers that are small 
entities would be subject to the proposed amendments to rule 206(4)-5. 
Finally, all investment advisers, whether they are small entities or 
not, would be subject to the proposed technical amendments to rules 
222-1 and 222-2. The small entities subject to these amendments include 
approximately 6 exempt reporting advisers and approximately 14,700 
State-registered advisers.\489\
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    \483\ See supra section II.A.7.a.
    \484\ Based on IARD data as of September 1, 2010.
    \485\ We believe that the only small entities that would become 
subject to registration as a result of the elimination of the 
private adviser exemption in section 203(b)(3) would be advisers to 
private funds that maintain their principal office and place of 
business in Wyoming. Based on IARD data as of September 1, 2010, we 
estimate that 36 SEC-registered small entity advisers are required 
to be registered with us because they have a principal office and 
place of business in Wyoming, which is 0.3% of all SEC-registered 
advisers (36 / 11,850 SEC-registered advisers = approximately 0.3%). 
We estimate that a similar proportion of the approximately 750 
advisers to private funds that will register with the Commission due 
to the elimination of the private adviser exemption in section 
203(b)(3) would be small Wyoming-based advisers. As a result, we 
estimate that approximately 2 small entity advisers to private funds 
will register with the Commission (750 private fund advisers x 0.3% 
= approximately 2).
    \486\ See supra note 324.
    \487\ Based on IARD data as of September 1, 2010, 142 of the 
advisers that would be considered small entities rely on the pension 
consultant exemption from registration. We estimate that 
approximately 15%, or 21, of these advisers would no longer be 
eligible to rely on the exemption if adopted as proposed. This ratio 
is consistent with our estimate for the PRA burden. See supra 
section V.E. of this Release.
    \488\ The only small entity exempt reporting advisers that would 
be subject to the proposed rule and proposed amendments would be 
exempt reporting advisers that maintain their principal office and 
place of business in Wyoming. As discussed supra in note 98 and 
accompanying and preceding text, the current practical effect of 
section 203A(a)(1) is to prohibit U.S. advisers with less than $25 
million in assets under management from registering with the 
Commission unless they maintain their principal office or place of 
business in Wyoming. Proposed new rule 204-4 requires an adviser 
relying on an exemption under new sections 203(l) or (m) of the 
Advisers Act to complete and file reports on Form ADV. See proposed 
rule 204-4; supra section II.B.1. of this Release. The exemptions 
from registration in sections 203(l) and (m) apply to advisers 
solely to venture capital funds and advisers solely to private funds 
with less than $150 million in assets under management, 
respectively. Small Wyoming-based advisers to venture capital funds 
or private funds may be required to register with the Commission but 
for the exemptions in section 203(l) or (m). Thus, these advisers 
would be subject to proposed rule 204-4 and the proposed amendments 
to rule 204-1, Form ADV, and Form ADV-H to give effect to the Dodd-
Frank Act's mandate for reporting by exempt reporting advisers. 
Assuming that the proportion of registered Wyoming-based small 
advisers to registered advisers is similar to the proportion of 
small Wyoming-based exempt reporting advisers to exempt reporting 
advisers generally, we estimate that approximately 6 exempt 
reporting advisers that are small entities would be subject to 
proposed rule 204-4 and the proposed amendments to rule 204-1, Form 
ADV, and Form ADV-H (2,000 exempt reporting advisers x 0.3% = 6 
small Wyoming-based exempt reporting advisers).
    \489\ Based on IARD data as of July 1, 2010, we estimate that 
there were approximately 14,700 State-registered advisers. Because 
section 203A currently precludes most advisers with less than $25 
million in assets under management from registering with the 
Commission, we assume that nearly all of the 14,700 State-registered 
advisers are small entities. Therefore, 14,700 small entities 
(registered with the states as of July 1, 2010) + 21 small entities 
(registering with the states due to the proposed amendment to the 
pension consultant exemption in rule 203A-2(b))--2 small entities 
(registering due to elimination of the private adviser exemption in 
section 203(b)(3))--15 small entities (de-registering with the 
states and registering with the Commission due to the proposed 
amendment to the multi-State adviser exemption in rule 203A-2(e)) = 
approximately 14,704 State-registered advisers that are small 
entities.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping and Other Compliance Requirements

    The proposed rules and rule and form amendments would impose 
certain reporting, recordkeeping, and compliance requirements on 
advisers, including small advisers. The proposals would require all of 
the small advisers registered with us to file an amended Form ADV, 
would require some to file Form ADV-W, and would require some to file 
reports as exempt reporting advisers. The amendments also would cause 
the adviser to be subject to the existing recordkeeping and compliance 
requirements for SEC-registered advisers. These requirements and the 
burdens on small advisers are discussed below.\490\
---------------------------------------------------------------------------

    \490\ Supra sections I through II of this Release, describe 
these requirements in more detail.
---------------------------------------------------------------------------

Transition to State Registration
    Proposed rule 203A-5 would impose costs on all investment advisers, 
including small advisers, by requiring each investment adviser 
registered with us to file an amendment to its Form ADV no later than 
August 20, 2011 (30 days after the July 21, 2011 effective date of the 
amendments to section 203A), and withdraw from Commission registration 
by October 19, 2011 (60 days after the required filing of Form ADV), if 
no longer eligible.\491\ We estimate that all of the 620 small advisers 
currently registered with the Commission would file Form ADV, but none 
would withdraw registration because the Dodd-Frank Act does not change 
the eligibility requirements for small advisers registered with us 
because they rely on one or more of the exemptions from the prohibition 
on registration.\492\
---------------------------------------------------------------------------

    \491\ Proposed rule 203A-5(a), (b). See supra section II.A.1. of 
this Release.
    \492\ See section 410 of the Dodd-Frank Act.
---------------------------------------------------------------------------

Switching Between State and Commission Registration
    The proposed amendments to rule 203A-1 would eliminate the $5 
million buffer in current rule 203A-1(a), which permits but does not 
require an adviser to register with the Commission if the adviser has 
between $25 million and $30 million of assets under management.\493\ By 
definition, a small adviser under the Advisers Act has less than $25 
million in assets under management, so elimination of this rule should 
have no impact on small advisers.\494\
---------------------------------------------------------------------------

    \493\ See proposed rule 203A-1; supra section II.A.4. of this 
Release.
    \494\ See rule 0-7(a)(1).
---------------------------------------------------------------------------

Exemptions From the Prohibition on Registration with the Commission
    The amendments we are proposing to two of the three exemptions from 
the prohibition on registration in rule 203A-2 would cause small 
advisers to be subject to new reporting, recordkeeping, and other 
compliance requirements.\495\ The proposed amendment to the exemption 
from the prohibition on registration available to pension consultants 
in rule 203A-2(b) would increase the minimum value of plan assets from 
$50 million to $200 million.\496\ We estimate that this may cause 
approximately 21 small adviser pension consultants to be required to 
withdraw from registration with us by filing Form ADV-W and thus no 
longer be subject to Commission rules.\497\ These advisers would likely 
need to register with one or more states, and comply with the states' 
recordkeeping and other regulatory requirements. This would have a 
negative impact on competition for these advisers compared to pension 
consultants with more than $200 million of plan assets that would 
remain registered with the Commission.
---------------------------------------------------------------------------

    \495\ See proposed rule 203A-2; supra section II.A.5. of this 
Release. The proposed elimination of the exemption from the 
prohibition on Commission registration for NRSROs in rule 203A-2(a) 
would not affect small advisers because based on IARD data as of 
September 1, 2010 only one NRSRO remains registered under the Act 
and it reports that it has more than $100 million of assets under 
management. Therefore, it would neither be a small adviser nor rely 
on the exemption.
    \496\ We also propose to renumber the rule as rule 203A-2(a). 
See proposed rule 203A-2(a); supra section II.A.5.b. of this 
Release.
    \497\ See supra notes 318-321 and accompanying text; supra note 
487 and accompanying text.
---------------------------------------------------------------------------

    The proposed amendment to the multi-State adviser exemption in rule 
203A-2(e) would permit investment advisers required to register as an 
investment adviser with 15 or more states, instead of 30 or more states 
under the current rule, to register with the Commission.\498\ An 
investment adviser relying on this exemption would continue to report 
certain information on Form ADV \499\ and maintain a record of the 
states in which the investment adviser has determined it would, but for 
the exemption, be required to register. This would promote efficiency 
and

[[Page 77094]]

competition by making the standards for the multi-State exemption 
consistent for small and mid-sized advisers. We estimate that, in 
addition to the approximately 23 small advisers that rely on the 
exemption currently, approximately 15 would begin relying on the 
exemption if amended as proposed.\500\ Advisers newly relying on the 
proposed amended exemption would incur costs associated with completing 
and filing Form ADV for purposes of registration with the Commission, 
and all of the advisers relying on the exemption will incur the costs 
associated with keeping records sufficient to demonstrate that they 
would be required to register with 15 or more states.\501\ In addition, 
these advisers will incur costs of complying with the Advisers Act and 
our rules, but they may see an absolute reduction in compliance costs 
by registering with the Commission instead of 15 or more states.\502\
---------------------------------------------------------------------------

    \498\ We also propose to renumber the rule as rule 203A-2(d). 
See proposed rule 203A-2(d); supra section II.A.5.c. of this 
Release.
    \499\ Advisers would be required to: (i) Include a 
representation on Schedule D of Form ADV that the investment adviser 
has concluded that it must register as an investment adviser with 15 
or more states; and (ii) undertake to withdraw from registration 
with the Commission if the adviser indicates on an annual updating 
amendment to Form ADV that the investment adviser would be required 
by the laws of fewer than 15 states to register as an investment 
adviser with those states. See proposed rule 203A-2(d)(2).
    \500\ See supra note 324.
    \501\ See supra notes 325-327 and accompanying text.
    \502\ See supra note 323 and accompanying text.
---------------------------------------------------------------------------

Elimination of Safe Harbor
    The proposed elimination of rule 203A-4, which provides a safe 
harbor from Commission registration for an investment adviser based on 
a reasonable belief that it is prohibited from registering with the 
Commission because it does not have at least $30 million of assets 
under management, would not create new requirements for small 
advisers.\503\ These advisers would not have at least $30 million of 
assets under management, and advisers have not, in our experience, 
asserted the availability of this safe harbor.
---------------------------------------------------------------------------

    \503\ Rule 203A-4. See supra section II.A.6. of this Release.
---------------------------------------------------------------------------

Mid-Sized Advisers
    Our proposal to incorporate into Form ADV an explanation of how we 
construe the determination of whether a mid-sized adviser is ``required 
to be registered'' or is ``subject to examination'' by a particular 
State securities authority for purposes of section 203A(a)(2)'s 
prohibition on mid-sized advisers from registering with the Commission 
would not create new reporting requirements for small advisers.\504\ 
The mid-sized adviser requirements would only apply to advisers with 
assets under management between $25 million and $100 million and would 
therefore not apply to small advisers.
---------------------------------------------------------------------------

    \504\ See proposed Form ADV: Instructions for Part 1A, instr. 
2.b.; supra section II.A.7. of this Release.
---------------------------------------------------------------------------

Exempt Reporting Advisers
    Proposed rule 204-4 and the proposed amendments to rules 204-1, 
Form ADV, and Form ADV-H to require exempt reporting advisers to file 
reports with the Commission electronically on Form ADV would impose 
reporting requirements on an estimated 6 small advisers.\505\ As 
discussed above, we estimate that completing and filing Form ADV will 
cost $1,764 for each exempt reporting adviser.\506\ In addition, small 
exempt reporting advisers would be required to pay an estimated filing 
fee of $200 annually,\507\ for a total of $1,200 for the estimated 6 
small exempt reporting advisers.\508\ Finally, under rule 204-4 exempt 
reporting advisers that seek a temporary hardship exemption from 
electronic filing would be required to complete and file Form ADV-
H.\509\ To the extent that either of the estimated two small exempt 
reporting advisers file Form ADV-H, we have estimated that it would 
require 1 burden hour at a total cost of $204.\510\
---------------------------------------------------------------------------

    \505\ See supra note 488.
    \506\ See supra note 338 and accompanying text. $3,528,000/2,000 
= $1,764.
    \507\ See supra section IV.B.2. of this Release (discussing the 
potential filing fee).
    \508\ $200 x 6 small exempt reporting advisers = $1,200.
    \509\ Proposed rule 204-4(e).
    \510\ See supra section IV.B.2. of this Release.
---------------------------------------------------------------------------

Amendments to Form ADV
    Proposed amendments to Form ADV would require registered advisers 
to report different or additional information than what is currently 
required. Approximately 620 small advisers currently registered with 
us, and two advisers currently relying on the private adviser exemption 
that we expect will register with us, would be subject to these 
requirements.\511\ We expect these 620 advisers would spend, on 
average, 4.5 hours to respond to the new and amended questions we are 
proposing today, other than the private fund reporting 
requirements.\512\ We expect the aggregate cost associated with this 
process would be $703,080.\513\ The two anticipated newly registering 
advisers would spend, in the aggregate, about 82 hours total to 
complete the form (Part 1 except for the private fund reporting 
requirements, and Part 2) as well as to amend the form periodically, to 
prepare brochure supplements, and to deliver codes of ethics to 
clients,\514\ for a total cost of $20,664.\515\ In addition, of these 
approximately 620 registered advisers, we estimate that 200 advise one 
or more private funds and would have to complete the private fund 
reporting requirements we are proposing today.\516\ We expect this will 
take 600 hours,\517\ in the aggregate, for a total cost of 
$151,200.\518\ The total estimated labor costs associated with our 
amendments that we expect will be borne by small advisers, therefore, 
are $874,944. Additionally, we estimate that one of the newly 
registering advisers would use outside legal services to assist them in 
preparing their Part 2 brochure, for a total non-labor cost of 
$3,200.\519\
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    \511\ See supra notes 484-485 and accompanying text.
    \512\ See supra text preceding note 388. We are calculating 
costs only of the increased burden because we have previously 
assessed the costs of the other items of Form ADV for registered 
advisers and for new advisers attributed to annual growth. The 
amendments we are proposing today would increase neither the burden 
associated with these items on Form ADV, nor the external costs 
associated with certain Part 2 requirements.
    \513\ We expect that the performance of this function will most 
likely be equally allocated between a senior compliance examiner and 
a compliance manager. Data from the SIFMA Management and Earnings 
Report, modified to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead, suggest that costs for these positions are 
$210 and $294 per hour, respectively. 620 advisers x 4.5 hours = 
2,790 hours. [1,395 hours x $210 = $292,950] + [1,395 hours x $294 = 
$410,130] = $703,080.
    \514\ 2 advisers x 40.74 hours per adviser to complete the 
entire form (except private fund reporting requirements) = 81.48 
hours.
    \515\ [41 hours x $210 = $8,610] + [41 hours x $294 = $12,054] = 
$20,664. As noted above, we expect that the performance of this 
function will most likely be equally allocated between a senior 
compliance examiner and a compliance manager. See supra note 354.
    \516\ See supra note 404.
    \517\ We expect these advisers are likely to advise 3 funds 
each. See text accompanying note 405. We estimated above that 
private fund reporting would take an adviser approximately 1 hour 
per fund to complete. 200 advisers x 3 hours = 600 hours.
    \518\ [300 hours x $210 = $63,000] + [300 hours x $294 = 
$88,200] = $151,200. As noted above, we expect that the performance 
of this function will most likely be equally allocated between a 
senior compliance examiner and a compliance manager. See supra note 
354.
    \519\ The currently approved burden associated with Form ADV 
already accounts for similar estimated costs to be incurred by 
current registrants. The non-labor costs for Form ADV are based on 
an estimate that 50% of small advisers will retain either legal 
services (at $3,200) or compliance consulting services (at $3,000) 
to assist in the preparation of Form ADV. See supra note 420 and 
accompanying text.
---------------------------------------------------------------------------

Amendments to Pay to Play Rule
    Our proposed amendment to rule 206(4)-5 to make it apply to exempt 
reporting advisers and foreign private advisers would not create new 
reporting, recordkeeping, or other compliance requirements on these 
advisers.\520\ Rather, we are proposing this amendment to ensure that 
the rule

[[Page 77095]]

continues to apply to these advisers and to prevent the unintended 
narrowing of the rule.\521\ Our proposed amendment to permit an adviser 
to pay any registered municipal advisor subject to a pay to play rule 
adopted by MSRB to solicit government entities on its behalf may create 
new recordkeeping and compliance requirements on investment advisers 
that are small entities subject to the rule to the extent that they 
have to verify and document that placement agents that they hire to 
solicit government entities are indeed registered municipal 
advisors.\522\ Finally, our technical amendment to rule 206(4)-5's 
definition of a ``covered associate'' \523\ of an investment adviser to 
clarify that a legal entity, not just a natural person, that is a 
general partner or managing member of an investment adviser would meet 
the definition, would not create any new reporting, recordkeeping, or 
other compliance requirements.\524\
---------------------------------------------------------------------------

    \520\ See supra section II.D.1 of this Release (discussing these 
amendments).
    \521\ See id.
    \522\ See id.
    \523\ See id.
    \524\ See id.
---------------------------------------------------------------------------

Other Amendments
    Our proposed amendments to rule 204-2's grandfathering provision 
are meant to ensure that private fund advisers that are required to 
register as a result of the Dodd-Frank Act's elimination of the private 
fund exemption in section 203(b)(3) would not face a retroactive 
recordkeeping requirement.\525\ Our proposed technical amendment to 
rule 204-2(e)(3)(ii) would add a cross-reference to the new definition 
of a private fund in section 202(a)(29) of the Advisers Act.\526\ These 
amendments would not create reporting, recordkeeping, and other 
compliance requirements for small entities independent of the 
reporting, recordkeeping, and other compliance requirements imposed by 
current rule 204-2.\527\
---------------------------------------------------------------------------

    \525\ See supra note 231 and accompanying text.
    \526\ See supra section II.D.2.b of this Release.
    \527\ The Dodd-Frank Act's removal of the private adviser 
exemption in section 203(b)(3) may require additional small advisers 
to register with the Commission. Therefore these small entities 
would become subject to rule 204-2 with its reporting, 
recordkeeping, and other compliance burdens. However, subjecting 
these entities to rule 204-2 is a function of the Dodd-Frank Act's 
removal of the private adviser exemption in section 203(b)(3), not 
our proposed amendments to rule 204-2.
---------------------------------------------------------------------------

    We do not believe that our proposed technical amendments to rules 
0-7, 222-1, and 222-2 would impose reporting, recordkeeping, and other 
compliance requirements on small advisers.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We believe that there are no proposed rules that duplicate, 
overlap, or conflict with the proposed rules and rule and form 
amendments.

F. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. In 
connection with the proposed rule amendments, the Commission considered 
the following alternatives: (i) The establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (ii) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rules for such small entities; (iii) 
the use of performance rather than design standards; and (iv) an 
exemption from coverage of the rules, or any part thereof, for such 
small entities.
    Regarding the first and fourth alternatives, we do not believe that 
differing compliance or reporting requirements or an exemption from 
coverage of the new rules or rule amendments, or any part thereof, for 
small entities, would be appropriate or consistent with investor 
protection or with Congress's mandate in the Dodd-Frank Act, to the 
extent the new rule or amendment is being proposed due to a 
Congressional mandate. Because the protections of the Advisers Act are 
intended to apply equally to clients of both large and small advisory 
firms, it would be inconsistent with the purposes of the Act to specify 
different requirements for small entities under the proposed rules and 
amendments unless expressly required to do so by Congress.
    Regarding the second alternative, proposed rule 203A-5 would enable 
small advisers to easily and efficiently identify whether they are 
subject to our regulatory authority after the Dodd-Frank Act's 
amendment to section 203A becomes effective, and would also help 
minimize any potential uncertainty about the effects of the Dodd-Frank 
Act on their registration status by providing a simple, efficient means 
of determining their post-Dodd-Frank registration status as of a 
specific date. The proposed amendments to rule 203A-1 eliminate the $5 
million buffer because it seems unnecessary in light of Congress's 
determination to require many (although not all) advisers having 
between $30 million and $100 million of assets under management to be 
registered with the states,\528\ and makes the registration 
requirements for advisers with assets under management between $25 
million and $30 million uniform with the requirements for advisers with 
assets under management between $30 million and $100 million. Our 
proposal to amend the multi-State adviser exemption in rule 203A-2(e) 
also would consolidate and simplify compliance for small advisers by 
aligning the rule with the multi-State exemption Congress built into 
the mid-sized adviser provision under section 410 of the Dodd-Frank Act 
and by requiring one standard for advisers relying on the 
exemption.\529\ This amendment also would reduce the compliance burdens 
on advisers required to be registered with at least 15 states, but less 
than 30, by allowing them to register with a single securities 
regulator--the Commission. Furthermore, our proposal to use an existing 
form, Form ADV, and an existing filing system, IARD, for reporting and 
registration purposes will clarify and simplify the processes of 
registering and/or reporting for small entities because: (i) All of the 
information collection requirements for both registration and reporting 
would be consolidated in a single form; (ii) a small exempt reporting 
adviser would be able to use the same form and filing system both for 
reporting and for purposes of registering with one or more State 
securities authorities; and (iii) a small exempt reporting adviser may 
find that it can no longer rely on an exemption from registration with 
the Commission and would be able to register simply by filing an 
amendment to its current Form ADV to apply for registration.\530\
---------------------------------------------------------------------------

    \528\ See supra note 67.
    \529\ See proposed rule 203A-2(d); supra section IV.A.1. of this 
Release. Under rule 203A-2(e), the prohibition on registration with 
the Commission does not apply to an investment adviser that is 
required to register with 30 or more states. Once registered with 
the Commission, the adviser remains eligible for Commission 
registration as long as it would be obligated, absent the exemption, 
to register with at least 25 states. We propose to amend rule 203A-
2(e) to permit all investment advisers required to register as an 
investment adviser with 15 or more states to register with the 
Commission.
    \530\ See supra section II.C. of this Release.
---------------------------------------------------------------------------

    Regarding the third alternative, we do not consider using 
performance rather than design standards to be consistent with our 
statutory mandate of investor protection or with Congress's mandate in 
the Dodd-Frank Act.

G. Solicitation of Comments

    We encourage written comments on matters discussed in this IRFA. In

[[Page 77096]]

particular, the Commission seeks comment on:
     The number of small entities subject to the proposed rules 
and rule and form amendments; and
     Whether the effect of the proposed rules and rule and form 
amendments on small entities would be economically significant.

Commenters are asked to describe the nature of any effect and provide 
empirical data supporting the extent of the effect.

VII. Effects on Competition, Efficiency and Capital Formation

    The Commission is proposing to adopt certain new rules and to amend 
others pursuant to its authority under section 204(a) of the Advisers 
Act,\531\ and sections 23(a) and 28(e)(2) of the Exchange Act.\532\ 
Section 204(a) of the Advisers Act and section 28(e)(2) of the Exchange 
Act require the Commission, when engaging in rulemaking under the 
authority provided in those sections, to consider whether the rule is 
``necessary or appropriate in the public interest or for the protection 
of investors.'' \533\ Section 202(c) of the Advisers Act requires the 
Commission, when engaging in rulemaking that requires it to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, ``in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.'' \534\ Section 3(f) of the Exchange Act requires the 
Commission, when engaging in rulemaking that requires it to consider or 
determine whether an action is necessary or appropriate in the public 
interest to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.\535\ Section 23(a) of the Exchange Act requires the 
Commission, in adopting rules under the Exchange Act, to consider the 
impact that any new rule would have on competition, and prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\536\
---------------------------------------------------------------------------

    \531\ 15 U.S.C. 80b-4(a).
    \532\ 15 U.S.C. 78w(a) and 78bb(e)(2).
    \533\ 15 U.S.C. 80b-4(a) and 78bb(e)(2).
    \534\ 15 U.S.C. 80b-2(c).
    \535\ 15 U.S.C. 78c(f).
    \536\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission is proposing to adopt rule 204-4 and to amend rules 
204-1 and 204-2 and Forms ADV, ADV-NR, and ADV-H.\537\ The proposed new 
rule and rule and form amendments are designed to give effect to 
provisions of Title IV of the Dodd-Frank Act.\538\ We are proposing new 
rule 204-4 to require exempt reporting advisers to file reports with 
the Commission electronically on Form ADV.\539\ We are also proposing 
amendments to Form ADV to improve our risk-assessment capabilities and 
so that it can serve the dual purpose of both an SEC reporting form for 
exempt reporting advisers and, as it is used today, a registration form 
for both State and SEC-registered firms.\540\ In addition to requiring 
that exempt reporting advisers use Form ADV, proposed rule 204-4 would 
require these advisers to submit reports through the IARD and to pay a 
filing fee.\541\ We are also proposing to amend rule 204-1, which 
addresses when and how advisers must amend their Form ADV, to add a 
requirement that exempt reporting advisers file updating amendments to 
reports filed on Form ADV.\542\
---------------------------------------------------------------------------

    \537\ In contrast, we are proposing new rule 203A-5 and 
amendments to rules 203A-1, 203A-2, 203A-3, and 203A-4 pursuant to 
our authority set forth in sections 203A(c) and 211(a), amendments 
to rules 0-7, 222-1, and 222-2 pursuant to our authority set forth 
in section 211(a), and amendments to rule 206(4)-5 pursuant to our 
authority set forth in sections 206(4) and 211(a). For a discussion 
of the effects of this proposed new rule and rule amendments on 
competition, efficiency, and capital formation, see supra sections 
IV., V., and VI. of this Release.
    \538\ For a discussion of the overall objectives of our 
proposals, see supra section I of this Release.
    \539\ Proposed rule 204-4. See supra section II.B.1. of this 
Release.
    \540\ See supra sections II.B. and II.C. of this Release.
    \541\ Proposed rule 204-4(b). Proposed rule 204-4(e) would also 
allow exempt reporting advisers having unanticipated technical 
difficulties that prevent submission of a filing to the IARD system 
to request a temporary hardship exemption from electronic filing 
requirements by filing Form ADV-H. We are also proposing technical 
amendments to Form ADV-H for this purpose.
    \542\ See proposed rule 204-1; supra section II.B.3. of this 
Release.
---------------------------------------------------------------------------

A. Proposed Exempt Reporting Adviser Reporting Requirements

    The Dodd-Frank Act provides that the Commission shall require 
reporting by exempt reporting advisers, but it does not indicate the 
information we should collect or the filing method by which it should 
be collected. Our choices, in proposing rule 204-4 to require these 
advisers to complete a sub-set of items contained in Form ADV and to 
file through the IARD, and in proposing to amend rule 204-1 to impose 
periodic updating requirements of those filings, would impose costs on 
exempt reporting advisers,\543\ but would also create efficiencies that 
benefit both us and filers by taking advantage of an established and 
proven adviser filing system and avoiding the expense and delay of 
developing a new form and filing system. Additionally, we believe this 
proposal may create efficiencies to the extent exempt reporting 
advisers may be required to register on Form ADV with one or more State 
securities authorities because they would be using the existing form 
and filing system that is also used by the states, which should reduce 
regulatory burdens.\544\ Similarly, regulatory burdens would be 
diminished for an exempt reporting adviser that later finds it can no 
longer rely on an exemption and would be required to register with us 
because the adviser would simply file an amendment to its current Form 
ADV to apply for Commission registration.\545\
---------------------------------------------------------------------------

    \543\ For a discussion of the costs of the reporting obligations 
we are proposing to apply to exempt reporting advisers, see section 
IV.B.2, of this Release.
    \544\ See supra section IV.A.2. of this Release.
    \545\ See proposed General Instruction 14 (providing procedural 
guidance to advisers that no longer meet the definition of exempt 
reporting adviser). See also supra note 128 and accompanying text. 
Certain items in Form ADV Part 1 are also linked to Form B-D, which 
would create efficiencies if the exempt reporting adviser ever 
applies for broker-dealer registration.
---------------------------------------------------------------------------

    Using Form ADV and IARD would also enable investors to access 
information on our Web site that may have previously been unavailable 
or not easily attainable, such as whether a prospective exempt 
reporting adviser has reported disciplinary events and whether its 
relationships with affiliates present conflicts of interest or 
potential efficiencies. Public access to this information, which may 
previously have been undisclosed, may promote competition to the extent 
that it would allow private fund investors to make informed decisions 
about these advisers, avoiding the burdens and costs associated with 
selling private funds to switch advisers at a later date, and thereby 
potentially creating efficiency gains in the marketplace and improving 
allocation of client assets among investment advisers. The availability 
of disciplinary information, in particular, about these advisers and 
their supervised persons may also enhance competition if, for example, 
firms and personnel with better disciplinary records outcompete those 
with worse records. Alternatively, the choices that we have made about 
the information these advisers would report (and that we would make 
publicly available), such as the identification of owners of the 
adviser or disciplinary information, could impose costs on advisers, 
including the potential loss of business to competitors (who may or may 
not report to us or be registered with us), as

[[Page 77097]]

this information may not typically be made available to others.
    Access to the information we propose to require exempt reporting 
advisers to report may also increase clients' and prospective clients' 
trust in investment advisers, which may encourage them to seek 
professional investment advice and encourage them to invest their 
financial assets. This may enhance capital formation by making more 
funds available for investment and enhancing the allocation of capital 
generally. On the other hand, to the extent that the information we 
propose to collect and the filing method by which we propose to collect 
it imposes costs on exempt reporting advisers that are then passed on 
to clients, this may deter clients from seeking professional investment 
advice and investing their financial assets. This may result in 
inefficiencies in the market for advisory services and hinder capital 
formation.

B. Proposed Risk-Assessment Amendments to Form ADV

    The amendments to Form ADV we are proposing today are designed to 
improve advisers' disclosure of their business practices (particularly, 
those relating to advising private funds), non-advisory activities and 
financial industry affiliations, and other conflicts of interest. 
Private fund reporting, in particular, would benefit private fund 
investors and other market participants and would provide us and other 
policy makers with better data. Better data would enhance our ability 
to form and frame regulatory policies regarding the private fund 
industry and fund advisers, and to evaluate the effect of our policies 
and programs on this sector. Private fund reporting would provide us 
with important information about this rapidly growing segment of the 
U.S. financial system. Additionally, data about which advisers have $1 
billion or more of assets would enable us to identify the advisers that 
are covered by section 956 of the Dodd-Frank Act addressing certain 
incentive-based compensation arrangements.
    As acknowledged above with respect to exempt reporting advisers, 
there may also be competitive impacts between registered investment 
advisers as a result of the collection of the proposed additional 
information on Form ADV. For instance, information regarding the amount 
of assets under management by specific types of clients could be used 
by competitors when marketing their own advisory services. Another 
example includes the information concerning private funds that we 
propose to require registered and exempt reporting advisers to submit 
on Form ADV, which could assist private fund investors in assessing 
investment choices or screen funds based on certain parameters such as 
the identification of certain fund service providers or gatekeepers. 
Similarly, this information could be used by other financial service 
providers (such as banks or broker-dealers) that do not provide similar 
information publicly. Increased competition among investment advisers 
(both exempt reporting and registered) and other financial service 
providers may result in capital being allocated more efficiently, 
benefiting clients and certain advisers.
    Better disclosure may increase clients' and prospective clients' 
trust in investment advisers, which may encourage them to seek 
professional investment advice and encourage them to invest their 
financial assets. This also may enhance capital formation by making 
more funds available for investment and enhancing the allocation of 
capital generally. On the other hand, if the rule amendments increase 
costs for investment advisers and these cost increases are passed on to 
clients, this may deter clients from seeking professional investment 
advice and investing their financial assets. This may result in 
inefficiencies in the market for advisory services and hinder capital 
formation.

C. Other Proposed Amendments

    Finally, we are proposing to amend rule 204-2 to cross-reference 
the new definition of private fund and add a grandfathering provision 
relieving firms that were exempt from registration prior to the 
effectiveness of the Dodd-Frank Act's elimination of the ``private 
adviser'' exemption from certain recordkeeping obligations applicable 
to registered advisers.\546\ We also are amending Forms ADV-NR and Form 
ADV-H to provide for their use by exempt reporting advisers. The 
proposed amendments to rule 204-2, Form ADV-NR, and Form ADV-H are 
technical in nature. We do not anticipate that they would have any 
bearing on efficiency, competition, or capital formation.
---------------------------------------------------------------------------

    \546\ See proposed rule 204-2; supra section II.D.2.b of this 
Release. We also intend to rescind rule 204-2(l) because that 
section was vacated by the Federal appeals court in Goldstein.
---------------------------------------------------------------------------

D. Request for Comment

    The Commission requests comment whether the proposed rule and rule 
amendments would, if adopted, promote efficiency, competition, and 
capital formation. Commenters are requested to provide empirical data 
to support their views.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \547\ the Commission must advise OMB 
whether a proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results in 
or is likely to result in: (1) An annual effect on the economy of $100 
million or more; (2) a major increase in costs or prices for consumers 
or individual industries; or (3) significant adverse effects on 
competition, investment, or innovation.
---------------------------------------------------------------------------

    \547\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C. and 15 U.S.C., and as a 
note to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential impact of the proposed new rule 
and proposed rule amendments on the economy on an annual basis. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.

IX. Statutory Authority

    The Commission is proposing new rule 203A-5 and amendments to rules 
203A-1, 203A-2, 203A-3, and 203A-4 under the Advisers Act pursuant to 
the authority set forth in sections 203A(c), and 211(a) of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-3A(c) and 80b-11(a)]; 
new rule 204-4 and amendments to rules 204-1 and 204-2 pursuant to the 
authority set forth in sections 204 and 211(a) of the Advisers Act [15 
U.S.C. 80b-4 and 80b-11(a)]; amendments to rule 206(4)-5 pursuant to 
authority set forth in sections 206(4) and 211(a) of the Advisers Act 
[15 U.S.C. 80b-6(4) and 80b-11(a)]; amendments to rules 0-7, 222-1, and 
222-2 pursuant to authority set forth in section 211(a) of the Advisers 
Act [15 U.S.C. 80b-11(a)]; and to amend Form ADV under section 19(a) of 
the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 
28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and 
78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 
U.S.C. 77sss(a)], section 38(a) of the Investment Company Act of 1940 
[15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, and 211(a) of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)]; Form ADV-NR under section 19(a) of the Securities Act of 1933 
[15 U.S.C. 77s(a)], section 23(a) of the Securities Exchange Act of 
1934 [15 U.S.C. 78w(a)], section 319(a) of the Trust Indenture Act of 
1939 [15 U.S.C. 77sss(a)], section 38(a) of the Investment Company Act 
of 1940 [15 U.S.C. 78a-

[[Page 77098]]

37(a)], and sections 203(c)(1), 204, and 211(a) of the Investment 
Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)]; and 
Form ADV-H pursuant to the authority set forth in sections 203(c)(1), 
204, and 211(a) of the Advisers Act [15 U.S.C. 80b-3(c)(1), 80b-4, 80b-
11(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 proposed to be amended as follows.

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

    1-2. The authority citation for Part 275 is amended by revising the 
general authority and by adding authority for sections 275.203A-5, 
275.204-1 and 275.204-4 to read 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.
* * * * *
    Section 275.203A-5 is also issued under 15 U.S.C. 80b-3a.
    Section 275.204-1 is also issued under sec. 407 and 408, Pub. L. 
111-203, 124 Stat. 1376.
    Section 275.204-4 is also issued under sec. 407 and 408, Pub. L. 
111-203, 124 Stat. 1376.

    3. Section 275.0-7 is amended by revising the reference to 
``Section 203A(a)(2)'' in paragraph (a)(1) to read ``Section 
203A(a)(3).''
    4. Section 275.203A-1 is revised to read as follows:

Sec.  275.203A-1  Switching to or from SEC registration.

    (a) State-registered advisers--switching to SEC registration. If 
you are registered with a State securities authority, you must apply 
for registration with the Commission within 90 days of filing an annual 
updating amendment to your Form ADV reporting that you are eligible for 
SEC registration and are not relying on an exemption from registration 
under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)).
    (b) SEC-registered advisers--switching to State registration. If 
you are registered with the Commission and file an annual updating 
amendment to your Form ADV reporting that you are not eligible for SEC 
registration and are not relying on an exemption from registration 
under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)), 
you must file Form ADV-W (17 CFR 279.2) to withdraw your SEC 
registration within 180 days of your fiscal year end (unless you then 
are eligible for SEC registration). During this period while you are 
registered with both the Commission and one or more State securities 
authorities, the Act and applicable State law will apply to your 
advisory activities.
    5. Section 275.203A-2 is amended by:
    a. Removing paragraph (a);
    b. Redesignating paragraphs (b) through (f) as paragraphs (a) 
through (e);
    c. Revising newly designated paragraph (a)(1);
    d. Revising the reference to ``paragraph (b) of this section'' in 
newly designated paragraph (a)(2) to read ``paragraph (a) of this 
section'';
    e. Revising newly designated paragraph (c)(1);
    f. Revising the reference in newly designated paragraph (c)(3) to 
``Sec.  275.203A-1(b)(2)'' to read ``Sec.  275.203A-1(b)'';
    g. Revising newly designated paragraph (d)(1);
    h. Further redesignating newly designated paragraphs (d)(2) and 
(d)(3) as paragraphs (d)(2)(i) and (d)(2)(ii);
    i. Adding new introductory text to paragraph (d)(2) and revising 
newly designated paragraphs (d)(2)(i) and (d)(2)(ii);
    j. Further redesignating newly designated paragraph (d)(4) as 
paragraph (d)(3);
    k. Revising the reference to ``paragraph (f) of this section'' in 
newly designated paragraphs (e)(1)(ii), (e)(1)(iii), and (e)(2) to read 
``paragraph (e) of this section'';
    l. Revising the reference to ``paragraph (f)(1)(i) of this 
section'' in newly designated paragraph (e)(1)(ii) to read ``paragraph 
(e)(1)(i) of this section'';
    m. Revising the reference ``paragraph (c) of this section'' in 
newly designated paragraph (e)(1)(iii) to read ``paragraph (b) of this 
section''; and
    n. Revising the reference ``Sec.  275.203(b)(3)-1'' in newly 
designated paragraph (e)(3) to read ``Sec.  275.202(a)(30)-1''.
    The revisions and additions read as follows:

Sec.  275.203A-2   Exemptions from prohibition on Commission 
registration.

    (a) 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 $200,000,000.
* * * * *
    (c) * * *
    (1) Immediately before it registers with the Commission, is not 
registered or required to be registered with the Commission or a State 
securities authority of any State and has a reasonable expectation that 
it would be eligible to register with the Commission within 120 days 
after the date the investment adviser's registration with the 
Commission becomes effective;
* * * * *
    (d) * * *
    (1) Upon submission of its application for registration with the 
Commission, is required by the laws of 15 or more States to register as 
an investment adviser with the State securities authority in the 
respective States, and thereafter would, but for this section, be 
required by the laws of at least 15 States to register as an investment 
adviser with the State securities authority in the respective States;
    (2) Elects to rely on paragraph (d) of this section by:
    (i) Indicating on Schedule D of its Form ADV 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 15 or more States to register 
as an investment adviser with the State securities authorities in the 
respective States or, in the case of an amendment to Form ADV, it would 
be required by the laws of at least 15 States to register as an 
investment adviser with the State securities authorities in the 
respective States, within 90 days prior to the date of filing Form ADV; 
and
    (ii) Undertaking on Schedule D of its Form ADV to withdraw from 
registration with the Commission if the adviser indicates on an annual 
updating amendment to Form ADV that the investment adviser would be 
required by the laws of fewer than 15 States to register as an 
investment adviser with the State securities authority in the 
respective States, and 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, by filing a completed Form ADV-W within 180 days 
of the adviser's fiscal year end (unless the adviser then has at least 
$100 million of assets under management or is otherwise eligible for 
SEC registration); and
* * * * *
    6. Section 275.203A-3 is amended by revising paragraph (a)(4) and 
adding paragraphs (d) and (e) to read as follows:

Sec.  275.203A-3   Definitions.

* * * * *
    (a) * * *

[[Page 77099]]

    (4) Supervised persons may rely on the definition of ``client'' in 
Sec.  275.202(a)(30)-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.
* * * * *
    (d) Assets under management. Determine ``assets under management'' 
by calculating the securities portfolios with respect to which an 
investment adviser provides continuous and regular supervisory or 
management services as reported on the investment adviser's Form ADV 
(17 CFR 279.1).
    (e) State securities authority. ``State securities authority'' 
means the securities commissioner or commission (or any agency, office 
or officer performing like functions) of any State.
    7. Section 275.203A-4 is removed and reserved.
    8. Section 275.203A-5 is added to read as follows:

Sec.  275.203A-5   Transition rules.

    (a) Every investment adviser registered with the Commission on July 
21, 2011 shall file an other-than-annual amendment to Form ADV (17 CFR 
279.1) no later than August 20, 2011 and shall determine its assets 
under management based on the current market value of the assets as 
determined within 30 days prior to the date of filing the Form ADV.
    (b) If an investment adviser registered with the Commission on July 
21, 2011 would be prohibited from registering with the Commission under 
section 203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)), and is not 
otherwise exempted by Sec.  275.203A-2 from such prohibition, such 
investment adviser shall withdraw from registration with the Commission 
by filing Form ADV-W (17 CFR 279.2) no later than October 19, 2011. 
During this period while an investment adviser is registered with both 
the Commission and one or more State securities authorities, the Act 
and applicable State law will apply to the investment adviser's 
advisory activities.
    (c) If, prior to the effective date of the withdrawal from 
registration of an investment adviser on Form ADV-W, the Commission has 
instituted a proceeding pursuant to section 203(e) of the Act (15 
U.S.C. 80b-3(e)) to suspend or revoke registration, or pursuant to 
section 203(h) of the Act (15 U.S.C. 80b-3(h)) to impose terms or 
conditions upon withdrawal, the withdrawal from registration shall not 
become effective except at such time and upon such terms and conditions 
as the Commission deems necessary or appropriate in the public interest 
or for the protection of investors.
    9. Section 275.204-1 is amended by revising the heading, paragraphs 
(b) and (c) to read as follows:

Sec.  275.204-1  Amendments to Form ADV.

* * * * *
    (b) Electronic filing of amendments.
    (1) Subject to paragraph (c), you must file all amendments to Part 
1A of Form ADV and Part 2A of Form ADV electronically with the IARD, 
unless you have received a continuing hardship exemption under Sec.  
275.203-3. You are not required to file with the Commission amendments 
to brochure supplements if required by Part 2B of Form ADV.
    (2) If you have received a continuing hardship exemption under 
Sec.  275.203-3, you must, when you are required to amend your Form 
ADV, file a completed Part 1A and Part 2A of Form ADV on paper with the 
SEC by mailing it to FINRA.

    Note to paragraphs (a) and (b):  Information on how to file with 
the IARD is available on our Web site at http://www.sec.gov/iard. 
For the annual updating amendment: Summaries of material changes 
that are not included in the adviser's brochure must be filed with 
the Commission as an exhibit to Part 2A in the same electronic file; 
and if you are not required to prepare a brochure, a summary of 
material changes, or an annual updating amendment to your brochure, 
you are not required to file them with the Commission. See the 
instructions for Part 2A of Form ADV.

    (c) Transition to electronic filing. If you are required to file a 
brochure and your fiscal year ends on or after December 31, 2010, you 
must amend your Form ADV by electronically filing with the IARD one or 
more brochures that satisfy the requirements of Part 2A of Form ADV (as 
amended effective October 12, 2010) as part of the next annual updating 
amendment that you are required to file.
* * * * *
    10. Section 275.204-2 is amended by removing paragraph (l), and 
revising paragraph (e)(3)(ii) to read as follows:

Sec.  275.204-2  Books and records to be maintained by investment 
advisers.

* * * * *
    (e) * * *
    (3) * * *
    (ii) Transition rule. If you are an investment adviser that was, 
prior to July 21, 2011, exempt from registration under section 
203(b)(3) of the Act (15 U.S.C. 80b-3(b)(3)), as in effect on July 20, 
2011, paragraph (e)(3)(i) of this section does not require you to 
maintain or preserve books and records that would otherwise be required 
to be maintained or preserved under the provisions of paragraph (a)(16) 
of this section to the extent those books and records pertain to the 
performance or rate of return of such private fund (as defined in 
section 202(a)(29) of the Act (15 U.S.C. 80b-2(a)(29)), or other 
account you advise for any period ended prior to July 21, 2011, 
provided that you were not registered with the Commission as an 
investment adviser during such period, and provided further that you 
continue to preserve any books and records in your possession that 
pertain to the performance or rate of return of such private fund or 
other account for such period.
* * * * *
    11. Section 275.204-4 is added to read as follows:

Sec.  275.204-4   Reporting by exempt reporting advisers.

    (a) Exempt reporting advisers. If you are an investment adviser 
relying on the exemption from registering with the Commission under 
section 203(l) or (m) of the Act (15 U.S.C. 80b-3(l) or 80b-3(m)), you 
must complete and file reports on Form ADV (17 CFR 279.1) by following 
the instructions in the Form, which specify the information that an 
exempt reporting adviser must provide.
    (b) Electronic filing. You must file Form ADV electronically with 
the Investment Adviser Registration Depository (IARD) unless you have 
received a hardship exemption under paragraph (e) of this section.

    Note to paragraph (b):  Information on how to file with the IARD 
is available on the Commission's Web site at http://www.sec.gov/iard.

    (c) When filed. Each Form ADV is considered filed with the 
Commission upon acceptance by the IARD.
    (d) Filing fees. You must pay FINRA (the operator of the IARD) a 
filing fee. The Commission has approved the amount of the filing fee. 
No portion of the filing fee is refundable. Your completed Form ADV 
will not be accepted by FINRA, and thus will not be considered filed 
with the Commission, until you have paid the filing fee.
    (e) Temporary hardship exemption.
    (1) Eligibility for exemption. If you have unanticipated technical 
difficulties that prevent submission of a filing to the IARD system, 
you may request a temporary hardship exemption from the requirements of 
this chapter to file electronically.
    (2) Application procedures. To request a temporary hardship 
exemption, you must:
    (i) File Form ADV-H (17 CFR 279.3) in paper format no later than 
one

[[Page 77100]]

business day after the filing that is the subject of the ADV-H was due; 
and
    (ii) Submit the filing that is the subject of the Form ADV-H in 
electronic format with the IARD no later than seven business days after 
the filing was due.
    (3) Effective date--upon filing. The temporary hardship exemption 
will be granted when you file a completed Form ADV-H.
    (f) Final report. You must file a final report in accordance with 
instructions in Form ADV when:
    (1) You cease operation as an investment adviser;
    (2) You no longer meet the definition of exempt reporting adviser 
under paragraph (a); or
    (3) You apply for registration with the Commission.

    Note to paragraph (f):  You do not have to pay a filing fee to 
file a final report on Form ADV through the IARD.

    12. Section 275.206(4)-5 is amended by:
    a. In paragraph (f)(2)(i), removing the term ``individual'' and 
adding in its place the term ``person''; and
    b. Revising paragraphs (a)(1), (a)(2) introductory text, (a)(2)(i), 
(d), and (f)(9) to read as follows:

Sec.  275.206(4)-5   Political contributions by certain investment 
advisers.

    (a) * * *
    (1) For any investment adviser registered (or required to be 
registered) with the Commission, or unregistered in reliance on the 
exemption available under section 203(b)(3) of the Advisers Act (15 
U.S.C. 80b-3(b)(3)), or that is an exempt reporting adviser, as defined 
in Sec.  275.204-4(a), to provide investment advisory services for 
compensation to a government entity within two years after a 
contribution to an official of the government entity is made by the 
investment adviser or any covered associate of the investment adviser 
(including a person who becomes a covered associate within two years 
after the contribution is made); and
    (2) For any investment adviser registered (or required to be 
registered) with the Commission, or unregistered in reliance on the 
exemption available under section 203(b)(3) of the Advisers Act (15 
U.S.C. 80b-3(b)(3)), or that is an exempt reporting adviser, or any of 
the investment adviser's covered associates:
    (i) To provide or agree to provide, directly or indirectly, payment 
to any person to solicit a government entity for investment advisory 
services on behalf of such investment adviser unless such person is:
    (A) A regulated municipal advisor; or
    (B) An executive officer, general partner, managing member (or, in 
each case, a person with a similar status or function), or employee of 
the investment adviser; and
* * * * *
    (d) Further prohibition. As a means reasonably designed to prevent 
fraudulent, deceptive or manipulative acts, practices, or courses of 
business within the meaning of section 206(4) of Advisers Act (15 
U.S.C. 80b-6(4)), it shall be unlawful for any investment adviser 
registered (or required to be registered) with the Commission, or 
unregistered in reliance on the exemption available under section 
203(b)(3) of the Advisers Act (15 U.S.C. 80b-3(b)(3)), or that is an 
exempt reporting adviser, or any of the investment adviser's covered 
associates to do anything indirectly which, if done directly, would 
result in a violation of this section.
* * * * *
    (f) * * *
    (9) Regulated municipal advisor means a municipal advisor 
registered with the Commission under section 15B of that Act and 
subject to rules of the Municipal Securities Rulemaking Board that:
    (i) Prohibit municipal advisors from engaging in distribution or 
solicitation activities if certain political contributions have been 
made; and
    (ii) The Commission, by order, finds:
    (A) Impose substantially equivalent or more stringent restrictions 
on municipal advisors than this section imposes on investment advisers; 
and
    (B) Are consistent with the objectives of this section.
* * * * *
    13. Section 275.222-1 is amended by revising the phrase ``Principal 
place of business'' to read ``Principal office and place of business'' 
in both the heading and the first sentence of paragraph (b).
    14. Section 275.222-2 is revised to read as follows:

Sec.  275.222-2  Definition of ``client'' for purposes of the national 
de minimis standard.

    For purposes of section 222(d)(2) of the Act (15 U.S.C. 80b-
18a(d)(2)), an investment adviser may rely upon the definition of 
``client'' provided by Sec.  275.202(a)(30)-1, without giving regard to 
paragraph (b)(4) of that section, provided that an investment adviser 
is not required to count as a client any person for whom the investment 
adviser provides advisory services without compensation.

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

    15. 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.

Sec.  279.1  [Amended]

    16. Form ADV [referenced in Sec.  279.1] is amended by:
    a. In the instructions to the form, revising the section entitled 
``Form ADV: General Instructions.'' The revised version of Form ADV: 
General Instructions is attached as Appendix A;
    b. In the instructions to the form, revising the section entitled 
``Form ADV: Instructions for Part 1A.'' The revised version of Form 
ADV: Instructions for Part 1A is attached as Appendix B;
    c. In the instructions to the form, revising the section entitled 
``Form ADV: Glossary of Terms.'' The revised version of Form ADV: 
Glossary of Terms is attached as Appendix C;
    d. In the form, revising Part 1A. The revised version of Form ADV, 
Part 1A is attached as Appendix D;
    e. In the form, revising the reference to ``proceeding'' in Item 
3.D. of Part 2B to read ``hearing or formal adjudication''; and
    f. In the form, revising the section entitled ``Form ADV: Domestic 
Investment Adviser Execution Page.'' The revised version of Form ADV: 
Domestic Investment Adviser Execution Page is attached as Appendix E.
    The revisions read as follows:

    Note: The text of Form ADV does not and the amendments will not 
appear in the Code of Federal Regulations.

* * * * *
Form ADV: Part 2B
* * * * *
    Item 3. * * *
    D. Any other hearing or formal adjudication in which a professional 
attainment, designation, or license of the supervised person was 
revoked or suspended because of a violation of rules relating to 
professional conduct. If the supervised person resigned (or otherwise 
relinquished the attainment, designation, or license) in anticipation 
of such a hearing or formal adjudication (and the adviser knows, or 
should have known, of such resignation or relinquishment), disclose the 
event.
* * * * *

Sec.  279.3  [Amended]

    17. Form ADV-H [referenced in Sec.  279.3] is amended by revising 
the form. The revised version of Form ADV-H is attached as Appendix F.

[[Page 77101]]

     Note: The text of Form ADV-H does not and the amendments will 
not appear in the Code of Federal Regulations.

Sec.  279.4  [Amended]

    18. Form ADV-NR [referenced in Sec.  279.4] is amended by revising 
the form. The revised version of Form ADV-NR is attached as Appendix G.

     Note: The text of Form ADV-NR does not and the amendments will 
not appear in the Code of Federal Regulations.

    By the Commission.

    November 19, 2010.
Elizabeth M. Murphy,
Secretary.
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[FR Doc. 2010-29956 Filed 12-9-10; 8:45 am]
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