[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]
[Rules and Regulations]
[Pages 42950-43105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16318]
[[Page 42949]]
Vol. 76
Tuesday,
No. 138
July 19, 2011
Part III
Securities and Exchange Commission
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17 CFR Parts 275 and 279
Rules Implementing Amendments to the Investment Advisers Act of 1940;
Final Rule
Federal Register / Vol. 76 , No. 138 / Tuesday, July 19, 2011 / Rules
and Regulations
[[Page 42950]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-3221; File No. S7-36-10]
RIN 3235-AK82
Rules Implementing Amendments to the Investment Advisers Act of
1940
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission is adopting 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 adopting rule amendments, including
amendments to the Commission's pay to play rule, that address a number
of other changes made by the Dodd-Frank Act.
DATES: Effective dates: The effective date of 17 CFR 275.204-4 and
275.203A-5(b) and (c), amendments to 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, and amendments to Forms ADV, ADV-E, ADV-H, and ADV-NR
(referenced in 17 CFR part 279) is September 19, 2011. The effective
date of 17 CFR 275.203A-5(a) and the amendment to 17 CFR 275.203-1 is
July 21, 2011. 17 CFR 275.202(a)(11)-1, 275.203(b)(3)-1, 275.203(b)(3)-
2, and 275.203A-4 are removed effective September 19, 2011.
Compliance Date: See section III of this Release.
FOR FURTHER INFORMATION CONTACT: David P. Bartels, Attorney-Adviser,
Michael J. Spratt, Attorney-Adviser, Jennifer R. Porter, Senior
Counsel, Devin F. Sullivan, Senior Counsel, Melissa A. Roverts, Branch
Chief, Matthew N. Goldin, Branch Chief, or Daniel S. Kahl, Assistant
Director, at (202) 551-6787 or [email protected], 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 adopting 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, 203-1, 203A-1, 203A-2, 203A-3, 204-1, 204-2,
206(4)-5, 222-1, and 222-2 [17 CFR 275.0-7, 275.203-1, 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-E, Form ADV-H, and Form ADV-NR [17 CFR 279.1, 279.3, and 279.4]
under the Advisers Act. The Commission is also rescinding rules
202(a)(11)-1, 203(b)(3)-1, 203(b)(3)-2, and 203A-4 [17 CFR
275.202(a)(11)-1, 275.203(b)(3)-1, 275.203(b)(3)-2, and 275.203A-4]
under the Advisers Act.
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\1\ Unless otherwise noted, when we refer to the Advisers Act,
or any paragraph of the Advisers Act, we are referring to 15 U.S.C.
80b of the United States Code, at which the Advisers Act is
codified, and when we refer to rule 0-7, rule 202(a)(11)-1, rule
203-1, 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 275.203-1; 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 (``CFR''), in which these rules are published.
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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. Nationally Recognized Statistical Rating Organizations
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. Public Availability of Reports
4. Updating Requirements
5. Final Reports
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. Custody: Item 9
6. Reporting $1 Billion in Assets: Item 1.O.
7. 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. Effective and Compliance Dates
A. Effective Dates
B. Compliance Dates
1. Transition to State Registration and Form ADV
2. Advisers Previously Exempt Under Section 203(b)(3)
3. Exempt Reporting Advisers
4. Other Amendments
IV. Certain Administrative Law Matters
V. Cost-Benefit Analysis
A. Benefits
B. Costs
VI. Paperwork Reduction Act Analysis
A. Rule 203A-2(d)
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
VII. Final Regulatory Flexibility Analysis
A. Need for and Objectives of the New Rules and Rule Amendments
B. Significant Issues Raised by Public Comment
C. Small Entities Subject to Rules and Rule Amendments
D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
E. Agency Action to Minimize Effect on Small Entities
VIII. Effects on Competition, Efficiency and Capital Formation
IX. Statutory Authority
Text of Rule and Form Amendments
Appendix A: Form ADV: General Instructions
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
Appendix H: Form ADV-E
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 (``Title IV'') includes
[[Page 42951]]
most of the amendments to the Advisers Act. These amendments include
provisions that reallocate primary 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 million and $100 million of assets under management.\3\
These provisions 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 on which many advisers, including those to many hedge
funds, private equity funds, and venture capital funds, rely in order
to avoid registration under the Act.\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 such 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 certain 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)
currently 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 also adopting
today 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. 3222 (``Exemptions Adopting Release'').
\5\ See section 407 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''). See also section 408 of the Dodd-Frank Act. 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 adds 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, unless indicated otherwise, 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.
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On November 19, 2010, we proposed new rules and amendments to
existing rules and forms to give effect to these provisions.\7\
Specifically, we proposed a new rule and amendments to our rules and
forms to facilitate mid-size advisers' transition from Commission to
state registration.\8\ We also proposed a new rule and rule amendments
to require certain advisers to private funds that are exempt from
registration under the Advisers Act to submit reports to us.\9\ We
proposed rule amendments, including amendments to the Commission's
``pay to play'' rule,\10\ to address a number of other changes to the
Advisers Act made by the Dodd-Frank Act.\11\ Also, in light of our
increased responsibility for oversight of private funds, we proposed to
require advisers to those funds to provide us with additional
information about the operation of those funds.\12\ Finally, we
proposed additional changes to Form ADV that would enhance our
oversight of advisers and also would enable us to identify advisers
that are subject to the Dodd-Frank Act's requirements concerning
certain incentive-based compensation arrangements.\13\
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\7\ See Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 3110 (Nov. 19,
2010) [75 FR 77052 (Dec. 10, 2010)] (``Implementing Proposing
Release'').
\8\ See id. at section II.A.
\9\ See id. at section II.B. Throughout this Release, we refer
to advisers exempt from registration under sections 203(l) and
203(m) of the Advisers Act as ``exempt reporting advisers.''
\10\ Rule 206(4)-5.
\11\ See Implementing Proposing Release, supra note 7, at
section II.D.
\12\ See sections 403, 407 and 408 of the Dodd-Frank Act;
Implementing Proposing Release, supra note 7, at section II.C.
\13\ See Implementing Proposing Release, supra note 7, at
section II.C; section 956 of the Dodd-Frank Act.
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We received more than 70 comment letters on our proposals, most of
which were from advisers, trade or professional organizations, and law
firms.\14\ Commenters generally supported our approach to facilitate
mid-size advisers' transition from Commission to state registration,
and our amendments to Form ADV, including those requiring disclosure of
additional information about private funds. Many, however, urged us to
take a different approach to, among other things, our proposed
amendments to the pay to play rule. We are adopting the proposed rules
and rule amendments with several modifications to address commenters'
concerns. We address these modifications and comments in detail below.
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\14\ Comment letters submitted in File No. S7-36-10 are
available on the Commission's Web site at: http://www.sec.gov/comments/s7-36-10/s73610.shtml. We also considered those comments
submitted in File No. S7-37-10 (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 (Nov. 19, 2010) [75 FR 77190 (Dec. 10,
2010)] (``Exemptions Proposing Release'')) that addressed the rules
and amendments adopted in this Release. Those comments are available
at on the Commission's Web site at: http://www.sec.gov/comments/s7-37-10/s73710.shtml.
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II. Discussion
A. Eligibility for Registration With the Commission: Section 410
Section 203A of the Advisers Act, enacted in 1996 as part of the
National Securities Markets Improvement Act (``NSMIA''), 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,\15\ and preempts certain state laws regulating advisers
that are registered with the Commission.\16\ This provision makes the
states the primary regulators of smaller advisers and the Commission
the primary regulator of larger advisers.\17\
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\15\ 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 if the
adviser is eligible for one of six exemptions the Commission has
adopted. See id.; rule 203A-2; infra section II.A.5.
\16\ 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.
Advisers Act section 203(a). Investment advisers that are prohibited
from registering with the Commission are subject to regulation by
the states, but the antifraud 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, require notice filings of documents filed with the
Commission, and 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). Section 410 of the Dodd-Frank Act did
not amend sections 203A(a)(1) or 203(a) of the Advisers Act.
\17\ 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 category of ``mid-
sized
[[Page 42952]]
advisers'' and shifts primary responsibility for their regulatory
oversight to the states by prohibiting from Commission registration an
investment adviser that is required to be 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.\18\ Unlike a small adviser, a mid-sized
adviser must register with the Commission: (i) if 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;
or (ii) if registered with that state, the adviser would not be subject
to examination as an investment adviser by that securities
commissioner.\19\ Section 203A(c) of the Advisers Act, which was not
amended by the Dodd-Frank Act, permits the Commission to exempt small
and mid-sized advisers from the prohibitions on Commission
registration,\20\ and we have adopted six exemptions for small advisers
pursuant to this authority.\21\
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\18\ See section 410 of the Dodd-Frank Act (adding new section
203A(a)(2) of the Advisers 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''). We are further
increasing this threshold to $110 million, pursuant to authority
granted to us by Congress. See section 410 of the Dodd-Frank Act;
infra section II.A.4.
\19\ See section 410 of the Dodd-Frank Act. A mid-sized adviser
also is 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; therefore, mid-sized advisers to
registered investment companies and business development companies
are not permitted to withdraw their Commission registrations.
Compare section 410 of the Dodd-Frank Act with Advisers Act section
203A(a)(1). Additionally, a mid-sized adviser may register with the
Commission if the adviser is required to register in 15 or more
states. See section 410 of the Dodd-Frank Act. For a discussion of
advisers required to register in multiple states, see infra section
II.A.5.c.
\20\ For the Commission to permit the registration of small and
mid-sized advisers with the Commission, application of the
prohibition from registration must be ``unfair, a burden on
interstate commerce, or otherwise inconsistent with the purposes''
of section 203A. Advisers Act section 203A(c). The Commission's
exercise of this authority not only would permit registration with
the Commission, but also would result in the preemption of state law
with respect to the advisers that register with us as a result of an
exemption. See Advisers Act sections 203(a), 203A(b), and 203A(c).
\21\ See rule 203A-2 (permitting the following types of advisers
to register with the Commission: (i) Nationally recognized
statistical rating organizations (``NRSROs''); (ii) certain 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) certain multi-state investment advisers; and (vi)
certain Internet advisers).
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As a consequence of section 410 of the Dodd-Frank Act, we estimate
that approximately 3,200 SEC-registered advisers will be required to
withdraw their registrations and register with one or more state
securities authorities.\22\ We are working closely with the state
securities authorities to provide an orderly transition of investment
adviser registrants to state regulation. In addition, we are adopting
rules and rule amendments, discussed below, that provide us with a
means of identifying advisers that must transition to state regulation,
that clarify the application of new statutory provisions, and that
modify certain exemptions from the prohibition on Commission
registration that we previously adopted under section 203A of the Act.
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\22\ According to data from the Investment Adviser Registration
Depository (``IARD'') as of April 7, 2011, 3,531 SEC-registered
advisers either: (i) Had assets under management between $25 million
and $90 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 $90 million and
are not relying on an exemption from registration. We estimate that
350 of these advisers will not switch to state registration because
their principal office and place of business is located in
Minnesota, New York, or Wyoming, which did not advise our staff that
advisers registered with them are subject to examination. See infra
note 152 (according to IARD data as of April 7, 2011, there were 63
mid-sized advisers in Minnesota, 286 in New York, and 1 in Wyoming).
As a result, we estimate that approximately 3,200 advisers will
switch to state registration. 3,531 SEC-registered advisers-350
advisers not switching to state registration = 3,181 advisers. In
the Implementing Proposing Release, we estimated that approximately
4,100 SEC-registered advisers would be required to withdraw their
registrations and register with one or more state securities
authorities, based on IARD data as of September 1, 2010. See
Implementing Proposing Release, supra note 7, at n.15. We have
lowered our estimate by 900 advisers to account for the advisers
that have between $90 million and $100 million of assets under
management that may remain registered with us as a result of the
amendments we are adopting to rule 203A-1, the advisers that have
withdrawn their registrations with us since that time, and as
discussed above, the advisers that will not switch registration
because they have a principal office and place of business in
Minnesota, New York or Wyoming. See section II.A.4. for a discussion
of adopted rule 203A-1. Based on IARD data as of April 7, 2011, 244
advisers had assets under management of between $90 million and $100
million and, from September 2, 2010 to April 7, 2011, 405 advisers
withdrew their registrations with us and 114 advisers initially
registered with us.
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1. Transition to State Registration
We are adopting new rule 203A-5 to provide for an orderly
transition to state registration for mid-sized advisers that will no
longer be eligible to register with the Commission.\23\
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\23\ As proposed, we are also amending the instructions to Form
ADV to explain this process. See amended Form ADV: General
Instructions (special one-time instruction for Dodd-Frank transition
filing for SEC-registered advisers).
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Existing Registrants. Under the rule, each adviser
registered with us on January 1, 2012 must file an amendment to its
Form ADV no later than March 30, 2012.\24\ These amendments will
respond to new items in Form ADV (discussed below) and will identify
mid-sized advisers no longer eligible to remain registered with the
Commission.\25\ Mid-sized advisers that are no longer eligible for
Commission registration must withdraw their registrations with us after
filing their Form ADV amendments by filing Form ADV-W \26\ no later
than June 28, 2012.\27\ Mid-sized advisers registered with the
Commission as of July 21, 2011 must remain registered with the
Commission (unless an exemption from Commission registration is
available) until January 1, 2012.\28\
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\24\ New rule 203A-5(b). In this filing, advisers will report
the current market value of their assets under management determined
within 90 days of the filing.
\25\ See infra sections II.A.2. and II.C. Advisers will be
required to update all of the items in Form ADV, and this filing
will serve as the annual updating amendment for most advisers. See
infra note 48 and accompanying text.
\26\ 17 CFR 279.2 (``Form ADV-W'').
\27\ New rule 203A-5(c)(1).
\28\ New rule 203A-5(a). We are using the authority provided to
us in section 203A(c) of the Act to require mid-sized advisers to
remain registered with the Commission until the programming of the
IARD is completed. See infra notes 35-41 and accompanying text. For
a discussion of section 203A(c) of the Act, see supra note 20. We
believe that the failure to provide a transition period during the
beginning of 2012 would be unfair, a burden on interstate commerce,
or otherwise inconsistent with the purposes of section 203A of the
Act. We are also adopting, as proposed, a provision that will 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.
New rule 203A-5(c)(2). This limitation on withdrawal of an adviser's
registration is similar to the one we adopted to implement NSMIA in
1997. See NSMIA Adopting Release, supra note 17.
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New Applicants. Until July 21, 2011, when the amendments
to section 203A(a)(2) take effect, advisers applying for registration
with the Commission that qualify as mid-sized advisers under section
203A(a)(2) of the Act \29\ may register with either the Commission or
the appropriate state securities authority.\30\ Thereafter, all such
advisers
[[Page 42953]]
are prohibited from registering with the Commission and must register
with the state securities authorities.\31\ We also note that advisers
that have assets under management of $100 million or more will continue
to register with the Commission (unless an exemption from registration
with the Commission otherwise is available).\32\
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\29\ For a discussion of section 203A(a)(2) of the Act, see
supra notes 18-19 and accompanying text. As discussed above, the
Dodd-Frank Act amendments to this section will be effective on July
21, 2011. See supra note 6 and accompanying text.
\30\ We noted in the Implementing Proposing Release that we
would not object if, on or after January 1, 2011 until the end of
the transition period, any state-registered or newly-registering
adviser is not registered with us, so long as the adviser reports on
its Form ADV that it has between $30 million and $100 million of
assets under management, is registered as an investment adviser in
the state in which it maintains its principal office and place of
business, and has a reasonable belief that it is required to be
registered with, and is subject to examination as an investment
adviser by, that state. See Implementing Proposing Release, supra
note 7, at section II.A.1. In order to account for the July 21, 2011
effective date of section 410 of the Dodd-Frank Act and the longer
transition period that we are adopting (ending on June 28, 2012
instead of October 19, 2011, as proposed), beginning on July 21,
2011, these advisers will no longer be able to choose to register
with us; instead, they will be prohibited from registering with us
and must instead register with the states. See infra note 31. We
believe that allowing these advisers to register with the Commission
before January 1, 2012 only to require them to withdraw their
registrations by June 28, 2012 would be burdensome, and permitting
them to choose whether to register with us until the summer of 2012
would be inconsistent with the purposes of Advisers Act section
203A(a)(2), as amended by section 410 of the Dodd-Frank Act. See
supra note 3 and accompanying text.
\31\ Once registered, an adviser must remain registered with the
Commission (unless an exemption is available) until January 1, 2012,
when it may transition to state registration as described above.
Until January 1, 2012, we are exempting from section 203A(a)(2) only
those mid-sized advisers already registered with us on July 21, 2011
that have at least $25 million in assets under management because
the IARD will not be able to accept the revised Form ADV by July 21,
2011 and it is our understanding that mid-sized advisers will need
additional time to switch to state registration. See new rule 203A-
5(a); supra note 28 and accompanying text. As a result, on or after
July 21, 2011, state-registered advisers and newly-registering
advisers will be subject to the section 203A(a)(2) prohibition from
Commission registration.
\32\ See Advisers Act section 203A(a)(2), as amended by the
Dodd-Frank Act. See also Advisers Act section 203. For a discussion
of the threshold requiring larger advisers to register with the
Commission, see infra section II.A.4.
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We have made several changes to these transition provisions in
response to comments we received.\33\ The proposed rule would have
provided mid-sized advisers with a 90-day transitional process with two
``grace periods,'' the first providing until August 20, 2011 for an
adviser to determine whether it is eligible for Commission registration
and to file an amended Form ADV, and the second providing until October
19, 2011 for an adviser to register in the states and withdraw its
registration with us.\34\ We noted in the Implementing Proposing
Release, however, that timing of the transition period would be
affected by our ability to re-program the IARD, through which advisers
file their amendments to Form ADV.\35\
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\33\ See proposed rule 203A-5(a)-(b); Implementing Proposing
Release, supra note 7, at section II.A.1.
\34\ See proposed rule 203A-5(a)-(b); Implementing Proposing
Release, supra note 7, at section II.A.1.
\35\ See Implementing Proposing Release, supra note 7, at
section II.A.1.
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We have worked closely with the Financial Industry Regulatory
Authority (``FINRA''), our IARD contractor, to make the needed
modifications, but it has informed us that the programming will not be
completed by the July 21, 2011 effective date of the Dodd-Frank Act. We
understand that beginning in November, the IARD will be updated to
reflect the revisions to Form ADV that we are adopting today. We noted
in the Implementing Proposing Release that if the IARD is unable to
accept filings of revised Form ADV on July 21, 2011, we might consider
delaying the transition process until the system could accept
electronic filing of the revised form.\36\
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\36\ See id.
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Commenters, including the North American Securities Administrators
Association, Inc. (``NASAA''), agreed with our assessment and supported
delaying the transition if the IARD could not accept the revised Form
ADV instead of adopting alternative requirements, such as requiring
interim paper filings.\37\ Many also urged us to provide additional
time for mid-sized advisers to complete the switch to state
registration,\38\ and recommended that the Commission match the current
180-day period \39\ provided to SEC-registered advisers that must
switch to state registration.\40\ We are persuaded by these commenters,
and, as described above, we are requiring mid-sized advisers registered
with us on July 21, 2011 to remain registered until they switch to
state registration after January 1, 2012.\41\ As noted above, rule
203A-5 provides until March 30, 2012 for each adviser already
registered with the Commission to determine whether it is eligible for
Commission registration and to file an amended Form ADV,\42\ and
provides an additional 90 days (i.e., by June 28, 2012) for an adviser
no longer eligible for Commission registration to register with the
states and withdraw its registration with us.\43\ After the end of
[[Page 42954]]
this period, we expect to cancel the registration of advisers no longer
eligible to register with us that fail to file an amendment or withdraw
their registrations in accordance with the rule.\44\ The revised
process that we are adopting today allows the Commission and state
regulators to manage the transition of mid-sized advisers in an orderly
manner.\45\
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\37\ Comment letter of the North American Securities
Administrators Association, Inc. (Feb. 10, 2011) (``NASAA Letter'')
(``the benefits of electronic filing, including easy public access
to the documents, are significant and would outweigh any
disadvantages imposed by a delay in filing deadlines.''); comment
letter of Bill Dezellem, CFA, Tieton Capital Management (Jan. 4,
2011) (``Dezellem Letter''); comment letter of the National
Regulatory Services (Jan. 24, 2011) (``NRS Letter''); comment letter
of the New York State Bar Association, Business Law Section,
Securities Regulation Committee (Apr. 1, 2011) (``NYSBA Committee
Letter'').
\38\ Comment letter of the American Bar Association, Section of
Business Law, Committee on Federal Regulation of Securities,
Committee on State Regulation of Securities, and the Committee on
Private Equity and Venture Capital (Jan. 31, 2011) (``ABA Committees
Letter''); comment letter of Altruist Financial Advisors LLC (Dec.
12, 2010) (``Altruist Letter''); comment letter of Capital Markets
Compliance, LLC (Feb. 8, 2011) (``CMC Letter''); Dezellem Letter;
comment letter of R.H. Dinel Investment Counsel, Inc. (Jan. 20,
2011) (``Dinel Letter''); comment letter of Financial Services
Institute (Jan. 24, 2011) (``FSI Letter''); comment letter of Amy
Klein (Nov. 30, 2010) (``Klein Letter''); NRS Letter; NYSBA
Committee Letter; comment letter of Sadis & Goldberg LLP (Jan. 21,
2011) (``Sadis Letter''); comment letter of L.A. Schnase (Dec. 23,
2010) (``Schnase Letter''); comment letter of Seward & Kissel LLP
(Jan. 31, 2011) (``Seward Letter''); comment letter of Shearman &
Sterling LLP (Jan. 24, 2011) (``Shearman Letter''). Only one
commenter supported the proposed 90-day grace period. Comment letter
of Pickard and Djinis LLP (Jan. 21, 2011) (``Pickard Letter'').
\39\ 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).
\40\ Altruist Letter; Dezellem Letter; FSI Letter; Klein Letter;
NYSBA Committee Letter; Schnase Letter; Seward Letter; Shearman
Letter. See also ABA Committees Letter (recommending December 31
deadline); NRS Letter (recommending rolling state registration
process). One commenter stated that based on its almost three
decades of experience, it ``most strongly supports a defined and
longer'' transition period. NRS Letter. Another stated that ``some
states may be unable to process such filings in a timely and
efficient manner.'' ABA Committees Letter. Several commenters echoed
concerns about timely state processing of applications, noting, in
particular, additional registration and compliance requirements in
many states and expected delays to approve state registrations given
the increase in filings as a result of the Dodd-Frank Act. See
Altruist Letter (noting that it took 122 days for a state to approve
its application). See also CMC Letter; Dezellem Letter; Klein
Letter; NRS Letter; NYSBA Committee Letter; Schnase Letter; Seward
Letter. To address potential timing issues, NASAA noted that it is
recommending to advisers to file with the states as soon as possible
and to the states to conditionally approve the registrations until
the re-filing of Form ADV is completed. NASAA Letter.
\41\ See supra note 28 and accompanying text.
\42\ New rule 203A-5(a) and (b). This deadline coincides with
the deadline for most advisers' required annual updating amendment
(90 days from December 31, 2011), eliminating the requirement that
they file an additional amendment to their Form ADV. See rule 204-
1(a); infra note 48. Postponing the beginning of the transition
process until January, instead of November or December, also will
ensure that the refiling of Form ADV does not interfere with the
November state registration and license renewal process and annual
system outages for the IARD scheduled in December.
\43\ New rule 203A-5(c)(1). The rule 203A-5 transition period is
the same 180-day transition period for advisers that fall below the
$25 million threshold and have to switch to state registration. See
rule 203A-1(b)(2). Other advisers that will be required to withdraw
from registration because they are no longer eligible for Commission
registration will include, for example, pension consultants with
plan assets of $50 million to $200 million. See infra section
II.A.5.b.
\44\ 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).
\45\ See also supra notes 24-28 and accompanying text.
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We are requiring that all advisers registered with us on January 1,
2012--regardless of size--file amendments to Form ADV no later than
March 30, 2012. Some commenters argued that advisers unaffected by the
statutory changes effected by the Dodd-Frank Act should not have to
complete and file all of Form ADV.\46\ We believe such a filing is
necessary for each adviser to confirm its current eligibility for
Commission registration in light of the multiple statutory changes (as
well as changes to the rules that we are adopting today) that could
affect whether the adviser may register with the Commission.\47\ These
commenters' concerns also should be allayed by the new March 30, 2012
deadline for filing Form ADV that will coincide with most advisers'
required annual updating amendment, eliminating the requirement that
they file an additional amendment to their Form ADV.\48\ Finally, as
recommended by several commenters,\49\ we are providing additional
flexibility for an adviser to choose the date by which it must
calculate its assets under management reported on Form ADV by requiring
the calculation within 90 days of the transition filing, rather than 30
days.\50\ This is the same amount of time that advisers are afforded to
report assets under management after the end of their fiscal year on
Form ADV today.\51\
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\46\ Comment letter of the Investment Company Institute (Jan.
24, 2011) (``ICI Letter'') (recommending exempting advisers that do
not rely on assets under management to register with the SEC);
comment letter of the Managed Funds Association (Jan. 24, 2011)
(``MFA Letter'') (recommending exempting private fund advisers that
file an initial Form ADV by July 7); NYSBA Committee Letter
(recommending exempting advisers who will continue to be eligible
for Commission registration and advisers relying on the section
203(b)(3) exemption that we proposed would have to register with the
Commission by July 21, 2011); Shearman Letter (recommending a more
limited filing of Form ADV to determine eligibility). But most
commenters supported the proposal. See CMC Letter; FSI Letter; NASAA
Letter; NRS Letter; Pickard Letter.
\47\ In addition, we believe that requiring advisers to complete
all of the items will provide the Commission and the state
regulatory authorities with essential information about the advisers
that are transitioning to state registration and the advisers that
are remaining registered with the Commission. See infra sections
II.A.2., II.C.
\48\ As of April 7, 2011, 10,636 of SEC-registered advisers
(approximately 92%) had a fiscal year ending on December 31. These
advisers will comply with rule 203A-5(b)'s Form ADV filing
requirement by submitting their annual amendment. SEC-registered
advisers not required to file an annual updating amendment between
January 1, 2012 and March 30, 2012 will file an other-than-annual
amendment, but they will complete all of the items on Part 1A of
Form ADV (not just the items required to be updated in a typical
other-than-annual amendment).
\49\ Altruist Letter (quarter end); comment letter of Dechert
LLP (Jan. 24, 2011) (``Dechert General Letter'') (rolling 12-month
average); Dezellem Letter (fiscal year end); Dinel Letter (rolling
three-year average); NYSBA Committee Letter (quarter end); Seward
Letter (quarter end); Shearman Letter (quarter end). Several
commenters argued, for example, that providing for the use of end of
quarter numbers precludes an administrate burden for many advisers
that value assets on a quarterly basis because most advisers already
value assets quarterly to calculate fees. Altruist Letter; NYSBA
Committee Letter; Seward Letter; Shearman Letter.
\50\ New rule 203A-5(b).
\51\ Form ADV: Instructions for Part 1A, instr. 5.b.(4).
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2. Amendments to Form ADV
We are adopting several amendments to Item 2.A. of Part 1A of Form
ADV to reflect the new threshold for registration and the revisions we
are making to related rules in response to the enactment of the Dodd-
Frank Act.\52\ Item 2 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. We
are adopting the revisions to Item 2.A. substantially as proposed,\53\
except that we have revised the instructions and Item 2.A.(1) to
reflect our adoption of a ``buffer'' for advisers with close to $100
million in assets under management, which we discuss below.\54\
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\52\ We are adopting conforming amendments to Item 2.A. and the
related items in Schedule D to reflect revisions to rule 203A-2,
which provides exemptions from the prohibition on registration with
the Commission. See amended Form ADV Items 2.A.(7), (10) and Section
2.A.(10) of amended Schedule D; infra sections II.A.4., II.A.5.,
II.A.7. Additionally, we are making conforming changes to the
instructions for Form ADV. See amended Form ADV: Instructions for
Part 1A, instr. 2. We also are revising 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
amended rules 203A-1, 203A-2(c) and (d), 203A-3(e); amended Form
ADV: Glossary with rules 203A-1(b)(1), 203A-2(e)(1), 203A-4; Form
ADV: Glossary. See also section 410 of the Dodd-Frank Act (amended
section 203A(a)(2) of the Advisers Act describes a state securities
authority as ``the securities commissioner (or any agency or office
performing like functions)'').
\53\ One commenter expressed the view that the item was
``sufficiently and clearly written.'' NRS Letter.
\54\ See amended Form ADV: Instructions for Part 1A, instr. 2.a.
For a discussion of the buffer, see infra section II.A.4.
---------------------------------------------------------------------------
To implement the new prohibition on registration for mid-sized
advisers, we are amending Item 2.A. to reflect the new statutory
threshold for registration. Item 2.A. requires each adviser registered
with us (and each applicant for registration) to identify whether it is
eligible to register with the Commission because it: (i) Is a large
adviser that has $100 million or more of regulatory assets under
management (or $90 million or more if an adviser is filing its most
recent annual updating amendment and is already registered with us);
\55\ (ii) is a mid-sized adviser that does not meet the criteria for
state registration or is not subject to examination; \56\ (iii) has its
principal office and place of business in Wyoming (which does not
regulate advisers) or outside the United States; \57\ (iv) meets the
requirements for one or more of the revised exemptive rules under
section 203A discussed below; \58\ (v) is an adviser (or subadviser) to
a registered investment company; \59\ (vi) is an adviser to a business
development company and has at least $25 million of regulatory assets
under management; \60\ or (vii) received an order permitting the
adviser to register with the Commission.\61\
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\55\ Amended Form ADV, Part 1A, Item 2.A.(1). We are revising
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.
\56\ Amended 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.
\57\ Amended Form ADV, Part 1A, Items 2.A.(3), 2.A.(4).
\58\ Amended Form ADV, Part 1A, Items 2.A.(7)-2.A.(11). For a
discussion of the exemptive rules, see infra section II.A.5.
\59\ Amended Form ADV, Part 1A, Item 2.A.(5).
\60\ Amended Form ADV, Part 1A, Item 2.A.(6).
\61\ Amended Form ADV, Part 1A, Item 2.A.(12). We are also
deleting the item for NRSROs to register as investment advisers. For
a discussion of NRSROs, see infra section II.A.5.a.
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Each adviser must check at least one of these items, or indicate
that the adviser is no longer eligible to remain registered with the
Commission.\62\ The IARD will prevent an applicant from registering
with us, and an adviser from remaining registered, unless it
[[Page 42955]]
represents on Form ADV that it meets at least one of the specific
eligibility criteria set forth in the Advisers Act or our rules.
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\62\ Amended Form ADV, Part 1A, Item 2.A.(13). One commenter
asked that we clarify whether advisers must check every box in Item
2.A. that they are eligible to check. Schnase Letter. The
instructions to the item indicate that an adviser must check ``at
least one'' of the items, but does not require all bases for
registration be identified. Amended 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 register with the Commission or
one or more 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
management services.'' \63\ Instructions to Form ADV provide advisers
with guidance in applying this provision, and until now have permitted
advisers to exclude certain types of assets that otherwise would have
to be included.\64\
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\63\ 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.
\64\ 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.
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We are adopting revisions to the instructions to Part 1A of Form
ADV to implement a uniform method for advisers to calculate assets
under management that will be used under the Act for regulatory
purposes in addition to assessing whether an adviser is eligible to
register with the Commission.\65\ As discussed in more detail below,
the amendments improve consistency by eliminating choices the
instructions had provided advisers that have enabled some of them to
opt in or out of federal or state regulation (by including or excluding
a class of assets). We are also amending rule 203A-3 to continue to
require that the calculation of ``assets under management'' for
purposes of section 203A of the Act 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.\66\ Finally, we are
altering 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 ``regulatory'' purposes of this reporting requirement
and to distinguish it from the assets under management disclosure that
advisory clients receive in Part 2 of Form ADV.\67\
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\65\ See amended Form ADV: Instructions for Part 1A, instr. 5.b.
See also sections 402(a) and 408 of the Dodd-Frank Act (adding
section 202(a)(30) of the Act, which defines 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) of the Act, which directs 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);
Exemptions Adopting Release, supra note 4, at section II.B.
\66\ See amended rule 203A-3(d).
\67\ See amended 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''). One commenter supported the change of terminology. See
Schnase Letter (supporting the idea of distinguishing ``regulatory
assets under management'' from ``assets under management'').
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Many commenters expressed general support for providing a uniform
method of calculating assets under management in order to maintain
consistency for registration and risk assessment purposes.\68\ Others,
however, disagreed with or sought changes to one or more of the
revisions we are making to the instructions, which we discuss below. We
are adopting the amendments as proposed.
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\68\ See, e.g., comment letter of the American Federation of
Labor and Congress of Industrial Organizations (Jan. 24, 2011)
(``AFL-CIO Letter'') (``an adviser's calculation of its assets under
management is central to the determination of whether that adviser
is required to register with the SEC and be subject to its oversight
* * *. The uniform, comprehensive methodology proposed by the SEC
will ensure its ability to oversee advisers to funds that may pose a
systemic threat.''); comment letter of Americans for Financial
Reform (Jan. 24, 2011) (``AFR Letter'') (``Because calculations of
the amount of assets under management by each adviser are key to the
determination of whether or not they are required to register, the
comprehensive and uniform definition of these terms in the proposed
rule is particularly important.''). See also comment letter of the
Alternative Investment Management Association (Jan. 24, 2011)
(``AIMA Letter''); Dechert General Letter; comment letter of the
Investment Adviser Association (by Valerie M. Baruch) (Jan. 24,
2011) (``IAA General Letter''); NRS Letter; comment letter of
O'Melveny & Myers LLP (on behalf of the China Venture Capital and
Private Equity Association) (Jan. 25, 2011) (``O'Melveny Letter'');
Schnase Letter; NYSBA Committee Letter; Dezellem Letter.
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Under the revised instructions, advisers must 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 family or proprietary assets,
assets managed without receiving compensation, or assets of foreign
clients.\69\ We proposed to require advisers to include these assets in
light of the new uses of the term ``assets under management'' in the
Advisers Act and the new regulatory requirements related to systemic
risk that we anticipated would be triggered by registration with the
Commission.\70\ Eliminating an adviser's ability to exclude all or some
of these assets will prevent advisers from excluding these assets from
their regulatory assets under management in order to remain below the
new asset threshold for registration and to avoid reporting systemic
risk information.\71\ This approach will also lead to more consistent
reporting of assets under management among advisers.
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\69\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(1).
\70\ See supra note 65. 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.
\71\ See Implementing Proposing Release, supra note 7, at nn.44-
45 and accompanying text; Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool Operators and Commodity
Trading Advisors on Form PF, Investment Advisers Act Release No. IA-
3145 (Jan. 26, 2011) [76 FR 8,068 (Feb. 11, 2011)] (``Systemic Risk
Reporting Release'') (proposing systemic risk reporting).
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A number of commenters disagreed with the proposed changes.\72\
Some argued that advisers should not be required to include proprietary
assets and assets managed without receiving compensation in the
calculation because such a requirement would be inconsistent with the
statutory definition of ``investment adviser.'' \73\ Although a person
is not an ``investment adviser'' for purposes of the Advisers Act
unless it receives compensation for providing advice to others, once a
person meets that definition (by receiving compensation from any client
to which it provides advice), the person is an adviser, and the Act
applies to the relationship between the adviser and any of its clients
(whether or not the adviser receives compensation from them).\74\
Moreover, the management of ``proprietary'' assets or assets for which
the adviser may not be compensated, when combined with other client
assets, may suggest that the adviser's activities are of national
concern or have implications regarding the reporting for the assessment
of systemic risk.\75\ We are therefore adopting the amendment to the
instruction, as proposed.\76\
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\72\ See AIMA Letter; Dechert General Letter; MFA Letter;
Pickard Letter; Seward Letter; NYSBA Committee Letter.
\73\ See Dechert General Letter; MFA Letter; Seward Letter;
NYSBA Committee Letter. See also Pickard Letter. Under Section
202(a)(11) of the Advisers Act, the definition of ``investment
adviser'' includes, among others, ``any person who, for
compensation, engages in the business of advising others * * * as to
the value of securities or as to the advisability of investing in,
purchasing, or selling securities * * *.''
\74\ See section 202(a)(11); Form ADV: Instructions for Part 1A,
Glossary of Terms, Client.
\75\ See supra note 70.
\76\ One commenter objected to the inclusion of assets of
foreign clients because it would require domestic advisers that only
have a foreign client base to register with the Commission. Comment
letter of Katten Muchin Rosenman LLP (on behalf of APG Asset
Management US Inc.) (Jan. 21, 2011). However, a domestic adviser
dealing exclusively with foreign clients must register with the
Commission if it uses any U.S. jurisdictional means in connection
with its advisory business. See section 203 of the Advisers Act
(requiring registration of any investment adviser that uses the
United States mails or any other means or instrumentality of
interstate commerce in connection with its business as an investment
adviser unless the adviser qualifies for an exemption from
registration or is prohibited from registering with the Commission).
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[[Page 42956]]
The revised instructions to Form ADV also clarify that an adviser
must calculate its regulatory assets under management on a gross basis,
that is, without deduction of ``any outstanding indebtedness or other
accrued but unpaid liabilities.'' \77\ Several commenters argued that
advisers should determine the amount of regulatory assets under
management on a net, rather than gross, basis.\78\ They asserted that
the use of net assets would better reflect the clients' assets at risk
that an adviser manages,\79\ and that use of gross assets would confuse
advisory clients.\80\ However, nothing in the current instructions
suggests that liabilities should be deducted from the calculation of an
adviser's assets under management. Indeed, since 1997, the instructions
have stated that an adviser should not deduct securities purchased on
margin when calculating its assets under management.\81\ Whether a
client has borrowed to purchase a portion of assets managed does not
seem to us a relevant consideration in determining the amount of assets
an adviser has to manage and the scope and national significance of an
adviser's business. Moreover, we are concerned that the use of net
assets could permit advisers that utilize investment strategies with
highly leveraged positions to avoid registration with the Commission
even though the activities of such advisers may have national
significance. The use of a net assets test also could allow advisers to
large and highly leveraged funds to avoid systemic risk reporting under
our proposed systemic risk reporting rules.\82\ In addition, there need
not be any investor confusion because although an adviser will be
required to use gross (rather than net) assets for regulatory purposes,
the instruction would not preclude an adviser from holding itself out
to its clients as managing a net amount of assets as may be its custom
in, for example, its client brochure. We are therefore adopting the
instruction, as proposed.\83\
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\77\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(2). Accordingly, an adviser cannot deduct accrued fees,
expenses, or the amount of any borrowing. Prior to today's
amendments, the instructions directed advisers not to ``deduct
securities purchased on margin.''
\78\ See, e.g., Dechert General Letter; comment letter of Georg
Merkl (Jan. 25, 2011) (``Merkl Exemptions Letter''); MFA Letter;
Seward Letter; Shearman Letter. See also NYSBA Committee Letter.
\79\ See Merkl Exemptions Letter; MFA Letter.
\80\ See Dechert General Letter; MFA Letter.
\81\ See Form ADV: Instructions for Part 1A, instr. 5.b.(2).
(``Do not deduct securities purchased on margin.'').
\82\ See Systemic Risk Reporting Release, supra note 71.
\83\ Some commenters asked that we clarify how the calculation
on a gross basis would apply with respect to, among others, mutual
funds, short positions, and leverage. See IAA General Letter; MFA
Letter. We expect that advisers will continue to calculate their
gross assets as they do today, even if they currently only calculate
gross assets as an intermediate step to compute their net assets. In
the case of pooled investment vehicles with a balance sheet, for
instance, an adviser could include in the calculation the total
assets of the entity as reported on the balance sheet.
---------------------------------------------------------------------------
We are also revising the Form ADV instructions, as proposed, to
provide guidance regarding how an adviser that advises private funds
determines the amount of assets it has under management. We have
designed our new 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 adopting today in the Exemptions
Adopting Release) and to prevent advisers from understating those
assets to avoid registration.
First, an adviser must include in its calculation of 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.\84\ A sub-
adviser to a private fund would include in its regulatory assets under
management only that portion of the value of the portfolio for which it
provides continuous and regular supervisory or management services.
Advisers that have discretionary authority over fund assets, or a
portion of fund assets, and that provide ongoing supervisory or
management services over those assets would exercise continuous and
regular supervisory or management services.\85\
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\84\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(1). One commenter specifically addressed this matter,
supporting our approach. See IAA General Letter.
\85\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(3).
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Second, an adviser must include the amount of any uncalled capital
commitments made to a private fund managed by the adviser.\86\ As we
explained in the Implementing Proposing Release, advisers to some
private funds (such as private equity funds) typically make investments
following capital calls on the funds' investors.\87\ One commenter
agreed with this approach generally,\88\ while another disagreed,
asserting that the uncalled capital commitments remain under the
management of the fund investor.\89\ As we noted in the Implementing
Proposing Release, in the early years of a private fund's life, its
adviser typically earns fees based on the total amount of capital
commitments, which we presume reflects compensation for efforts
expended on behalf of the fund in preparation for the investments.\90\
We are adopting the instruction, as proposed.
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\86\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(1). 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.
\87\ Implementing Proposing Release, supra note 7, at n.53 and
accompanying text.
\88\ See AIMA Letter (supporting including uncalled capital
commitments, provided that the adviser has full contractual rights
to call that capital and would be given responsibility for
management of those assets).
\89\ See Merkl Exemptions Letter.
\90\ Implementing Proposing Release, supra note 7, at n.54 and
accompanying text.
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Third, advisers must use the market value of private fund assets,
or the fair value of private fund assets where market value is
unavailable.\91\ This requirement is designed to make advisers value
private fund assets on a more meaningful and consistent basis for
regulatory purposes under the Act and it, therefore, should result in a
more coherent application of the Act's regulatory requirements and
assessment of risk. This instruction would prevent, for example, an
adviser electing to value its assets based on their cost, which could
be significantly lower than the value of the assets based on their fair
value, thus permitting the adviser to avoid registration with or
reporting to the Commission. It is designed to prevent inconsistent
application of the Advisers Act to advisers managing the same amount of
assets.
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\91\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(4). This valuation requirement is described in terms similar to
the definition of ``value'' in the Investment Company Act, which
looks to market value when quotations are readily available and, if
not, then to fair value. See Investment Company Act section 2(a)(41)
(15 U.S.C. 80a-2(a)(41)). Other standards also may be expressed as
requiring that a determination of fair value be based on market
quotations where they are readily available.
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We received a number of comments regarding the use of fair value,
which represents a change from the current instruction that permits an
adviser to calculate the value of its assets under management based on
whatever method the adviser uses to report its assets to clients or to
calculate fees for
[[Page 42957]]
investment advisory services.\92\ One commenter, for example, supported
requiring the use of fair value, noting that it would help achieve more
consistent asset calculations and reporting across the investment
advisory industry, and that it would enable better application of our
staff's risk assessment program.\93\ Other commenters, including the
Managed Funds Association, however, objected to the use of fair value,
asserting that the requirement would cause those advisers that did not
use fair value standards to incur additional costs, particularly if the
assets are illiquid and therefore difficult to fair value.\94\
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\92\ See Form ADV: Instructions for Part 1A, instr. 5.b.(4).
\93\ See IAA General Letter. See also ABA Committees Letter
(addressing the requirement within the context of the asset
calculation for purposes of the foreign private adviser and the
private fund adviser exemptions).
\94\ See MFA Letter; Merkl Exemptions Letter; O'Melveny Letter;
Seward Letter.
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In the Implementing Proposing Release, we noted that we understood
that many private funds already value assets in accordance with U.S.
generally accepted accounting principles (``GAAP'') or other
international accounting standards that require the use of fair value,
citing letters we had received in connection with other rulemaking
initiatives.\95\ We are sensitive to the costs this new requirement
will impose. We believe, however, that this approach is warranted in
light of the unique regulatory purposes of the calculation under the
Advisers Act. We estimated these costs in the Implementing Proposing
Release,\96\ and have taken several steps to mitigate them.\97\ While
many advisers will calculate fair value in accordance with GAAP or
another international accounting standard,\98\ other advisers acting
consistently and in good faith may utilize another fair valuation
standard.\99\ While these other standards may not provide the quality
of information in financial reporting (for example, of private fund
returns), we expect these calculations will provide sufficient
consistency for the purposes that regulatory assets under management
serve in our rules (such as applying annual thresholds to determine the
registration status of an adviser).\100\
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\95\ See Implementing Proposing Release, supra note 7, at n.56
and accompanying text.
\96\ See Implementing Proposing Release, supra note 7, at n.369
and accompanying text.
\97\ We recognize that although these steps will provide
advisers greater flexibility in calculating the value of their
private fund assets, they also will result in valuations that are
not as comparable as they could be if we specified a fair value
standard (e.g., as specified in GAAP).
\98\ Several commenters asked that we not require advisers to
fair value private fund assets in accordance with GAAP for purposes
of calculating regulatory assets under management because many
funds, particularly offshore ones, do not use GAAP and such a
requirement would be unduly burdensome. See, e.g., comment letter of
European Fund and Asset Management Association (Jan. 24, 2011)
(``EFAMA Letter''); IAA General Letter; Comment letter of Katten
Muchin Rosenman LLP (on behalf of non-U.S. Advisers) (Jan. 24, 2011)
(``Katten Foreign Advisers Letter''). We did not propose such a
requirement, nor are we adopting one.
\99\ Consistent with this good faith requirement, we would
expect that an adviser that calculates fair value in accordance with
GAAP or another basis of accounting for financial reporting purposes
will also use that same basis for purposes of determining the fair
value of its regulatory assets under management.
\100\ The fair valuation process need not be the result of a
particular mandated procedure and the procedure need not involve the
use of a third-party pricing service, appraiser or similar outside
expert. An adviser could rely on the procedure for calculating fair
value that is specified in a private fund's governing documents. The
fund's governing documents may provide, for example, that the fund's
general partner determines the fair value of the fund's assets.
Advisers are not, however, required to fair value real estate assets
only in those limited circumstances where real estate assets are not
required to be fair valued for financial reporting purposes under
accounting principles that otherwise require fair value for assets
of private funds. For example, in those cases, an adviser may
instead value the real estate assets as the private fund does for
financial reporting purposes. We note that the Financial Accounting
Standards Board (``FASB'') has a current project related to
investment property entities that may require real estate assets
subject to that accounting standard to be measured by the adviser at
fair value. See FASB Project on Investment Properties. We also note
that certain international accounting standards currently permit,
but do not require, fair valuation of certain real estate assets.
See International Accounting Standard 40, Investment Property. To
the extent that an adviser follows GAAP or another accounting
standard that requires or in the future requires real estate assets
to be fair valued, this limited exception to the use of fair value
measurement for real estate assets would not be available.
---------------------------------------------------------------------------
The alternatives that commenters recommended (e.g., cost basis or
any method required by the private fund's governing documents other
than fair value) would not meet our objective of having more meaningful
and comparable valuation of private fund assets, and could result in a
significant understatement of appreciated assets.\101\ Moreover, these
alternative approaches could permit advisers to circumvent the Advisers
Act's registration requirements. Permitting the use of any valuation
standard set forth in the governing documents of the private fund other
than fair value could effectively yield to the adviser the choice of
the most favorable standard for determining its registration obligation
as well as the application of other regulatory requirements, and would
not provide consistent outcomes from similarly situated advisers.
Accordingly, we are adopting the requirement as proposed.
---------------------------------------------------------------------------
\101\ See Merkl Exemptions Letter; MFA Letter; O'Melveny Letter;
Seward Letter; NYSBA Committee Letter.
---------------------------------------------------------------------------
We also requested comment in the Implementing Proposing Release on
whether we should require advisers to report their assets under
management more frequently than annually. All commenters who responded
to our request asked that we continue to require annual reporting,
arguing that more frequent reporting would require additional
calculations only for purposes of Form ADV disclosure, thus placing an
unnecessary burden on advisers.\102\ As commenters recommended, we are
not changing the frequency of the reporting requirement.
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\102\ See, e.g., AIMA Letter; NRS Letter; O'Melveny Letter;
NYSBA Committee Letter. Under the Systemic Risk Reporting Release,
we proposed to require large advisers with $1 billion or more in
assets under management attributable to hedge funds, unregistered
money market funds or private equity funds to file systemic risk
reports quarterly. See Systemic Risk Reporting Release, supra note
71.
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4. Switching Between State and Commission Registration
Rule 203A-1 is designed to prevent 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. We are amending the rule to eliminate the current
buffer for advisers that have assets under management between $25
million and $30 million that permits these advisers to remain regulated
by the states, and we are replacing it with a similar buffer for mid-
sized advisers.\103\ We are also retaining, as proposed, the
requirement that eligibility for registration be determined annually as
part of an adviser's annual updating amendment, allowing an adviser to
avoid the need to change registration status based on fluctuations that
occur during the course of the year.\104\
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\103\ Amended rule 203A-1(a). Additionally, we are revising the
provision in rule 203A-1 that does not require an adviser to
withdraw its Commission registration until its assets under
management fall below $25 million to reflect the new, $90 million
threshold. See amended rule 203A-1(a)(1).
\104\ Amended rule 203A-1(b)(2) (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).
We are not renumbering this paragraph as proposed. Compare proposed
rule 203A-1(a)-(b) with amended rule 203A-1(b)(1)-(2).
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The amended rule provides a buffer for mid-sized advisers with
assets under management close to $100 million to determine whether and
when to switch between state and Commission
[[Page 42958]]
registration.\105\ The rule raises the threshold above which a mid-
sized investment adviser must register with the Commission to $110
million; but, once registered with the Commission, an adviser need not
withdraw its registration until it has less than $90 million of assets
under management.\106\
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\105\ Amended rule 203A-1(a).
\106\ Amended rule 203A-1(a)(1). Mid-sized advisers eligible for
a rule 203A-2 exemption and advisers to a registered investment
company or business development company under the Investment Company
Act will not be able to rely on the buffer because they are required
to register with us regardless of whether they have $100 million of
assets under management. Amended rule 203A-1(a)(2). In addition,
advisers that rely on amended rule 203A-2(c) to register with the
Commission because they expect to be eligible for registration
within 120 days cannot rely on the buffer--they must have $100
million of assets under management within 120 days to remain
registered with the Commission. See Form ADV: Instructions for Part
1A, instrs. 2.a., 2.g. See also amended rule 203A-1(a)(2)(ii);
amended rule 203A-2(c).
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Although commenters did not object to elimination of the current
buffer, several argued that we need to include a new buffer for mid-
sized advisers that have close to $100 million of assets under
management.\107\ Some commenters, for example, asserted that the
current $5 million buffer was effective in preventing frequent
switching of registration attributable to market fluctuations,\108\
while another called the buffer an important element of regulatory
flexibility.\109\ Several advisers with close to $100 million of assets
under management asserted that a buffer is necessary to prevent them
from switching to and from Commission registration.\110\ Commenters
recommended several different buffers, including one for advisers with
between $100 million and $120 million (to retain the current buffer's
20 percent increase in assets under management),\111\ one that would
fall below $100 million,\112\ and a buffer that straddled above and
below $100 million.\113\
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\107\ Altruist Letter; Dezellem Letter; Dinel Letter; FSI
Letter; comment letter of Intelligent Capitalworks Investment
Advisors (Jan. 24, 2011) (``ICW Letter''); comment letter of JVL
Associates, LLC (Jan. 13, 2011) (``JVL Associates Letter''); comment
letter of Georg Merkl (Jan. 25, 2011) (``Merkl Implementing
Letter''); NASAA Letter; NRS Letter; NYSBA Committee Letter; comment
letter of The Wealth Coach, LLC (by Jeffrey W. McClure) (Dec. 31,
2010) (``Wealth Coach Letter''); and comment letter of WJM
Financial, LLC (Jan. 4, 2011) (``WJM Letter''). To prevent an
adviser from switching frequently between state and Commission
registration, we proposed to retain an adviser's ability to rely on
the reporting on Form ADV of assets under management in the annual
updating amendment for purposes of determining its eligibility to
register. See proposed rule 203A-1(b).
\108\ See, e.g., Altruist Letter; NRS Letter.
\109\ NASAA Letter.
\110\ ICW Letter (for 3 years, adviser's assets under management
have been greater than $100 million by a few million dollars and at
various times throughout the year has been reduced to under $100
million by just a few days of downside market volatility); JVL
Associates Letter (adviser's assets under management have fluctuated
around $100 million since 2007). See also Wealth Coach Letter (from
October 2008 through March 2009, adviser's total assets under
management fell over 25%).
\111\ Altruist Letter; FSI Letter; NASAA Letter; WJM Letter. See
also ICW Letter; Merkl Implementing Letter; NYSBA Committee Letter.
\112\ Dezellem Letter ($80-$100 million); Dinel Letter ($80-$100
million); JVL Associates Letter ($90-$100 million); NRS Letter ($90-
$100 million).
\113\ Wealth Coach Letter ($85-$115 million).
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We are persuaded by these comments that a buffer may prevent costs
and disruption to advisers that otherwise may have to switch between
federal and state registration frequently because of, for example, the
volatility of the market values of the assets they manage. Rule 203A-
1(a), as amended, raises the threshold above which a mid-sized
investment adviser must register with the Commission to $110
million.\114\ Once registered with the Commission, an adviser need not
withdraw its registration until it has less than $90 million of assets
under management.\115\ The amendment operates to provide a buffer of 20
percent of the $100 million statutory threshold for registration with
the Commission, which is the same percentage as the current
buffer.\116\ We believe a 20 percent buffer is appropriate because it
is large enough to accommodate market fluctuations or the departure of
one or more clients, and does not substantially increase or decrease
the $100 million threshold set by Congress in the Dodd-Frank Act.\117\
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\114\ We find that raising the threshold for mid-sized advisers
to register with the Commission is appropriate in accordance with
the purposes of the Advisers Act. Advisers Act section
203A(a)(2)(B)(ii), as amended by the Dodd-Frank Act.
\115\ Amended rule 203A-1(a)(1). We find that not providing this
buffer and requiring advisers with assets under management of
between $90 million and $100 million to register with the states
would be unfair, a burden on interstate commerce, or otherwise
inconsistent with the purposes of section 203A of the Advisers Act.
Advisers Act section 203A(c). Advisers Act section 203A(c) 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. See supra note 20 for a discussion of
section 203A(c).
\116\ Commenters said the current $5 million buffer, which is 20
percent of the $25 million statutory threshold, effectively limits
advisers having to switch registrations due to market changes in
their assets under management. See, e.g., Altruist Letter (current
$5 million buffer ``was useful in lessening the need to switch back
and forth between state and Federal regulation as an IA's AUM grew
or fell''). See also Advisers Act section 203A(a)(1); rule 203A-
1(a). The amendment we are adopting provides a $20 million buffer,
which is 20 percent of the $100 million statutory threshold. See
Advisers Act section 203A(a)(2), as amended by the Dodd-Frank Act;
amended rule 203A-1(a)(1).
\117\ An adviser must register if its assets under management
are $110 million or more, which is $10 million higher than the $100
million statutory threshold. See Advisers Act section 203A(a)(2), as
amended by the Dodd-Frank Act; amended rule 203A-1(a)(1). See also
supra note 108 (citing commenters discussing market fluctuations);
Senate Committee Report, supra note 18, at 76 (stating that this
amendment increases the threshold above which all investment
advisers must register with the Commission from $25 million to $100
million).
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5. Exemptions From the Prohibition on Registration With the Commission
Using the authority provided by section 203A(c) of the Advisers
Act, we are adopting, as proposed, amendments to three of the
exemptions in rule 203A-2 from the prohibition on Commission
registration in section 203A to reflect developments since their
original adoption, including the enactment of the Dodd-Frank Act, which
we discuss below.\118\ Each of the exemptions (including those we are
not amending) also applies to mid-sized advisers, exempting them from
the prohibitions on registering with the Commission if they meet the
requirements of rule 203A-2.\119\
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\118\ Using the authority provided in section 203A(c) of the
Advisers Act, the Commission has permitted six types of investment
advisers to register with the Commission under rule 203A-2: (i)
NRSROs; (ii) certain pension consultants; (iii) certain 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) certain multi-
state investment advisers; and (vi) certain Internet advisers. See
supra notes 20-21 and accompanying text. 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,
respectively. See amended rule 203A-2(b), (c), and (e). We are
requiring advisers to comply with amended rule 203A-2 60 days after
publication in the Federal Register. See infra section III.
\119\ 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, supra note 17, at section II.D. 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 are eligible to
register with us. See section 410 of the Dodd-Frank Act; amended
rule 203A-2. We asked, but did not receive comment on, whether we
should limit rule 203A-2's application to small advisers; however,
one commenter agreed that these exemptions should apply to all
advisers, including mid-sized advisers. NRS Letter (strongly
supporting that the exemptions be applicable to all advisers no
matter their assets under management as it ``promotes uniformity,
clarity and a consistent standard for all.''). We are leaving rule
203A-2 unchanged in this regard.
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[[Page 42959]]
a. Nationally Recognized Statistical Rating Organizations
We are eliminating, as proposed, the exemption in rule 203A-2(a)
from the prohibition on Commission registration for nationally
recognized statistical rating organizations (``NRSROs'').\120\ Since we
adopted this exemption, Congress amended the Act to exclude certain
NRSROs from the Act's definition of ``investment adviser'' \121\ and
provided for a separate regulatory regime for NRSROs under the
Securities Exchange Act of 1934 (``Exchange Act'').\122\ Commenters
supported the elimination of this provision.\123\
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\120\ See rule 203A-2(a).
\121\ Credit Rating Agency Reform Act of 2006, P.L. 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 on behalf of
others).
\122\ Credit Rating Agency Reform Act, supra note 121, at
sections 4(a), 5.
\123\ NRS Letter (asserting that the proposal is consistent with
the Credit Rating Agency Reform Act, which amended the Advisers Act
to exclude NRSROs and to provide for a separate regulatory regime
for them under the Exchange Act); Pickard Letter (asserting that
continued availability of the NRSRO exemption is causing confusion
among advisers).
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b. Pension Consultants
We are amending rule 203A-2(b), the exemption available to pension
consultants, to increase the minimum value of plan assets required to
rely on the exemption from $50 million to $200 million.\124\ As
discussed in the Implementing Proposing Release, 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.\125\ As a result of this amendment, advisers currently relying
on the pension consultant exemption advising plan assets of less than
$200 million may be required to withdraw from Commission registration
and register with one or more states.\126\
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\124\ Amended rule 203A-2(a). 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, supra note 17, at section II.D.2. The exemption does not
apply to pension consultants that solely provide services to plan
participants. See NSMIA Adopting Release, supra note 17, at section
II.D.2. 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 provides investment advice. Rule 203A-2(b)(3).
\125\ See Implementing Proposing Release, supra note 7, at
section II.A.5.b.; NSMIA Adopting Release, supra note 17, at section
II.D.2.; Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 1601, section
II.D.2. (Dec. 20, 1996) [61 FR 68480 (Dec. 27, 1996)].
\126\ An adviser currently relying on the exemption, but that
advises plan assets of less than $200 million and files an annual
updating amendment to its Form ADV following the compliance date of
the amended rule, will be required to withdraw from Commission
registration within 180 days of the adviser's fiscal year end
(unless the adviser is otherwise eligible for SEC registration). See
rule 203A-1(b)(2); supra note 118.
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We proposed to increase the 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, and to maintain the same ratio as today
of plan assets to the statutory threshold for registration.\127\
Commenters supported our proposal.\128\ One agreed that the new $200
million threshold would continue to ensure that the activities of a
pension consultant registered with the Commission are significant
enough to have an impact on national markets.\129\ We are adopting the
amendment, as proposed.
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\127\ Proposed rule 203A-2(a).
\128\ See NRS Letter; Pickard Letter.
\129\ NRS Letter. See also NSMIA Adopting Release, supra note
17, 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.
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c. Multi-State Advisers
We are adopting, as proposed, amendments to the multi-state adviser
exemption to align the rule with the multi-state exemption that
Congress provided for mid-sized advisers in section 410 of the Dodd-
Frank Act.\130\ Amended rule 203A-2(d) permits all investment advisers
who are required to register as an investment adviser with 15 or more
states to register with the Commission, rather than 30 states, as
currently required.\131\ An adviser relying on the rule must withdraw
from registration with the Commission when it is no longer required to
be registered with 15 states.\132\ We are also rescinding, as proposed,
the provision in the current 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 adopting a similar cushion for the 15-
state threshold.\133\
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\130\ Amended rule 203A-2(d). Form ADV will not be amended to
reflect the changes to the multi-state adviser exemption until the
end of the calendar year. See supra section II.A.1. Until that time,
both a mid-sized adviser eligible for the statutory multi-state
exemption and a small adviser eligible for the exemption under
amended rule 203A-2(d) because it is required to register as an
adviser in 15 or more states may register or remain registered (as
the case may be) with the Commission by checking the boxes (Item
2.A.(9) and the relevant section of Schedule D) indicating that it
is exempt because it is required to register in 30 or more states.
See supra note 118. Upon making its next amendments to Form ADV, the
adviser should revise its filing to report reliance on the new
multi-state adviser exemption.
\131\ We note that amended rule 203A-2(d) permits an adviser
otherwise eligible to rely on the exemption to choose to maintain
its state registrations and not switch to SEC registration. See
amended rule 203A-2(d)(2) (adviser elects to rely on the exemption
by making the required representations on Form ADV).
\132\ See amended rule 203A-2(d). To rely on this exemption, an
adviser also must continue 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 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 15 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. Amended rule 203A-2(d)(2)-(3). The adviser may not
include in the number of states those in which it is 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)].
\133\ See rule 203A-2(e)(1). Eliminating this buffer simplifies
the requirements of the exemption. See NRS Letter (``The Dodd-Frank
Act has addressed the multi-state adviser exemption to simplify the
requirements of this exemption.'')
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Commenters generally agreed with our proposal to align our multi-
state exemption for small advisers with the statutory exemption for
mid-sized advisers.\134\ A few, however, recommended a lower threshold
of required state registrations for eligibility for the multi-state
exemption.\135\ In light of Congressional determination to set the
threshold at 15 states and our stated purpose in amending the rule to
align it with the Dodd-Frank Act, we have determined not to lower the
threshold further.\136\ We also note that the
[[Page 42960]]
requirement that advisers annually assess their eligibility for
registration and the grace periods provided to switch to and from state
registration should further mitigate the frequency with which an
investment adviser required to register in 15 states will have to
switch between state and federal registration.\137\
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\134\ See NASAA Letter; comment letter of the National Education
Association Member Benefits Corporation (Jan. 21, 2011) (``NEA
Letter''); NRS Letter; Pickard Letter; Seward Letter; Shearman
Letter.
\135\ See Seward Letter and Shearman Letter (in each case
supporting the 15-state threshold we proposed, and suggesting the
burdens of maintaining multiple state registrations can be
significant). See also NEA Letter. One of these commenters also
would support further decreasing the number of states to five and
requiring advisers relying on the exemption to have at least $25
million of assets under management. Seward Letter. Another ``would
support an even lower threshold.'' Shearman Letter.
\136\ See section 410 of the Dodd-Frank Act (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); H. Rep.
No. 111-517, at 867 (2010) (``Conference Committee Report'')
(``Those advisers who qualify to register with their home state must
register with the SEC should the adviser operate in more than 15
states.'').
\137\ See supra section II.A.4.
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6. Elimination of Safe Harbor
We are rescinding, as proposed, rule 203A-4, which has provided 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.\138\ One
commenter argued that the safe harbor should be retained for mid-sized
advisers because advisers calculating regulatory assets under
management face similar challenges today as when the safe harbor was
adopted.\139\ We disagree. As stated in the Implementing Proposing
Release, the safe harbor was designed for smaller advisory businesses
with assets under management of less than $30 million, which may not
employ the same tools or otherwise have a need to calculate assets as
precisely as advisers with greater assets under management.\140\ We
also believe that the revisions we are adopting to the Form ADV
instructions to implement a uniform method for advisers to calculate
assets under management will clarify the requirements and reduce
confusion among advisers.\141\ Moreover, the rule is a safe harbor only
from our enforcement actions, and to our knowledge few, if any,
advisers have relied upon it in the 14 years since it was adopted.\142\
Accordingly, we are rescinding the rule.
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\138\ Rule 203A-4.
\139\ NYSBA Committee Letter. Another commenter asserted that
there has been and continues to be confusion among smaller advisers
in calculating assets under management. NRS Letter.
\140\ Implementing Proposing Release, supra note 7, at section
II.A.6. (citing rule 203A-4; NSMIA Adopting Release, supra note 17,
at section II.B.3.).
\141\ See supra section II.A.3.
\142\ See NRS Letter (noting a belief that the safe harbor has
been little used by small advisers based upon the commenter's years
of consulting for such advisers).
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7. Mid-Sized Advisers
We are amending Form ADV to require a mid-sized adviser registering
with us to affirm, upon application and annually thereafter, that it is
either: (i) 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; or (ii) is not subject to examination as
an adviser by that state.\143\ These form revisions implement the Dodd-
Frank Act amendment to section 203A of the Advisers Act that prohibits
mid-sized advisers from registering with the Commission, but only: (i)
If 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.\144\ 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.\145\ We are therefore providing an explanation of these
provisions in instructions to Form ADV.\146\
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\143\ See amended Form ADV, Part 1A, Item 2.A.(2). For a
discussion of changes to Form ADV, Part 1A, Item 2.A., see supra
section II.A.2.
\144\ See section 410 of the Dodd-Frank Act. An adviser
reporting that it is no longer able to make this affirmation will
have 180 days from its fiscal year end to withdraw from Commission
registration. See amended rule 203A-1(b)(2). Thus, the rule will
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.
\145\ 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 changing
this definition. See amended rule 203A-3(c). For a discussion of
amendments we are making to the calculation of assets under
management, see supra section II.A.3.
\146\ See amended Form ADV: Instructions for Part 1A, instr.
2.b.
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a. Required To Be Registered
The Form ADV instructions we are adopting reflect that the
``required to be registered'' standard that Congress included in new
section 203A(a)(2) of the Advisers Act for mid-sized advisers is
different from the ``regulated or required to be regulated'' standard
set forth in section 203A(a)(1) for small advisers.\147\ The
instruction explains that a mid-sized adviser ``is not required to be
registered'' with the state securities authority and must register with
the Commission (unless an exemption from registration with the
Commission otherwise is available)\148\ if the adviser is exempt from
registration under the law of the state in which it has its principal
office and place of business, or is excluded from the definition of
investment adviser in that state.\149\ Thus, for example, an adviser
with $75 million of assets under management that is exempt from
registration in the state in which its principal office and place of
business is located will have to register with the Commission (unless
an exemption from Commission registration is available). None of the
commenters disputed our interpretation or suggested an alternative
interpretation of the ``required to be registered'' element,\150\ and
we are adopting the instructions, as proposed.\151\
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\147\ See amended Form ADV: Instructions for Part 1A, instr.
2.b. 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. Advisers Act section 203A(a)(1). See also
Advisers Act section 203(a). 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. See NSMIA Adopting Release, supra
note 17, at section II.E.1. 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). See The Wall Street Reform and Consumer Protection Act
of 2009, H.R. 4173, 111th Cong. Sec. 7418 (2009); Restoring
American Financial Stability Act of 2010, S. 3217, 111th Cong. Sec.
410 (2010). But the final version of the Dodd-Frank Act prohibits 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. See section 410 of the Dodd-Frank Act.
\148\ See, e.g., Advisers Act sections 203(a) and (b), 203A(b);
rule 203A-2.
\149\ See, e.g., Uniform Securities Act Sec. Sec. 102(15),
403(b) (2002). An adviser not registered under a state adviser
statute in contravention of such statute, however, is not eligible
for registration with the Commission. Similarly, an adviser could
not voluntarily register with the Commission to avoid state
registration.
\150\ One commenter suggested that we clarify whether mid-sized
advisers that are exempt from registration in their home states may
or are required to register with us. Sadis Letter. As discussed
above and in the Form ADV instructions, if a mid-sized adviser is
not required to be registered in the state where it has its
principal office and place of business, the adviser must register
with the Commission (unless an exemption from Commission
registration is available). See supra notes 148-149 and accompanying
text; amended Form ADV: Instructions for Part 1A, instr. 2.b.
\151\ See amended Form ADV: Instructions for Part 1A, instr.
2.b.
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[[Page 42961]]
b. Subject to Examination
As we discussed in the Implementing Proposing Release, our staff
contacted the state securities authority for each state and, based upon
information they have provided us, identified those states that do not
subject advisers registered with them to examination.\152\ We have
posted this list on our Web site,\153\ and it also will be available to
advisers using the IARD to register or amend their registration
forms.\154\ Based on those responses, advisers with their principal
office and place of business in Minnesota, New York and Wyoming with
assets under management between $25 million and $100 million must
register with the Commission.\155\
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\152\ All state securities authorities other than Minnesota, New
York and Wyoming have advised our staff that advisers registered
with them are subject to examination. According to IARD data as of
April 7, 2011, there were 63 advisers with assets under management
between $25 million and $90 million and a principal office and place
of business in Minnesota, 286 in New York, and 1 in Wyoming.
\153\ See http://www.sec.gov/divisions/investment/midsizedadviserinfo.htm.
\154\ See amended Form ADV, Part 1A, Item 2.A.(2)(b); amended
Form ADV: Instructions for Part 1A, instr. 2.b. The staff also
requested that each state notify us promptly if advisers in the
state will begin to be subject to examination or will no longer be
subject to examination, and we will update the list on the IARD and
our Web site accordingly.
\155\ See supra note 152. The requirement for such an adviser to
register with the Commission, as opposed to one of these states,
will be effective on July 21, 2011.
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Several commenters agreed with our approach of relying on responses
from the state regulators rather than determinations by the Commission
to identify whether an adviser is ``subject to examination'' by a
state.\156\ Two commenters, however, suggested that we should instead
establish our own criteria for whether an adviser is ``subject to
examination,'' and one further recommended that we should engage in an
evaluation of each state's adviser examination program.\157\ We do not
believe that the alternatives suggested are practical or appropriate.
As we explained in the Implementing Proposing Release, the states are
the most familiar with their own circumstances and are in the best
position to determine whether advisers in their states are subject to
examination.\158\
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\156\ See NASAA Letter (proposed approach ``complies with the
clear and unambiguous language of the statute'' and ``attempting to
define or otherwise interpret terms that are plain and direct is
contrary to long-established rules of statutory construction.'');
NRS Letter; Pickard Letter. See also Sadis Letter (recommending the
Commission clarify whether an adviser in a particular state is
required to register with the Commission).
\157\ ABA Committees Letter (recommending the Commission
construe ``examination'' to indicate a ``structured adviser
examination program, rather than one conducted on an occasional,
sporadic or informal basis,'' and require an annual affirmation from
each state that it subjects advisers to examination); FSI Letter
(recommending the Commission engage in a stringent evaluation of
each state's adviser examination program and expressly define
``subject to examination'' to, at a minimum, include a ``uniform or
risk based routine examination process'' and that it ``mirrors the
frequency of broker-dealer examination by FINRA and the SEC'').
\158\ See Implementing Proposing Release, supra note 7, at
section II.A.7.b.
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B. Exempt Reporting Advisers: Sections 407 and 408
To implement new sections 203(l) and 203(m) of the Advisers Act, we
are adopting a new rule, as proposed, that requires advisers relying on
those exemptions from registration to submit to us, and to periodically
update, reports that consist of a limited subset of items on Form
ADV.\159\ We are also adopting the amendments we proposed to Form ADV
to permit the form to serve as both a reporting and registration form
and to specify the seven items these ``exempt reporting advisers'' must
complete.\160\
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\159\ We refer to advisers that rely on the exemptions from
registration provided in either new section 203(l) or new section
203(m) of the Advisers Act as ``exempt reporting advisers.'' For a
brief discussion of these exemptions, see infra note 162 and
accompanying text; for a more in-depth discussion, see Exemptions
Adopting Release, supra note 4.
\160\ For a discussion of additional amendments we are proposing
to Part 1 of Form ADV, see infra section II.C.
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As discussed above, the Dodd-Frank Act amends the Advisers Act, as
of July 21, 2011, to create two new exemptions from registration for
advisers to certain types of ``private funds'' and to repeal the
private adviser exemption contained in section 203(b)(3) of the
Advisers Act on which advisers to many hedge and other private funds
relied in order to avoid registration.\161\ Both section 203(l) (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 and to submit such
reports ``as the Commission determines necessary or appropriate in the
public interest.'' \162\ The rules and amendments to Form ADV that we
are adopting today are designed to address the reporting aspects of
these two exemptions.\163\
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\161\ 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-
54). See supra note 4; Implementing Proposing Release, supra note 7,
at n.112 and accompanying text.
\162\ See sections 407 and 408 of the Dodd-Frank Act, adding
Advisers Act sections 203(l) and (m). See supra note 5. See also
Exemptions Adopting Release, supra note 4, at section II.; section
204(a) of the Advisers Act and section 204(b)(5), as added by
section 404 of the Dodd-Frank Act.
\163\ Recordkeeping requirements for exempt reporting advisers
will be addressed in a future release. See sections 407 and 408 of
the Dodd-Frank Act (providing that the Commission shall require
investment advisers exempt from registration under either section
407 or 408 of the Dodd-Frank Act to maintain such records as the
Commission determines necessary or appropriate in the public
interest or for the protection of investors.).
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1. Reporting Required
Rule 204-4 requires exempt reporting advisers to file reports with
the Commission electronically on Form ADV through the IARD using the
same process used by registered investment advisers.\164\ An exempt
reporting adviser must submit its initial Form ADV within 60 days of
relying on the exemption from registration under either section 203(l)
or section 203(m) of the Advisers Act.\165\ Each Form ADV is considered
filed with the Commission upon acceptance by the IARD.\166\ An exempt
reporting adviser unable to file electronically as a result of
unanticipated technical difficulties may, like a registered adviser,
request a temporary hardship exemption of up to seven business days
after the filing was due.\167\ Advisers filing the form must
[[Page 42962]]
pay a filing fee designed to pay the reasonable costs associated with
the filing and maintenance of the system.\168\ We anticipate that
filing fees, which the Commission will consider separately, will be the
same as those for registered investment advisers, which currently range
from $40 to $225 based on the amount of assets an adviser has under
management.\169\
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\164\ New rule 204-4. See amended Form ADV: General Instructions
6, 7, 8 and 9 (providing guidance about the IARD entitlement
process, signing the form, and submitting it for filing). We are
also adopting technical amendments, as proposed, to Form ADV-NR, to
enable exempt reporting advisers to appoint the Secretary of the
Commission as an agent for service of process for certain non-
resident advisers. See amended Form ADV-NR; amended Form ADV:
General Instruction 19.
\165\ See amended Form ADV: General Instruction 13. An adviser
may not be both registered with us and filing as an exempt reporting
adviser at the same time. An SEC registered adviser switching from
being registered to being an exempt reporting adviser must first
file a Form ADV-W to withdraw its SEC registration before submitting
its first report as an exempt reporting adviser. We have modified
General Instruction 13 from the proposal to reflect IARD system
functionality, which we continue to develop.
\166\ New 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.'').
\167\ See new rule 204-4(e) (providing a temporary hardship
exemption for an adviser having unanticipated technical difficulties
that prevent submission of a filing to IARD); amended Form ADV-H;
amended Form ADV: General Instruction 17.
\168\ New rule 204-4(d).
\169\ The current fee schedule applicable to advisers applying
for registration may be found on our Web site at http://www.sec.gov/divisions/investment/iard/iardfee.shtml.
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Several commenters expressed the view that use of Form ADV and the
IARD for exempt reporting advisers would be efficient, because the
system is familiar to many advisers and because it would integrate the
process of filing with the Commission with any parallel filing the
adviser may be obligated to make with state securities
authorities.\170\ Commenters agreed with our expectation that use of
Form ADV and the IARD would facilitate a transition from filing reports
with us to applying for registration with us.\171\ Two commenters urged
that we create a separate reporting system.\172\ One recommended a new,
more interactive system; and the other suggested a separate filing
system to avoid confusion among investors who might mistakenly assume
that an exempt reporting adviser is registered if its information comes
up in an IARD search. We share these commenters' general goals of
innovation and the avoidance of investor confusion as our staff works
with FINRA (our IARD contractor) to continue improving the IARD.\173\
However, the expense and delay of initiating and developing a new
system with adequate functionality, which neither commenter addressed,
argues against these commenters' recommendations. We are adopting rule
204-4 as proposed.
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\170\ 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 amended Form ADV: General Instruction 14 (noting that exempt
reporting advisers who file reports with the SEC may continue to be
subject to state registration, reporting, or other obligations).
\171\ ABA Committees Letter; comment letter of Better Markets,
Inc. (Jan. 24, 2011) (``Better Markets Letter''); NRS Letter; NASAA
Letter. Form ADV, as amended, permits 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. See amended Form ADV: General Instruction 15 (providing
procedural guidance to advisers that no longer meet the definition
of exempt reporting adviser).
\172\ Merkl Implementing Letter; Seward Letter. See also
Shearman Letter (making similar arguments regarding the potential
for investor confusion, but not advocating use of a different form
or reporting system).
\173\ Our staff, for example, recently completed a study
mandated by section 919B of the Dodd-Frank Act on ways to improve
investor access to information about certain financial service
providers, including data contained in the IARD. See Staff of the
Office of Investor Education and Advocacy of the U.S. Securities and
Exchange Commission, Study and Recommendations on Improved Investor
Access to Registration Information about Investment Advisers and
Broker-Dealers, Jan. 2011, available at http://www.sec.gov/news/studies/2011/919bstudy.pdf.
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2. Information in Reports
We are also amending Form ADV to accommodate its use by exempt
reporting advisers. First, we are re-titling 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 revising the cover page to require exempt reporting
advisers to indicate the type of report they are filing.\174\ Finally,
we are amending Item 2 of Part 1A, which today requires advisers to
indicate their eligibility for SEC registration, to add a new
subsection B that requires an exempt reporting adviser to identify the
exemption(s) on which it is relying to report, rather than register,
with the Commission.\175\
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\174\ An exempt reporting adviser must indicate whether it is
submitting an initial report, an annual updating amendment, an
other-than-annual amendment, or a final report. We are also adopting
corresponding changes to General Instruction 2.
\175\ An exempt reporting adviser must 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 amended Form ADV, Part
1A, Item 2.B, questions 1 and 2. An exempt reporting adviser relying
on the latter exemption, for private fund advisers, must also
indicate the amount of private fund assets it manages in Section
2.B. 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, need only include private fund assets that
they manage at a place of business in the United States. See
Exemptions Adopting Release, supra note 4, at section II.B.3. An
adviser that acts solely as an adviser to private funds but is no
longer eligible to check box 2.B.(2) because it has assets under
management in the United States of $150 million or more may, subject
to certain conditions, check a separate box to continue filing as an
exempt reporting adviser during the safe harbor transition period
described below. See infra note 211 and accompanying text. See also
amended Form ADV, Part 1A, Item 2.B, question 3; Form ADV: General
Instruction 15.
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Some commenters asserted that it would be inconsistent with these
new exemptions to require exempt reporting advisers to submit reports
to the Commission,\176\ while others argued that we proposed to require
too much information.\177\ Congress, however, 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.\178\ In addition, the Dodd-Frank Act neither limits the
types of information we could require in the reports nor specifies the
purpose for which we would use the information.
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\176\ Comment letter of Avoca Capital Holdings (Dec. 21, 2011)
(``Avoca Letter''); AIMA Letter; comment letter of AustinVentures
(Jan. 21, 2011) (``AV Letter'').
\177\ Comment letter of Berkeley Center for Law, Business and
the Economy (Jan. 31, 2011) (``BCLBE Letter''); Shearman Letter;
comment letter of Village Ventures, Inc. (Jan. 24, 2011) (``Village
Ventures Letter'').
\178\ See sections 407 and 408 of the Dodd-Frank Act.
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We are adopting, as proposed, a requirement that exempt reporting
advisers complete the following items of Part 1A of Form ADV: Items 1
(Identifying Information), 2.B. (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).\179\ In addition,
we are requiring, as proposed, that exempt reporting advisers also
complete corresponding sections of Schedules A, B, C, and D.\180\
Responses to these items will assist us to identify exempt reporting
advisers, their owners, and their business models. The information we
collect will provide us with information as to whether these advisers
or their activities might present sufficient concerns to warrant our
further attention in order to protect their clients, investors, and
other market participants.\181\ The reports will also provide the
public with some basic information about these advisers and their
businesses.
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\179\ See amended Form ADV: General Instruction 3. We will
continue to monitor whether we should also require exempt reporting
advisers to complete other items on Form ADV (e.g., Part 2).
\180\ See id.; Implementing Proposing Release, supra note 7, at
section II.B.2.
\181\ One commenter agreed. See ABA Committees Letter (stating
that most of the information exempt reporting advisers would have to
provide is of a nature that will assist the Commission to identify
compliance risks posed by exempt reporting advisers and thus such
disclosure responds to the mandate set forth in the Dodd-Frank Act).
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Items 1, 3, and 10 elicit basic identification details such as
name, address, contact information, form of organization, and who
controls the adviser. Items 6 and 7.A. provide us with details
regarding other business activities in which the adviser and its
[[Page 42963]]
affiliates are engaged, 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 requires advisers to disclose the
disciplinary history of the adviser and its employees and to complete a
separate schedule containing details of each disciplinary event.\182\
Item 7.B. and Section 7.B. of Schedule D require advisers to private
funds, which these advisers manage by terms of the exemptions, to
disclose information regarding each private fund they advise. As
discussed in more detail in Section II.C. of this Release, we are
adopting significant amendments to Section 7.B. of Schedule D that are
designed to provide us with a comprehensive overview, or census, of
private funds.\183\ Exempt reporting advisers' responses to Item 7.B.,
and Section 7.B.(1) of Schedule D, in conjunction with information
provided by registered advisers, will provide us with important data
about these funds that we would use to identify risks to their
investors.
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\182\ See amended Form ADV, Part 1A, Disclosure Reporting Pages.
\183\ 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 service providers and its gross assets. See amended Form
ADV, Part 1A, Schedule D, Section 7.B.(1). See also infra Section
II.C.1.
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Several commenters expressed general support for the Commission's
proposed reporting requirement.\184\ One commenter urged us not to
require exempt reporting advisers to report information about their
other business activities in response to Item 6, their related persons
in response to Item 7.A., their private funds in response to Item 7.B.,
and their control persons in response to Item 10 because, among other
reasons, such information ``would not add to the Commission's ability
to protect the public interest or investors.'' \185\ We disagree.
Without this information, the reports would contain little more than
basic identifying data, which would be inadequate to help us to
meaningfully identify significant risks to an exempt reporting
adviser's clients, investors, or other market participants. Moreover,
to require such limited information to be reported would deny investors
an opportunity to verify disclosures they receive directly from the
adviser.
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\184\ See, e.g., AFL-CIO Letter; comment letter of Council of
Institutional Investors (Jan. 20, 2011) (``CII Letter''); NRS
Letter; Better Markets Letter; ABA Committees Letter; NASAA Letter.
\185\ Village Ventures Letter (asserting also that the
requirements would be burdensome). We address the anticipated costs
and burdens associated with these requirements below. See infra
Section V.
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Some commenters urged that we broaden the scope of information we
proposed to collect, suggesting among other things that the Commission
should require all or some of the additional information that
registered advisers must submit on Form ADV, including a requirement to
prepare and deliver a client brochure (Part 2) and brochure
supplements.\186\ We have considered our need for this information in
light of the exemptions Congress provided in the Dodd-Frank Act and the
regulatory role we expect to assume with respect to exempt reporting
advisers. We have not sought to apply most of the prophylactic rules we
have adopted for registered advisers,\187\ and we do not anticipate
that our staff will conduct compliance examinations of these advisers
on a regular basis.\188\ One commenter who urged us to collect a
broader set of information recommended that we apply additional
prophylactic rules to exempt reporting advisers, the consequence of
which would be to reduce the distinctions between these advisers and
registered advisers, which those urging us to collect less information
argued we should avoid.\189\ We believe that requiring advisers to
complete the items we proposed strikes an appropriate balance. As
discussed in more detail below, we have revised some of these items in
response to comments we received.
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\186\ See Better Markets Letter; CII Letter. 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. See also AFL-CIO Letter (suggesting requiring
performance reporting).
\187\ See, e.g., rule 206(4)-2 (the custody rule), which applies
to advisers registered or required to be registered with the
Commission. But see rule 206(4)-5 (the ``pay to play'' rule)
(applied to exempt reporting advisers that previously relied on the
private adviser exemption and continues to apply to exempt reporting
advisers that currently rely on exemptions from registration under
sections 203(l) and 203(m) of the Advisers Act). See infra section
II.D.1. (discussing amendments we are adopting today to the pay to
play rule to continue to apply the rule to exempt reporting advisers
and foreign private advisers).
\188\ Our staff will conduct cause examinations where there are
indications of wrongdoing, e.g., those examinations prompted by
tips, complaints, and referrals. Under section 204(a) of the
Advisers Act, however, 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).
\189\ Compare comment letter of Coalition of Private Investment
Companies (Jan. 28, 2011) (``CPIC Letter'') with AV Letter; AIMA
Letter; Shearman Letter; Village Ventures Letter. See Merkl
Implementing Letter (indicating that our proposal created a
meaningful distinction between registered advisers and exempt
reporting advisers by not subjecting exempt reporting advisers to
all of Form ADV, to compliance program requirements under rule
206(4)-7, to custody requirements under rule 206(4)-2, and to
regular examinations, consistent with a primary concern of Congress
in adopting the Dodd-Frank Act).
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3. Public Availability of Reports
Several commenters urged that we not make public any information
filed by exempt reporting advisers.\190\ Other commenters, however,
supported public disclosure of information by these advisers and
suggested that such data would be useful, for example, for prospective
clients who were conducting ``due diligence'' reviews of advisers.\191\
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\190\ See AV Letter; AIMA Letter; ABA Committees Letter; Avoca
Letter; Katten Foreign Advisers Letter; MFA Letter; NRS Letter;
comment letter of the National Venture Capital Association (Jan. 24,
2011) (``NVCA Letter''); Shearman Letter; Seward Letter.
\191\ See AFL-CIO Letter; CII Letter; Better Markets Letter
(each lauding the Commission's initiative to create, for the first
time, a database of public information on private investment funds).
See also Merkl Implementing Letter (noting that a potential investor
would be better able to perform due diligence if the information
were made available to the public); CII Letter (arguing that an
investor could make an informed decision regarding the integrity of
a prospective adviser if he or she were able to review the
disciplinary history of the exempt reporting adviser and its
employees).
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Section 210(a) of the Advisers Act requires information contained
in reports filed with the Commission to be made available to the
public, unless we find that public disclosure is neither necessary nor
appropriate in the public interest or for the protection of investors.
Commenters did not persuade us that we could make such a finding.\192\
On the contrary, we believe
[[Page 42964]]
the public reporting requirements we are adopting will provide a level
of transparency that will help us to identify practices that may harm
investors,\193\ will aid investors in conducting their own due
diligence,\194\ and will deter advisers' fraud and facilitate earlier
discovery of potential misconduct.\195\ For instance, investors will be
able to compare Form ADV information to the information they have
received in offering documents and due diligence to identify potential
misrepresentations. For these reasons, we believe public availability
of these reports is in the public interest and will help to protect
investors. Suggestions by some that the Dodd-Frank Act compels us to
deny public access to these reports are misplaced.\196\ In the Dodd-
Frank Act, Congress sought to protect only certain proprietary and
similarly sensitive information submitted by advisers about their
private funds in reports for the assessment of systemic risk.\197\ In
light of section 210 of the Act, which presumes reports submitted to us
by advisers to be publicly available, together with the Freedom of
Information Act,\198\ which generally supports disclosure of such
documents, we believe at this time that the information should be
publicly available.\199\
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\192\ See AV Letter (claiming that the public disclosure of the
reports would be ``unnecessary and intrusive'' and would be done
``for no apparent reason''); MFA Letter (urging that, absent a
compelling policy reason for public disclosure, the reports should
not be publicly available because some of the information is
competitively sensitive); NVCA Letter (arguing that making public
the ownership or control persons of an exempt reporting adviser
would cause competition for scarce human resources among these
advisers and could reveal strategic relationships to competitors);
NRS Letter (claiming that because investors and prospective
investors receive voluminous offering documents, due diligence
questionnaires, and other materials, limited Form ADV Part 1A
information would be of little value and limited use); ABA
Committees Letter (indicating there would be no benefit in members
of the general public having access to this information because they
are not qualified to invest); Katten Foreign Advisers Letter
(claiming that private fund investors already receive an offering
document that should cover the items that would be included in the
reports). See also Katten Foreign Advisers Letter; NVCA Letter; AIMA
Letter (each conditioning its support for the scope of the reporting
requirement on making the reports non-public).
\193\ For instance, census data about a private fund's
gatekeepers, including administrators and auditors, will be
available on Section 7.B.1. of Schedule D and will 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).
\194\ See supra note 191.
\195\ 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).
\196\ ABA Committees Letter; Avoca Letter; AV Letter; Seward
Letter; Shearman Letter.
\197\ Compare section 404 of the Dodd-Frank Act, codified at
Advisers Act section 204(b), with sections 407 and 408 of the Dodd-
Frank Act, codified at Advisers Act sections 203(l) and 203(m). See
also Systemic Risk Reporting Release, supra note 71 (proposing
confidential reporting by advisers to private funds designed to
assist the Financial Stability Oversight Council (``FSOC'') in its
assessment of systemic risk in the U.S. financial system).
\198\ 5 U.S.C. 552(a).
\199\ Information on Form ADV is available to the public through
the Investment Adviser Public Disclosure System (``IAPD''), which
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. In response to commenters' suggestions we
will, 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. See Shearman Letter; Seward Letter (expressing
concerns that public access to reports by exempt reporting advisers
might cause confusion if an unregistered adviser's information comes
up in an IARD search, an investor's perception may be that the
adviser is registered).
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Some commenters expressed more narrow concerns that certain of the
information we proposed to require could require them to disclose
proprietary or competitively sensitive information.\200\ As discussed
below, we have responded to those concerns by revising certain of our
items in a manner that will affect the information that both registered
and exempt reporting advisers will provide to us.\201\
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\200\ See infra note 238. The NVCA also argued that requiring a
venture capital fund adviser to report information about the
adviser's control persons, as required by Item 10 of Part 1A of Form
ADV, could increase competition among these advisers for human
resources. While this information could result in competitive
effects among these advisers, the effects of this item are not
unique to these advisers, and they may result in benefits.
\201\ See infra Section II.C.1.
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4. Updating Requirements
We are also amending 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.\202\ As amended, rule 204-1 requires 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.
Similarly, we are amending General Instruction 4 to Form ADV to require
an exempt reporting adviser, like a registered adviser, to update
promptly Items 1 (Identification Information), 3 (Form of
Organization), and 11 (Disciplinary Information) if they become
inaccurate in any way, and to update Item 10 (Control Persons) if it
becomes materially inaccurate.\203\
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\202\ Rule 204-1. We are also amending 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.
\203\ See amended Form ADV: General Instruction 4.
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Most of the commenters who addressed updating and amendment
requirements agreed with our approach to update the report annually and
to amend it according to the same schedule as is applicable to
registered advisers.\204\ In order to permit us to receive timely
information from exempt reporting advisers, we are adopting the rule
amendments as proposed.
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\204\ NRS Letter; Merkl Implementing Letter; CII Letter; ABA
Committees Letter. Some of the commenters added that information
reported by exempt reporting advisers that is allowed to become
significantly outdated or inaccurate would not serve the
Commission's or public's interest or protect investors as mandated
by the Dodd-Frank Act and could be misleading. ABA Committees
Letter; Merkl Implementing Letter. But see NVCA Letter (indicating
that, because venture capital fund investments are long-term and
illiquid, there would be little, if any, benefit to investors,
regulators or the public to update the report more frequently).
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5. Final Reports
When an adviser ceases to be an exempt reporting adviser, new rule
204-4 requires the adviser to file an amendment to its Form ADV to
indicate that it is filing a final report.\205\ Final report filings
will allow us to distinguish such a filer from one that is failing to
meet its filing obligations.\206\ In some cases an exempt reporting
adviser will file a final report because it ceases to do business as an
investment adviser and thus is no longer subject to reporting under the
Act.\207\ In other cases an exempt reporting adviser will file a final
report in connection with becoming registered with the Commission, in
which case it will continue to periodically update its Form ADV, but as
a registered adviser.\208\
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\205\ New rule 204-4(f).
\206\ Id. Advisers filing a final report are not required to pay
a filing fee. An adviser that failed to file a final report would
violate rule 204-4(f).
\207\ Such an adviser must indicate that it is filing a final
report and update Item 1 (Identifying Information) of Part 1A of
Form ADV. Amended Form ADV: General Instruction 15.
\208\ An exempt reporting adviser may be required to become
registered with the Commission if, for example, it is relying on the
exemption provided by section 203(l) of the Act and accepts a client
that is not a venture capital fund. See amended Form ADV: General
Instruction 15; Exemptions Adopting Release, supra note 4, at
Section II.A.
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Amended general instruction 15 to Form ADV provides guidance to
exempt reporting advisers transitioning to becoming registered with the
Commission. An exempt reporting adviser wishing to register with the
Commission can file a single amendment to its Form ADV that will serve
both as a final ``report'' as an exempt reporting adviser and an
application for registration under the Advisers Act.\209\ While an
application is pending, but before it is approved, an adviser may
continue to operate as an exempt reporting adviser in accordance with
the terms of the relevant exemption.\210\ In addition, General
[[Page 42965]]
Instruction 15 provides a safe harbor for certain exempt reporting
advisers relying on the ``private fund adviser'' exemption provided by
rule 203(m)-1. Such an adviser that has complied with all of its
reporting obligations as an exempt reporting adviser may continue
advising private fund clients for up to 90 days after filing an annual
updating amendment indicating that it has private fund assets of $150
million or more before filing its final report and application for
registration.\211\ This transition period is designed to accommodate
events that may be beyond the adviser's control, such as an increase in
the value of the adviser's assets under management, but it is not
available to an adviser that otherwise would not qualify for the
exemption provided by rule 203(m)-1. The transition period also is not
available to advisers relying on the ``venture capital adviser''
exemption in section 203(l) of the Act. Advisers seeking to rely on
that exemption may not accept a client that is not a venture capital
fund without first registering under the Adviser Act.\212\ Commenters
who addressed the proposal to require a final report endorsed the
Commission's approach.\213\
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\209\ See amended Form ADV: General Instruction 15.
\210\ See amended Form ADV: General Instruction 15. For example,
an adviser transitioning from exempt reporting to registered would
violate the Advisers Act registration requirement if it provides
advisory services to a client that is not a private fund before the
Commission approves its application for registration.
\211\ See amended Form ADV: General Instruction 15. This
condition reflects the importance of the Advisers Act reporting
requirements applicable to advisers relying on the exemption
provided by rule 203(m)-1. See also Exemptions Adopting Release,
supra note 4, at n.377. An adviser that meets or exceeds $150
million in assets under management in the United States must
indicate that change by checking the box in Item 2.B.(3) of Form ADV
in its annual updating amendment.
\212\ See amended Form ADV: General Instruction 15.
\213\ ABA Committees Letter; Merkl Implementing Letter.
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C. Form ADV
We are adopting today a number of amendments to Form ADV that will
improve our ability to oversee investment advisers. 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, such as to efficiently allocate our
examination resources based on the risks we discern, or to identify
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 examinations. Moreover, the information in Form ADV
allows us to better understand the investment advisory industry and to
evaluate the implications of policy choices we must make in
administering the Advisers Act.
As amended, Form ADV requires advisers to provide us with
additional information about three areas of their operations.\214\
First, we require advisers to provide additional information about
private funds they advise. Second, we expand the data advisers provide
us 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
require additional information about advisers' non-advisory activities
and their financial industry affiliations. Some additional changes to
the Form (described below) 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.\215\
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\214\ In addition, we are making several clarifying or technical
amendments in response to comments, frequently asked questions we
receive, and our experience administering the form. See infra
sections II.C.5. and 7.
\215\ See section 956 of the Dodd-Frank Act.
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The commenters that addressed these proposed amendments to Form ADV
generally supported the amendments,\216\ although many expressed
concerns with or urged changes to the proposed private fund reporting
requirements contained in Item 7.B. and Section 7.B.(1) of Schedule
D.\217\ Two commenters argued that the new information requirements we
proposed to Part 1A of Form ADV overlap in some respects with the new
brochure requirements (Part 2 of Form ADV) and should not be
adopted.\218\ We acknowledge some overlap in the information required
to be reported, but note that overlap may be necessary as the two parts
of Form ADV serve very different purposes. Part 2 of Form ADV may
overlap Part 1 to ensure that investors are fully informed about a
particular practice or conflict, while the information we collect in
Part 1 permits us to collect data about that practice or conflict for
regulatory purposes.
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\216\ See, e.g., NASAA Letter; IAA General Letter (stating that
enhanced disclosure in Part 1 of Form ADV will improve the
Commission's ability to gather data about firms and to conduct
appropriate inquiries, inspections, and other activities based on
that data, and noting that certain additional information will allow
the Commission to focus its examination and enforcement resources on
those advisers that appear to present greater compliance risks);
CPIC Letter (noting that additional information that the revised
form will collect should be of assistance to the Commission in its
efforts to identify fund advisers, to verify the existence and
location of assets and to carry out general market surveillance, and
it should also be of use to investors as they conduct due diligence
and research the background of fund managers).
\217\ See, e.g., ABA Committees Letter; AV Letter; AIMA Letter;
comment letter of CompliGlobe Ltd. (Jan. 24, 2011) (``CompliGlobe
Letter''); comment letter of Debevoise & Plimpton LLP (Jan. 24,
2011) (``Debevoise General Letter''); comment letter of DLA Piper
LLP (US) (on behalf of Emerging Growth and Venture Capital Group)
(Jan. 24, 2011)) (``DLA Piper VC Letter''); comment letter of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (Jan.
24, 2011) (``Gunderson Letter''); IAA General Letter; Katten Foreign
Advisers Letter; MFA Letter; NRS Letter; NVCA Letter; O'Melveny
Letter; Seward Letter; Shearman Letter.
\218\ See NRS Letter (asserting that parts of the proposed
amendments to Items 5, 6, 7, 8, and 10 would result in duplicative
reporting); Seward Letter.
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We are adopting amendments to the form, with several substantive
and technical or clarifying revisions that respond to comments we
received.
1. Private Fund Reporting: Item 7.B.
We are adopting amendments to Item 7.B. and Schedule D of Form ADV
that expand the information advisers must report to us about the
private funds they advise. This information will provide us with a more
complete understanding of private funds and permit us to enhance our
assessment of advisers for purposes of targeting our examinations. The
information will also improve our ability to identify practices that
could harm investors and help expose and deter fraud and other
misconduct.\219\ Both registered and exempt reporting advisers are
required to complete Item 7.B. and the related portions of Schedule D.
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\219\ See Implementing Proposing Release, supra note 7, at
nn.148-150 and accompanying text.
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Item 7.B. requires an adviser to complete a separate Section 7.B.
of Schedule D for each private fund that it advises. Part A of Section
7.B.(1) requires an adviser to provide basic information regarding the
size and organizational, operational, and investment characteristics of
each fund. Part B requires information about five types of private fund
service providers that perform important roles as ``gatekeepers.'' This
information will be publicly available, as is other information
reported on Form ADV. We are adopting these amendments with several
changes, discussed below, that respond to comments we received.
Item 7.B. has required an adviser to complete section 7.B. of
Schedule D for each ``investment-related'' limited partnership or
limited liability company
[[Page 42966]]
that it or a related person advises.\220\ We are modifying, as
proposed, the scope of Item 7.B. by requiring an adviser to complete a
separate Schedule D for each ``private fund'' that the adviser (but not
a related person) manages. We use the new term ``private fund,''
defined in section 202(a)(29) of the Act,\221\ with the result that
advisers must report on pooled investment vehicles regardless of how
they are organized. In addition, as proposed, we are narrowing the
reporting requirement so that advisers are no longer required to report
on the funds of their related persons, which in most cases are now
required to be reported to us by a related person that is either
registered under the Act or is an exempt reporting adviser.\222\
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\220\ Section 7.B. of Schedule D previously required an adviser
to a private fund that is a limited partnership or limited liability
company to provide only the following information: (i) The name of
the fund; (ii) the name of the general partner or manager; (iii)
whether the adviser's clients are solicited to invest in the fund;
(iv) the approximate percentage of the adviser's clients that have
invested in the fund; (v) the minimum investment commitment; and
(vi) the current value of the total assets of the fund. As we
discussed in the Implementing Proposing Release, this information
provided us with little data about the operations of the many large
hedge funds and other private funds managed by a growing number of
advisers registered with the Commission.
\221\ This section defines a ``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.
\222\ The Dodd-Frank Act repealed the private adviser exemption
effective July 21, 2011, so many private fund advisers that were
previously unregistered will now be required to register under the
Advisers Act. See supra at sections I. and II.B.
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We are also adopting several measures that will help to avoid
multiple reporting for each private fund and minimize the overall
burden of reporting private fund information. First, only one adviser
must report the full scope of information for each private fund, even
where there are other advisers to the same fund (e.g.,
subadvisers).\223\ Second, an adviser managing a master-feeder
arrangement may submit a single Section 7.B.(1) for the master fund and
all of the feeder funds if these funds would otherwise report
substantially identical information.\224\ Finally, an adviser with a
principal office and place of business outside the United States is not
required to complete Schedule D for any private fund that, during the
adviser's last fiscal year, was not a United States person, was not
offered in the United States and was not beneficially owned by any
United States person.\225\ Commenters did not address any of the issues
raised by these changes to Item 7.B., which we are adopting as
proposed.
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\223\ If an investment adviser completes section 7.B.(1) of
Schedule D for a private fund, other advisers to that fund do not
have to complete section 7.B.(1) for that private fund. See amended
Form ADV, Part 1A, Note to Item 7.B.; Section 7.B.(2) of Schedule D.
Section 7.B.(1) of Schedule D requires advisers to provide a private
fund identification number, which is a unique identification number
for each fund. Advisers must obtain an identification number for
each private fund by logging onto the IARD Web site and using the
private fund identification number generator. Once an adviser
obtains a private fund identification number for a private fund, all
advisers to the fund must use that same number on Sections 7.B.(1)
and 7.B.(2) for that fund and continue using that same number
whenever they amend either section of Schedule D. See amended Form
ADV: Instructions for Part 1A, instr. 6.b.
\224\ See amended Form ADV: Instructions for Part 1A, instr.
6.d. The feeder funds need not have a direct relationship with the
master fund's prime broker or custodian to rely on this instruction.
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'').
\225\ See amended Form ADV: Instructions for Part 1A, instr.
6.a. This instruction is only necessary for those funds that fall
within the definition of ``private fund.'' A non-U.S. fund that has
never used U.S. jurisdictional means in the offering of the
securities it issues would not be a private fund. See Exemptions
Adopting Release, supra note 4, at n.285 and accompanying text. We
have modified this instruction from the proposal to more closely
follow the requirements of Regulation S; the instruction now looks
to whether the offering was made ``in the United States'' rather
than ``to * * * any United States person.'' See also amended Form
ADV: Glossary. ``United States person'' is defined by reference to
the definition in rule 203(m)-1, 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 Adopting Release, supra
note 4, at section II.B.4.
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An adviser must file a separate Section 7.B.(1) (Parts A and B) for
each private fund it manages.\226\ Part A of Section 7.B.(1) requires
an adviser to provide the name of the fund and the state or country in
which the fund is organized and to identify other persons involved in
the management of the fund.\227\ Part A also requires the adviser to
report whether the fund is part of a master-feeder arrangement \228\ or
is a fund of funds \229\ and to provide information about the
regulatory status of the fund, such as the exclusion from the
Investment Company Act on which the fund relies, whether the fund is
subject to the jurisdiction of a foreign regulatory authority, and
whether the fund relies on an exemption from registration under the
Securities Act of 1933 (the ``Securities Act'') with respect to its
securities.\230\ An adviser must also identify, within seven broad
categories, the type of investment strategy the fund employs,\231\
report whether the fund invests in securities of registered investment
companies,\232\ and provide the gross asset value of the fund.\233\
Finally, an adviser must provide limited information regarding
investors in the fund, including: (i) The minimum amount that investors
are required to invest; \234\ (ii) the approximate number of beneficial
owners of the fund and the approximate percentage of the fund
beneficially owned by the adviser and
[[Page 42967]]
its related persons, funds of funds and non-United States persons;
\235\ and (iii) the extent to which clients of the adviser are
solicited to invest, and have invested, in the fund.\236\ We are
adopting Part A with several changes discussed below.\237\
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\226\ See amended Form ADV, Part 1A, Item 7.B.
\227\ An adviser is required to report the names of the fund's
general partner, trustee and directors and persons occupying similar
positions as well as the name and SEC file number of any other
advisers to the fund. See amended Form ADV, Part 1A, Section
7.B.(1)A. of Schedule D, questions 1-3 and 17-18.
\228\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, questions 6 and 7. As discussed above, an adviser
managing a master-feeder arrangement may submit a single Schedule D
for the relevant funds if the information provided would otherwise
be substantially identical. See supra note 224 and accompanying
text. We have added a note to question 6 to clarify that an adviser
must respond to that question regardless of whether it is filing a
single Schedule D, Section 7.B.(1) for the master-feeder arrangement
or reporting on the funds separately.
\229\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 8. Clause (b) of this question also requires
the adviser to indicate whether the fund invests in funds managed by
the adviser or its related persons.
\230\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, questions 4-5 and 21-22. Two commenters asserted that
requiring advisers to report whether the fund relies on an exemption
from registration under the Securities Act with respect to its
securities is unnecessarily duplicative because the information is
already reported on Form D. See Debevoise General Letter; NYSBA
Committee Letter. We are not persuaded that providing this
information will significantly increase the reporting burden, and
the information will assist both the Commission and the public in
quickly and accurately locating additional relevant information
regarding the fund.
\231\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 10. The categories, which are defined in the
Instructions for Part 1A, 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. See infra note 248 and accompanying text for a
discussion of changes to these definitions.
\232\ This information relates to compliance with the provision
of the Investment Company Act that limits the ability of one
investment company to invest in shares of another. See section
12(d)(1) of the Investment Company Act (15 U.S.C. 80a-12(d)(1)) and
amended Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D, question
9. We have modified this question from the proposal to cross-
reference Instruction 6.e. of the Instructions for Part 1A, which
excludes from this question investments in money market funds made
in reliance on rule 12d1-1 under the Investment Company Act because
that rule exempts (subject to the conditions described in the rule)
investments in money market funds from the limitations contained in
section 12(d)(1) of the Investment Company Act. 17 CFR 270.12d1-1.
\233\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 11.
\234\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 12. We made one change in this item in response
to a comment, which pointed out that a private fund manager may have
discretion to lower the minimum amount, meaning that the minimum
investment may in practice be different from the amount set out in
the organizational documents of the fund. IAA General Letter. We
have added an instruction clarifying that the amount reported should
be the amount that is routinely required of investors who are not
related persons of the adviser.
\235\ Id. questions 13-16. For purposes of these questions,
beneficial owners are persons who would be counted as beneficial
owners under section 3(c)(1) of the Investment Company Act or who
would be included in determining whether the owners of the fund are
qualified purchasers under section 3(c)(7) of that Act. (15 U.S.C.
80a-3(c)(1) or (7)). We added the word ``approximate'' to question
13 to make this question more consistent with questions 14-16 and
because we understand based on comments received that, in some
cases, the number of beneficial owners may change frequently, making
a precise number more difficult to provide and less meaningful. See
IAA General Letter.
\236\ Id. questions 19-20. This information helps to identify
where a fund manager may have conflicts of interest with fund
investors of the sort that implicate the adviser's fiduciary
obligations to the fund and, in some cases, create risks for the
fund investors.
\237\ See also infra notes 264 through 279 and accompanying text
for a general discussion of comments on Section 7.B.(1). Some of
these comments relate to all or portions of the proposed reporting
requirements in Part A.
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Several commenters argued that certain information we proposed to
include in Part A is competitively sensitive or proprietary and, as a
result, should not be disclosed publicly.\238\ These commenters focused
in particular on three of the proposed questions in Part A. The first
would have required an adviser to report both the gross and net asset
values of each private fund it manages.\239\ Commenters asserted that
public disclosure of this information could reveal a fund's leverage,
which may be competitively sensitive strategy information.\240\ In
addition, commenters expressed concerns regarding the competitive
effects of our proposal to require that advisers report the assets and
liabilities of each fund broken down by class and categorization in the
fair value hierarchy established under GAAP.\241\ Commenters explained
that this disclosure could harm an adviser's competitiveness and could,
for instance, be used to ascertain the values of private companies held
by venture capital funds that make only one or a few investments,
potentially harming the private company and the interests of the
private fund and its investors.\242\ Finally, our proposal would have
required that advisers report the approximate percentage of each fund
beneficially owned by certain types of investors.\243\ Commenters
argued that the public disclosure of these data could reveal
potentially sensitive information and, in particular, that they could
be used to reverse engineer investor identities where a fund is owned
by a few investors and that it could serve to deter certain
institutional clients from investing in private funds.\244\ We are
persuaded at this time that, with respect to these three questions, the
benefit of public disclosure would not outweigh the potential
competitive harm. Therefore, we are not adopting the amendments that
would have required an adviser: (i) to disclose each private fund's net
assets; \245\ (ii) to report private fund assets and liabilities by
class and categorization in the fair value hierarchy established under
GAAP; \246\ and (iii) to specify the percentage of each fund owned by
particular types of beneficial owners.\247\
---------------------------------------------------------------------------
\238\ See IAA General Letter; MFA Letter; NVCA Letter; NYSBA
Committee Letter; O'Melveny Letter.
\239\ See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D,
questions 11(a) and 11(b).
\240\ See, e.g., MFA Letter. See also NYSBA Committee Letter.
\241\ See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D,
question 12. See also FASB ASC 820-10-50-2b.
\242\ See MFA Letter; NVCA Letter; O'Melveny Letter.
\243\ See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D,
question 17. The investor types included individuals, broker-
dealers, insurance companies, registered investment companies,
private funds, non-profits, pension funds, banks and thrift
institutions, and state and municipal government entities.
\244\ IAA General Letter. See also MFA Letter.
\245\ We are, however, adopting question 11(a), concerning gross
assets, as proposed. This question retains the requirement, included
in Form ADV prior to today's amendments, that advisers report the
total (or gross) assets of their private funds on Section 7.B. of
Schedule D. Net asset values of individual funds may be important to
our investor protection mission and to FSOC's systemic risk
monitoring activities. See Systemic Risk Reporting Release, supra
note 71 (proposing non-public reporting of gross and net asset
values for private funds managed by registered investment advisers).
\246\ The fair value breakdown for individual funds may be
important to our investor protection mission and to FSOC's systemic
risk monitoring activities, and we will consider whether to adopt it
as part of our Form PF proposal. See Systemic Risk Reporting
Release, supra note 71. Some commenters also expressed concern with
respect to the burden of reporting this information. See, e.g., ABA
Committees Letter; AIMA Letter; Dechert General Letter; DLA Piper VC
Letter; IAA General Letter; Katten Foreign Advisers Letter; Merkl
Implementing Letter; NVCA Letter. We will consider these comments in
connection with our consideration of other comments on proposed Form
PF.
\247\ Beneficial ownership percentages of funds may be important
to our investor protection mission and to FSOC's systemic risk
monitoring activities, and we will consider whether to adopt it as
part of our Form PF proposal. See Systemic Risk Reporting Release,
supra note 71. Some commenters also expressed concern with respect
to the burden of reporting this information. See, e.g., Debevoise
General Letter; IAA General Letter; Shearman Letter. We will
consider these comments in connection with our consideration of
other comments on proposed Form PF.
---------------------------------------------------------------------------
As noted above, Part A of Section 7.B.(1) requires an adviser to
classify each of its private funds by strategy, using definitions that
we proposed in the instructions to Form ADV.\248\ In the Systemic Risk
Reporting Release, we also proposed to use these definitions for
purposes of Form PF.\249\ Although we received no comments on these
definitions in this rulemaking, we received several comments on the
same definitions in response to Form PF.\250\ We have considered these
comments in the context of this rulemaking and have determined to make
several changes. We will also consider these comments in the context of
the Form PF release.
---------------------------------------------------------------------------
\248\ The definitions appear in Instruction 6 of the
instructions to Part 1A of Form ADV. See supra at note 231 and
accompanying text.
\249\ See Systemic Risk Reporting Release, supra note 71, at
section II.B.1. If adopted, registered advisers would use Form PF to
report information about the private funds they manage for use by
FSOC in its assessment of systemic risk in the U.S. financial
system.
\250\ These comments were submitted in response to the Systemic
Risk Reporting Release, supra note 71, and are available on the
Commission's Web site at: http://www.sec.gov/comments/s7-05-11/s70511.shtml.
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The first of the changes we are making clarifies the definitions to
address concerns that a securitized asset fund may be classified as a
hedge fund because of its borrowings.\251\ We believe that the quality
and usefulness of the data reported depends in part on accurately
grouping funds and that securitized asset funds should not be
categorized as hedge funds based on their issuance of debt. To clarify
the definitions, we have excluded securitized asset funds from the
definition of ``hedge fund'' and modified ``securitized asset fund'' so
that it is no longer defined by reference to ``hedge fund.''
---------------------------------------------------------------------------
\251\ See Comment letter of TCW Group, Inc. (Apr. 12, 2011)
(``TCW Systemic Risk Reporting Letter'').
---------------------------------------------------------------------------
Second, we have modified clause (a) of the ``hedge fund''
definition, which classifies funds based on whether performance fees or
allocations are calculated by taking into account unrealized gains. One
commenter pointed out that even funds that do not allow for the payment
of such fees or allocations, such as private equity funds, may be
required to accrue or allocate these amounts in their financial
statements to comply with applicable accounting principles.\252\ We did
not intend for funds that accrue or allocate these fees or allocations
solely for financial reporting purposes to be classified as hedge
funds, so we have clarified that clause (a) relates only to
[[Page 42968]]
fees or allocations that may be paid to an investment adviser (or its
related persons).
---------------------------------------------------------------------------
\252\ See TCW Systemic Risk Reporting Letter.
---------------------------------------------------------------------------
Third, we have addressed another commenter's concern that clause
(a) could inadvertently capture certain private equity funds because,
although these funds typically calculate currently payable performance
fees and allocations based on realized amounts, they will sometimes
reduce these fees and allocations by taking into account ``unrealized
losses net of unrealized gains in the portfolio.'' \253\ We agree that
funds should not be classified as hedge funds based solely on this
practice and have clarified that clause (a) would not include
performance fees or allocations the calculation of which may take into
account unrealized gains solely for the purpose of reducing such fees
or allocations to reflect net unrealized losses.
---------------------------------------------------------------------------
\253\ See comment letter of the Private Equity Growth Capital
Council (Apr. 12, 2011) (``PEGCC Systemic Risk Reporting Letter'').
---------------------------------------------------------------------------
Finally, several commenters asserted that clause (c) of the ``hedge
fund'' definition, which looks to whether a fund may engage in short
selling, should include an exception for a de minimis amount of short
selling or exclude short selling intended to hedge the fund's
exposures.\254\ We continue to believe that short selling is a
potentially important distinguishing feature of hedge funds, many of
which may, as the name suggests, use short selling to hedge or manage
risk of various types. We are persuaded, however, that many funds
pursuing traditional investment strategies use short positions to hedge
foreign exchange risk and to manage the duration of interest rate
exposure, and we are concerned that including funds within the
definition of ``hedge fund'' solely because they use these particular
techniques would dilute the meaningfulness of the category. Therefore,
we have modified clause (c) to provide an exception for short selling
that hedges currency exposure or manages duration.\255\ We expect that
the changes to the private fund definitions discussed above will
provide for a more accurate classification of private funds and reduce
the number of funds categorized as hedge funds.
---------------------------------------------------------------------------
\254\ See comment letter of the Investment Adviser Association
(Apr. 12, 2011) (``IAA Systemic Risk Reporting Letter''); PEGCC
Systemic Risk Reporting Letter; Comment letter of Securities
Industry and Financial Markets Association (Apr. 12, 2011) (``SIFMA
Systemic Risk Reporting Letter''); TCW Systemic Risk Reporting
Letter.
\255\ We have also made a change to clause (c) to clarify that
this clause includes traditional short sales and any transaction
resulting in a short exposure to a security or other asset (such as
using a derivative instrument to take a short position). The purpose
of this definition is to appropriately categorize funds that engage
in certain types of market activity, and whether the definition
applies should not depend on the form in which the fund engages in
that activity. In addition, we note that several commenters
expressed concern that clauses (b) and (c) of the ``hedge fund''
definition are too broad because many funds have the capacity to
borrow or incur derivative exposures in excess of the specified
amounts or to engage in short selling but do not in fact engage, or
intend to engage, in these practices. See, e.g., comment letter of
the Alternative Investment Management Association (Apr. 12, 2011);
IAA Systemic Risk Reporting Letter; PEGCC Systemic Risk Reporting
Letter; SIFMA Systemic Risk Reporting Letter; TCW Systemic Risk
Reporting Letter. These commenters generally argued that clauses (b)
and (c) should focus on actual or contemplated use of these
practices rather than potential use. We have not made changes to the
``hedge fund'' definition in response to these comments because we
continue to believe that clauses (b) and (c) properly focus on a
fund's ability to engage in these practices. Even a fund for which
leverage or short selling is an important part of its strategy may
not engage in that practice during every reporting period. We would,
however, not regard a private fund to be a ``hedge fund'' solely
because its organizational documents fail to prohibit the fund from
borrowing or incurring derivative exposures in excess of the
specified amounts or from engaging in short selling so long as the
fund in fact does not engage in these practices (other than, in the
case of clause (c), short selling for the purpose of hedging
currency exposure or managing duration) and a reasonable investor
would understand, based on the fund's offering documents, that the
fund will not engage in these practices.
---------------------------------------------------------------------------
Part B of Section 7.B.(1), as amended, requires advisers to report
information concerning five types of service providers that generally
perform important roles as ``gatekeepers'' for private funds--auditors,
prime brokers, custodians, administrators, and marketers.\256\ An
adviser must identify each of these service providers, report their
locations, and indicate which of them, if any, are related persons of
the adviser.\257\ In addition, for certain types of service providers,
an adviser would report information intended to help us and investors
understand the nature of the services provided. For instance, with
respect to each prime broker, an adviser must indicate whether the
prime broker has custody of fund assets.\258\
---------------------------------------------------------------------------
\256\ See amended Form ADV, Part 1A, Section 7.B.(1)B. of
Schedule D.
\257\ Id. questions 23-28.
\258\ Id. question 24(e). See also id. questions 23(a), 23(g),
23(h), 26(e), 26(f), 28(f), and 28(g).
---------------------------------------------------------------------------
We are adopting Part B with minor changes from the Implementing
Proposing Release that are designed to clarify instructions. Where we
ask for the percentage of the fund's assets valued by a third party, we
have revised the question and instructions to clarify that a person
should be viewed as valuing an asset for this purpose only if that
person carried out the valuation procedure for that asset (if any) and
that person's determination as to value was used for purposes of
subscriptions, redemptions, distributions and fee calculations.\259\ We
have decided not to require advisers to report the name and location of
the third parties performing these valuations because we recognize, as
commenters pointed out, that identifying the specific person carrying
out the valuation could be difficult where two or more third parties
are involved (such as where an unaffiliated administrator obtains a
quote from an electronic pricing service).\260\ In addition, we are
modifying question 23, which requires information about the relevant
private fund's auditing firm, so that advisers must indicate whether
the fund's auditor issued an unqualified opinion on the fund's
financial statements.\261\ By requiring this information in question
23, we are able to relieve advisers from the burden of reporting
similar information with respect to private funds in Section 9.C. of
Schedule D.\262\ Few commenters specifically addressed the proposed
reporting requirements in Part B.\263\
---------------------------------------------------------------------------
\259\ Id. question 27. We are making this change in response to
commenter requests for clarification regarding ``what constitutes
assets `valued' by a third-party administrator.'' IAA General
Letter; see also ABA Committees Letter.
\260\ See IAA General Letter and ABA Committees Letter, each
discussing the difficulty of identifying who is ``valuing'' an
asset. See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)B. of Schedule D,
question 28(f)(2) and (3).
\261\ See amended Form ADV, Part 1A, Section 7.B.(1)B. of
Schedule D, question 23(h).
\262\ See amended Form ADV, Part 1A, Item 9.C., which provides
that ``[i]f you checked Item 9.C.(2), you do not have to list
auditor information in Section 9.C. of Schedule D if you already
provided this information with respect to the private funds you
advise in Section 7.B.(1) of Schedule D.'' An adviser must still
complete Section 9.C. of Schedule D with respect to clients other
than private funds to the extent required by the instructions to
Item 9.C.
\263\ See, e.g., Debevoise General Letter (contending that the
service provider information ``goes beyond what is necessary''
because it requests ``both the legal name of the custodian as well
as the custodian's primary business name'' (original emphasis));
Shearman Letter (arguing that a ``fund's investors will generally
already receive [information identifying the fund's service
providers] and it generally has little public interest''). With
respect to the comment in the Debevoise General Letter, we are not
persuaded that providing both a legal name and business name will
significantly increase the reporting burden, and the information
will assist both the Commission and the public in quickly and
accurately identifying the relevant custodian. With respect to the
comment in the Shearman Letter, see the discussion accompanying note
272 below regarding the value of public disclosure of Section
7.B.(1) information generally.
---------------------------------------------------------------------------
Many commenters who addressed the private fund reporting
requirements did not comment on specific items but provided comments
more generally on the proposals. Several expressed strong support for
the proposal as a whole,\264\
[[Page 42969]]
and some agreed with our assessment that the new information will allow
us to identify harmful practices, to improve risk assessment, and to
more efficiently target examinations.\265\ A few recommended that we
expand the requirements to include reporting of performance
information.\266\ Many commenters offered more measured support,
generally agreeing with the Commission's proposal but expressing
reservations about the public availability of the information or
concerns about the difficulty of responding to specific reporting
items.\267\ Often citing these same concerns, some commenters disagreed
more generally with the Commission's proposal.\268\
---------------------------------------------------------------------------
\264\ See, e.g., AFL-CIO Letter; AFR Letter; Better Markets
Letter; CII Letter; CPIC Letter; comment letter of U.S. Senator Carl
Levin (``Sen. Levin Letter'').
\265\ See, e.g., CII Letter; CPIC Letter; NASAA Letter; Sen.
Levin Letter (also asserting that the data would assist FSOC in
monitoring systemic risk).
\266\ See AFL-CIO Letter and AFR Letter, each favoring public
disclosure of 1-, 5- and 10-year performance numbers. We note that
performance data may be important to our investor protection mission
and to FSOC's systemic risk monitoring activities, and we will
consider these comments in connection with our consideration of
other comments on proposed Form PF. See Systemic Risk Reporting
Release, supra note 71.
\267\ See, e.g., IAA General Letter (supporting the ``increased
oversight of private funds and increased information gathering'' but
arguing that ``the Commission should limit the public availability
of private fund information provided on Part 1 of Form ADV.''); MFA
Letter (``MFA strongly supports private fund managers reporting to
the Commission information about their businesses or the funds they
manage. We believe, however, that the Commission should carefully
consider whether the additional step of publicly disclosing
information it collects would enhance its oversight capabilities,
and whether any such benefits would outweigh the potentially
significant costs to managers in sharing sensitive business
information with market participants.''); Dechert General Letter
(stating that they ``generally agree with the information the
Revised Form ADV would be soliciting with respect to private funds
managed by registered or exempt reporting advisers'' but expressing
reservations regarding the requirement to report private fund assets
and liabilities by class and categorization in the fair value
hierarchy established under GAAP). See also DLA Piper VC Letter;
Merkl Implementing Letter; NVCA Letter.
\268\ See, e.g., AIMA Letter; AV Letter; CompliGlobe Letter;
Debevoise General Letter; Katten Foreign Advisers Letter; NRS
Letter; NYSBA Committee Letter; Seward Letter; Shearman Letter; AV
Letter.
---------------------------------------------------------------------------
Critics of the proposal most frequently focused on public
disclosure of the information required by Section 7.B., arguing that
all or part of the required private fund information is competitively
sensitive or proprietary.\269\ As discussed above, we have made several
changes to Part A of Section 7.B.(1) to address some of these concerns.
However, we continue to believe that, as a general matter, the
information we collect in response to Item 7.B. is important for
several reasons, including to inform prospective clients and other
investors.\270\ Moreover, and as we discussed in the Implementing
Proposing Release, the public availability of this information will
serve as a check on fund managers, helping to deter fraud and other
misconduct.\271\ We are not persuaded that public disclosure is
unnecessary simply because, as some commenters asserted, investors in
these pooled investment vehicles meet certain sophistication standards
or may otherwise receive similar information from advisers.\272\ To the
contrary, it is precisely the ability of these investors to compare
Form ADV information to the information they have received in offering
documents and due diligence that makes public disclosure valuable. We
also believe that public disclosure could reduce the likelihood of
advisers making false representations regarding fund service providers,
such as administrators and auditors, who could uncover false
representations by reviewing the information that advisers report to us
and comparing it to their own client lists.\273\ In addition, as
discussed above, the Advisers Act requires that information filed in a
report with the Commission be made available to the public unless the
Commission finds that public disclosure is neither necessary nor
appropriate in the public interest or for the protection of
investors.\274\ We are not convinced that withholding the private fund
information reported on Form ADV is in the public interest. Therefore,
as proposed, it will be available to the public.
---------------------------------------------------------------------------
\269\ See, e.g., ABA Committees Letter; AIMA Letter; AV Letter;
CompliGlobe Letter; Debevoise Letter; DLA Piper VC Letter; Gunderson
Letter; IAA General Letter; Katten Foreign Advisers Letter; MFA
Letter; NRS Letter; NVCA Letter; NYSBA Committee Letter; O'Melveny
Letter; Seward Letter; Shearman Letter.
\270\ Several commenters agreed. See, e.g., AFL-CIO Letter
(``This information will assist investors as they perform due
diligence before making investment decisions * * *''); AFR Letter
(``making clear and uniform information on private investment funds
available to the public will make it easier for investors to perform
due diligence * * *''); CII Letter; CPIC Letter (``The additional
information that the revised Form will collect * * * should also be
of use to investors as they conduct due diligence and research the
background of fund managers.'').
\271\ See Implementing Proposing Release, supra note 7, at
nn.150 and 175 and accompanying text. See also CII Letter (agreeing
that ``the public availability of such basic information would aid
investors in their due diligence efforts and help investors and
other industry participants protect against fraud'').
\272\ See, e.g., ABA Committees Letter; AV Letter; NRS Letter;
NYSBA Committee Letter; Shearman Letter.
\273\ See, e.g., 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).
\274\ Advisers Act section 210(a). See supra section II.B.3. for
discussion of public availability of exempt reporting adviser
filings.
---------------------------------------------------------------------------
Commenters expressing disagreement with all or parts of our
proposal also pointed to what they viewed as an excessive reporting
burden, particularly where valuation or ownership information would be
required.\275\ As discussed above, we are adopting Part A of Section
7.B.(1) with several changes that reduce the amount of information
required in respect of private funds. We are not convinced that the
burden associated with Item 7.B. and Schedule D will be excessive, in
part because commenters confirmed that much of the required information
is readily available to private fund advisers.\276\ These commenters
also acknowledged that the required information is similar to, and at
times less extensive than, the information that investors in hedge
funds and other private funds commonly receive in response to due
diligence questionnaires or in offering documents.\277\ Moreover,
responses to many of the items are unlikely to change from year to
year.
---------------------------------------------------------------------------
\275\ See, e.g., AIMA Letter; AV Letter; BCLBE Letter; Debevoise
General Letter; comment letter of Dechert LLP (on behalf of foreign
asset manager) (Jan. 24, 2011) (``Dechert Foreign Adviser Letter'');
Gunderson Letter; Katten Foreign Advisers Letter; NRS Letter; Seward
Letter; Shearman Letter; Village Ventures Letter.
\276\ See, e.g., ABA Committees Letter (``We expect that most
ERAs will already have most of the information requested by Form ADV
Part 1 readily available.''); Katten Foreign Advisers Letter
(``Virtually all of the requested information would already have
been provided to investors in the fund through an offering document
or follow up status reports.''); NRS Letter (arguing that the
expanded private fund disclosures on Schedule D would ``replicate
the due diligence questionnaire information. * * *'').
\277\ See, e.g., ABA Committees Letter; NRS Letter. See also
AIMA's Illustrative Questionnaire For Due Diligence of Hedge Fund
Managers, available at (registration required) http://www.aima.org/en/knowledge_centre/index.cfm.
---------------------------------------------------------------------------
Finally, a few commenters expressed concern that an adviser's
required public disclosure on Section 7.B.(1) of Schedule D could call
into question a private fund's reliance on the non-public offering
exemption in the Securities Act.\278\ We believe public disclosure of
the information required by Section 7.B.(1) of Schedule D
[[Page 42970]]
through IAPD would not, in and of itself, jeopardize the fund's
reliance on that exemption (or the safe harbor for offshore offerings
provided by Regulation S under the Securities Act).\279\
---------------------------------------------------------------------------
\278\ See IAA General Letter; MFA Letter. The non-public
offering exemption is found in Section 4(2) of the Securities Act.
Offers and sale of securities by an issuer that satisfy the
conditions of Rule 506 of Regulation D (17 CFR 230.501 et seq.) are
deemed to be non-public within the meaning of Section 4(2).
\279\ We have previously taken a similar position with respect
to mandatory reporting in Part 2 of Form ADV. See Part 2 Release,
supra note 67, at n. 276 and accompanying text. Regulation S is
codified at 17 CFR 230.901 et seq.
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2. Advisory Business Information: Employees, Clients and Advisory
Activities: Item 5
Item 5 of Part 1A requires a registered 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 also requires information from the adviser about the number of
its employees, the amount of assets it manages, and the number and
types of its clients.
We are adopting the amendments that we proposed to Item 5.B., which
require an adviser to indicate how many of its employees are registered
as investment adviser representatives or are licensed insurance
agents.\280\ An adviser must also provide a single numerical
approximation (instead of a range) in response to these questions as
well as to the existing questions that ask about employees that perform
investment advisory functions or are registered representatives of a
broker-dealer, and firms that solicit advisory clients.\281\ Commenters
did not object to these new questions and revisions.
---------------------------------------------------------------------------
\280\ Amended Form ADV, Part 1A, Items 5.B.(1)-(5).
\281\ Amended Form ADV, Part 1A, Item 5.B.(6).
---------------------------------------------------------------------------
We are adopting amendments to Items 5.C. and 5.D., which require
advisers to report the number and types of clients the adviser
services. Specifically, the amendments require each registered adviser
to: (i) provide an approximate number of clients it has if over 100;
\282\ (ii) report the approximate percentage of its clients that are
not United States persons; \283\ (iii) specify the types of clients
that it advises (adding categories for business development companies,
other investment advisers, and insurance companies) and the percentage
that each client type comprises of its total number of clients (adding
a box to check if 100% of an adviser's clients are a particular type);
\284\ and (iv) report in a new item the approximate percentage (in
broad ranges) of assets under management attributable to each client
type.\285\ These form amendments are designed to help us better
understand an adviser's business.
---------------------------------------------------------------------------
\282\ Amended Form ADV, Part 1A, Item 5.C.(1).
\283\ Amended Form ADV, Part 1A, Item 5.C.(2). See supra note
225 (discussing the definition of ``United States person'').
\284\ Amended Form ADV Part 1A, Item 5.D.(1).
\285\ Amended Form ADV Part 1A, Item 5.D.(2).
---------------------------------------------------------------------------
Commenters did not address our proposed amendments to Item 5.C.,
which we are adopting as proposed. We are making one change to Item
5.D., as suggested by one commenter, so that advisers report
approximate percentages of assets under management by client type in
broad ranges (i.e., 25 percent segments).\286\ This change will
decrease the burden on advisers gathering the data necessary to respond
to this item while retaining the substance of the information we need
for our risk-assessment program. We are also, at the suggestion of a
commenter, adding a note to Items 5.D.(1) and (2) to clarify that an
adviser should check all applicable boxes.\287\
---------------------------------------------------------------------------
\286\ Advisers should not, however, include as clients the
investors in a private fund they advise unless they have a separate
advisory relationship with those investors. Amended Form ADV, Part
1A, Items 5.C., 5.D. and 5.H.
\287\ See IAA General Letter. For example, an adviser to a state
pension plan should check boxes for both ``pension and profit
sharing plans'' and ``state or municipal government entities.'' We
also note that we are not adopting our proposal to divide the
category for pension and profit sharing plans into those subject to
ERISA and those that are not. See id. (noting that there could be
substantial confusion about what it means to be ``subject to'' ERISA
because some plans are subject to some, but not all, of ERISA's
provisions).
---------------------------------------------------------------------------
We are adopting, as proposed, amendments to Item 5.G. that require
an adviser to select from a list set forth in the form the types of
advisory services that it provides, and that add two additional types
of services: (i) portfolio management for pooled investment vehicles,
other than registered investment companies; and (ii) educational
seminars or workshops.\288\ At the request of a commenter, we are
clarifying that educational seminars and workshops would not include
episodic meetings at which advisers educate existing clients about
issues related to the ongoing management of their accounts.\289\ In
addition, the revised item requires that if an adviser selects from
that list ``portfolio management for an investment company,'' the
adviser must provide the SEC file number for the registered investment
company, as well as business development companies that have made an
election pursuant to section 54 of the Investment Company Act of 1940,
in Section 5.G.(3) of Schedule D. This information will connect
information reported on Form ADV to information reported on forms filed
through our EDGAR system by investment companies managed by these
advisers. We have made a few technical changes to avoid potential
overlap of some of the listed types of advisory services.\290\
---------------------------------------------------------------------------
\288\ Amended Form ADV, Part 1A, Item 5.G.
\289\ See IAA General Letter (requesting clarification that such
episodic meetings would not be reportable educational seminars or
workshops). We also confirm this commenter's understanding that
educational seminars and workshops would not include events
sponsored by third parties that are merely attended by an adviser's
supervised persons.
\290\ See amended Form ADV, Part 1A, Items 5.G.(4) and 5.G.(5).
---------------------------------------------------------------------------
We are adopting new Item 5.J. to require advisers to indicate
whether they report, in response to Item 4.B. of Part 2A of Form ADV,
that they provide investment advice only with respect to limited types
of investments. We had proposed to require advisers to indicate the
types of investments they provided advice about during the previous
fiscal year. Commenters expressed skepticism about whether such an item
would provide us with much useful information because many advisers
would simply indicate all the items.\291\ We agree, and have revised
the item to provide us with information that will identify advisers
that disclose to their clients that they provide specialized advice,
which is the type of information we had intended to collect.
---------------------------------------------------------------------------
\291\ IAA General Letter.
---------------------------------------------------------------------------
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 adopting amendments
to these items largely as proposed to provide us with a more complete
picture of the activities of an adviser and its related persons, which
would better enable us to assess the conflicts of interest and risks
that may be created by those relationships and to identify affiliated
financial service businesses.
First, we are expanding the lists of types of financial service
businesses in both Items 6.A. and 7.A. As a result, an adviser must
also report whether it or a related person is a trust company,
registered municipal advisor, registered security-based swap dealer, or
major security-based swap participant, the latter three of which are or
will be new SEC-registrants under the Dodd-Frank Act's amendments to
the Exchange
[[Page 42971]]
Act.\292\ Second, to parallel Item 7.A. for related persons, an adviser
must also report if it is an accountant (or accounting firm) or lawyer
(or law firm). Last, amendments to Item 7.A. require an adviser to
report if a related person is a sponsor, general partner or managing
member of a pooled investment vehicle,\293\ and add an instruction to
clarify that advisers' responses must include related persons that are
foreign affiliates, regardless of whether they are registered or
required to be registered in the United States. One commenter expressed
support for the additions we proposed to make to the lists in Items
6.A. and 7.A., which we are adopting as proposed.\294\ In response to
commenters, we are clarifying that for responses to Item 7.A. relating
to natural persons (e.g., accountant, lawyer), the adviser should
respond affirmatively only for such persons that have a separate
business in that field rather than for those persons that the adviser
may employ as accountants or lawyers.\295\
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\292\ Amended 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.
\293\ This serves to retain information about related persons
that would otherwise not be required as a result of amendments we
are adopting to Item 7.B. Amended Item 7.B. and section 7.B.(1) of
Schedule D require advisers to report private fund information only
about funds they advise, not funds advised by a related person. See
supra section II.C.1. We have also deleted ``investment company''
from the list in Item 7 as duplicative of information we obtain in
another category of Item 7.A., as well as Item 5. See, e.g., amended
Form ADV, Part 1A, Items 5.D., 5.G., Section 5.G.(3) of Schedule D,
and Item 7.A.(2).
\294\ NRS Letter.
\295\ NEA Letter; IAA General Letter. Many of the questions in
Item 5.B. elicit information about an adviser's employees acting in
the scope of employment. We note that because Item 6 asks questions
about the advisory firm, responses should not relate to natural
persons, unless the adviser is operating as a sole proprietor.
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We also are amending Schedule D, which contains expanded reporting
requirements that correspond to Items 6 and 7. Section 6.A. of Schedule
D requires an adviser that checks the box in Item 6.A. to indicate that
it is engaged in another financial service business under a different
name, to list that other business name, and to identify the other lines
of business in which the adviser engages using that name.\296\ Sections
6.B.(2) and 6.B.(3) of Schedule D similarly require advisers that are
primarily engaged in another business or that sell products or provide
services other than investment advice to advisory clients to describe
that business and provide the name under which it conducts that
business, if different. One commenter, an association comprised of
state regulators, expressed particular support for the Schedule D
reporting requirement we are adopting with respect to 6.B.(3).\297\
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\296\ 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.''
\297\ NASAA Letter. We note, ``6.B.(3)'' was inadvertently
renumbered in Part 1A of Form ADV as ``6.C.'' in our proposal.
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Section 7.A. of Schedule D, requires advisers to provide certain
identifying information for any type of related person listed in Item
7.A. as well as to provide more details about the relationship between
the adviser and the related person, including whether the related
person is registered with a foreign financial regulatory authority,
whether they share employees or the same physical location, and, if the
adviser is reporting a related person investment adviser, whether the
related person is exempt from registration.\298\ Responses to these
questions will allow us to link disparate pieces of information to
which we have access concerning an adviser and its affiliates as well
as to identify whether the adviser controls the affiliate or vice
versa. It will also provide us with a tool to identify where there may
be advisory activities by unregistered affiliates.
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\298\ The questions we are adopting in Section 7.A. of Schedule
D contain a few minor modifications from the proposal to renumber
the questions and to clarify wording (e.g., questions 11 and 12).
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Commenters who addressed Section 7.A. of Schedule D urged that we
limit the reporting of related persons, which could be significant in
the case of advisers that are part of a large organization.\299\ Many
of these commenters pointed out that in some cases the adviser and its
clients have no business dealings with some affiliates and thus there
is less of a chance of conflicts developing. We agree and have revised
the proposed item to permit an adviser to omit reporting about certain
related persons in a manner that is similar to the approach suggested
by a commenter.\300\ In particular, an adviser need not complete
Section 7.A. of Schedule D for any related person if: (1) The adviser
has no business dealings with the related person in connection with
advisory services it provides to its clients; (2) the adviser does not
conduct shared operations with the related person; (3) the adviser does
not refer clients or business to the related person, and the related
person does not refer prospective clients or business to the adviser;
(4) the adviser does not share supervised persons or premises with the
related person; and (5) the adviser has no reason to believe that its
relationship with the related person otherwise creates a conflict of
interest with its clients.\301\ These criteria are designed so that
advisers need not report about affiliates who are likely to present
little, if any, potential for conflicts of interest. Under these
criteria, an adviser may omit, for example, an offshore adviser that
has no business dealings with the adviser, a bank that merely provides
payroll services to the adviser, an accounting firm that prepares the
adviser's annual tax return filings, or a real estate broker that
represents the adviser in securing office space. However, an adviser
may not omit an affiliated adviser with whom the adviser shares
information technology infrastructure, for example, as the advisers
would be considered to share operations.
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\299\ See, e.g., Shearman Letter.
\300\ See IAA General Letter (suggesting we adopt a standard for
omitting a related person based on factors established several years
ago by our staff in Frequently Asked Questions on Form ADV and
IARD).
\301\ Amended Form ADV, Part 1A, Item 7.A.
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Finally, we have moved to this item a question that had been in
Item 9 that requires advisers to report whether a related person
foreign financial institution acts as a qualified custodian for client
assets under the adviser custody rule, to centralize reporting of
related qualified custodians in a single item.\302\
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\302\ Amended Form ADV, Part 1A, Section 7.A. of Schedule D,
question 8. At the suggestion of commenters, we have also modified
this question to include the remainder of the questions in what had
been Section 9.D. of the previous version of Form ADV Part 1A, which
we inadvertently failed to include when we relocated this question
in Proposed Form ADV Part 1A. Consequently, we have also eliminated
Section 9.D. See IAA General Letter; Schnase Letter.
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4. Participation in Client Transactions: Item 8
Item 8 requires a registered adviser to report information about
its transactions, if any, with clients, including whether the adviser
or a related person (including a foreign related person) engages in
transactions with clients as a principal, otherwise sells securities to
clients, or has discretionary authority over client assets. We are
adopting three amendments to this item. First, an adviser that
indicates it has discretionary authority to determine the brokers or
dealers for client transactions or that it recommends brokers or
dealers
[[Page 42972]]
to clients \303\ must additionally report whether any of such brokers
or dealers are related persons of the adviser.\304\ Second, an adviser
that indicates that it receives ``soft dollar benefits'' must 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.\305\ Third, an adviser must report whether it or its related
person receives direct or indirect compensation for client
referrals.\306\ These amendments, which we are adopting as proposed,
are designed to 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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\303\ Amended Form ADV, Part 1A, Items 8.C.3. and 8.E.
\304\ Amended Form ADV, Part 1A, Items 8.D. and 8.F.
\305\ Amended Form ADV, Part 1A, Item 8.G.(2). See also
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)]
(``28(e) Release'').
\306\ Amended Form ADV, Part 1A, Items 8.H. and 8.I.
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Comments on these amendments were limited to the question about
soft dollars, which commenters supported, but these commenters urged us
to permit advisers to answer based on an adviser's reasonable belief
that the benefits received are eligible research and brokerage services
under the safe harbor provided by section 28(e) of the Exchange
Act.\307\ We are not making this change as the safe harbor itself does
not include a ``reasonable belief'' standard and the Form ADV item is
intended to track the language of the statute. We also remind advisers
that we have issued interpretive guidance on section 28(e) of the
Exchange Act and direct advisers to it if relying on this safe
harbor.\308\
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\307\ See ICI Letter; IAA General Letter.
\308\ See 28(e) Release, supra note 305, at Sections II.B. and
III.
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5. Custody: Item 9
We are amending Item 9 to require each registered adviser 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.\309\ In 2009, we amended certain items
of Form ADV in connection with amendments we made to Advisers Act rule
206(4)-2 (the ``2009 Custody Amendments''). At that time, we modified
Item 9 to elicit information about the adviser or its related person(s)
acting as qualified custodian.\310\ We did not, however, request
information about other qualified custodians. This additional data will
provide us with a more complete picture of an adviser's custodial
practices.\311\ Commenters suggested that advisers be permitted to
provide an approximate number of qualified custodians in response to
this item.\312\ We have not made such a change. An adviser with custody
of client funds or securities must maintain those assets with a
qualified custodian,\313\ and must therefore know the identity (and
therefore number) of qualified custodians that maintain its clients'
assets.
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\309\ Amended Form ADV, Part 1A, Item 9.F. We have also made a
minor modification from the proposal to make clear that an adviser
need only respond if it has custody of client funds or securities,
including if it has custody because a related person has custody in
connection with advisory services the adviser provides to its
clients.
\310\ 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)] (``2009 Custody Release'').
\311\ Consistent with the updating requirements for Items
9.A.(2), 9.B.(2), and 9.E., advisers are required to update new Item
9.F. only annually. See amended Form ADV: General Instruction 4.
\312\ IAA General Letter; NRS Letter. But see NRS Letter
(indicating that many advisers have only one or two qualified
custodians).
\313\ Rule 206(4)-2(a)(1) (defining ``qualified custodian'').
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We are also adopting several clarifications urged by commenters,
and to make certain technical changes.\314\ The first of these changes
clarifies that Item 9 asks whether the adviser or a related person has
custody of funds and securities of clients that are not registered
investment companies. The questions in Item 9 relate to various
provisions of rule 206(4)-2 (the custody rule), and advisers are not
required to comply with rule 206(4)-2 with respect to the account of an
investment company registered under the Investment Company Act.\315\
Second, we are amending the notes within Item 9.A. to correct a
drafting error.\316\ The amended note within Item 9.A. requires an
adviser to exclude from 9.A. and to report in 9.B. only client assets
for which custody is attributed to the adviser as a result of related
person custody.\317\ Third, we are also clarifying in Items 9.B. and
9.C. that advisers' responses must include funds and securities of
which a related person has custody in connection with advisory services
the adviser provides to clients.\318\ This clarification aligns the
reporting requirements of these items with the amended definition of
custody adopted in the 2009 Custody Amendments.\319\ Finally, amended
question (6) within Section 9.C. of Schedule D enables an adviser to
check a box to indicate that it has not yet received a report prepared
by an independent accountant that audited a pooled investment vehicle
or that examined internal controls.\320\ Under the previous version of
this question, an adviser who had not yet received the independent
public accountant's report by the time the adviser submitted its Form
ADV filing could not accurately respond. The updating requirements of
Item 9.C. and Section 9.C. of Schedule D, however, require advisers to
promptly file an amendment to update their response when the
accountant's report is available.\321\
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\314\ Investment advisers registered with us were required to
begin completing revised Item 9 in connection with amendments we
made to rule 206(4)-2 (the custody rule) as of their first annual
updating amendment after January 1, 2011. See 2009 Custody Release,
supra note 310 at n.161 and accompanying text. We are also making a
technical amendment to Form ADV-E to reflect the requirement that
the accountant's report be filed electronically. Staff notified
advisers in November 2010 that the IARD system had been programmed
to accept Form ADV-E. See 2009 Custody Release, supra note 310 at
n.53 and accompanying text (establishing the requirement for Form
ADV-E to be filed electronically, explaining that accountants
performing surprise examinations should continue paper filing of
Form ADV-E until the IARD system is programmed to accept Form ADV-E,
and noting that advisers would be informed when that programming was
completed).
\315\ Rule 206(4)-2(b)(5). These advisers must instead comply
with custody requirements under the Investment Company Act.
\316\ See IAA General Letter; Pickard Letter; Schnase Letter
(each urging us to correct this drafting error).
\317\ When we adopted the 2009 Custody Amendments we explained
that Items 9.A. and 9.B. require a registered adviser to report to
us whether the adviser or a related person has custody of client
funds or securities, and if so, both the total U.S. dollar amount of
those assets as well as the number of clients for whose accounts the
adviser or its related person has custody. See 2009 Custody Release,
supra note 310 at n.145 and accompanying text. Item 9.A., which was
intended to limit reporting of assets the adviser has custody of
other than through a related person, inadvertently required the
adviser to include assets attributable to it in certain
circumstances where a related person had custody of the assets.
We also are making a technical revision to the note within Item
9.A. to remind advisers that their responses should not include
assets of which they have custody solely because they deduct
advisory fees from client accounts.
\318\ See IAA General Letter.
\319\ We amended the definition of ``custody'' to include
circumstances under which a related person ``holds, directly or
indirectly, client funds or securities, or has any authority to
obtain possession of them, in connection with advisory services [an
adviser] provide[s] to clients.'' See rule 206(4)-2(d)(2).
\320\ Question 6 does not require a response about reports
related to an independent verification (or ``surprise examination'')
of client assets because the independent public accountant that
conducts the surprise examination separately files a certificate on
Form ADV-E. See rule 206(4)-2(a)(4).
\321\ See amended Form ADV: General Instruction 4.
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[[Page 42973]]
6. Reporting $1 Billion in Assets: Item 1.O.
We are adopting, as proposed, Item 1.O. and related instructions to
require each adviser to indicate whether it had $1 billion or more in
total assets shown on the adviser's balance sheet as of the last day of
the most recent fiscal year,\322\ which we will use to identify those
advisers that could be subject to rules regarding certain excessive
incentive-based compensation arrangements required by section 956 of
the Dodd-Frank Act.\323\ Two commenters supported the proposal,\324\
while another suggested that we allow an adviser to exclude certain
assets from the calculation so that certain advisers would not be
covered by any future rule regarding section 956.\325\ Although we
retain certain flexibility to adopt a different standard for purposes
of the incentive-based compensation rule,\326\ we believe, as noted
above, that this new item will assist us in identifying the advisers
that may be subject to such future rule.\327\
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\322\ See amended Form ADV, Part 1A, Item 1.O. (adviser must
mark ``yes'' or ``no'' to indicate whether it has $1 billion or more
in assets). For purposes of this reporting requirement only, the
amount of assets will be 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, using the same accounting method
used to prepare the balance sheet. See amended Form ADV:
Instructions for Part 1A, instr. 1.b. We are not requiring advisers
to use GAAP or another accounting method.
\323\ The Commission and other Federal regulators proposed a
joint rule that addresses certain excessive incentive-based
compensation arrangements, including those of investment advisers
with $1 billion or more in assets, pursuant to section 956 of the
Dodd-Frank Act. See Incentive-Based Compensation Arrangements,
Release No. 34-64140 (Mar. 29, 2011) [76 FR 21170 (Apr. 14, 2011)]
(``Incentive Compensation Proposing Release''). We construe section
956 as specifying, and thus 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. See
Implementing Proposing Release, supra note 7, at n.196; Incentive
Compensation Proposing Release, at section III.
\324\ See IAA Letter; ICI Letter. One commenter argued that Form
ADV is not the correct reporting mechanism for this information, but
did not recommend an alternative way to identify these advisers. NRS
Letter.
\325\ MFA Letter.
\326\ In the Incentive Compensation Proposing Release, we
invited comments on whether the determination of total balance sheet
assets should be further tailored for certain types of advisers. See
Incentive Compensation Proposing Release, supra note 323, at section
III.
\327\ We also note that almost all of the other covered
financial institutions under section 956 already report the amount
of their total assets to their Federal regulator. See Incentive
Compensation Proposing Release, supra note 323, at section III.
(proposing to calculate ``total consolidated assets'' based on
reports filed with each Federal regulator).
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7. Other Amendments to Form ADV
The amendments we are adopting today also include a number of
additional changes unrelated to the Dodd-Frank Act that are intended to
improve our ability to assess compliance risks. To improve certain
identifying information we obtain from other items of Part 1A of Form
ADV, we are amending Item 1.J. 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.\328\ An adviser also has the option, in Item 1.K., to provide
an additional regulatory contact for Form ADV.\329\ Neither Items 1.K.
nor 1.J. will be viewable by the public on our Web site.\330\ One
commenter expressed its support for this change to the form.\331\ We
are also amending 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.\332\ An affirmative response to this item will 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. New Item 1.P. requires an adviser to provide a
``legal entity identifier'' if it has one.\333\ In addition, we are
adding ``Limited Partnership'' as another choice advisers may select to
indicate how their organization is legally formed.\334\ Other than the
addition of Item 1.P., we are adopting amended Item 1 as proposed.
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\328\ Amended Form ADV, Part 1A, Item 1.J. An adviser is also
required to provide the name of its chief compliance officer on
Schedule A of Form ADV. 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 must
instead provide a designated person's contact information in Item
1.K. Likewise, an exempt reporting adviser need not provide the name
of a chief compliance officer on Schedule A of Form ADV.
\329\ Amended Form ADV, Part 1A, Item 1.K.
\330\ We note that clients will be provided with a supervisory
contact in brochure supplements. See Part 2 Release, supra note 67.
\331\ See NRS Letter.
\332\ Amended Form ADV, Part 1A, Items 1.N. and 10.B., and
Section 10.B. of Schedule D.
\333\ Amended Form ADV, Part 1A, Item 1.P. See also Amended Form
ADV: Glossary (defining ``Legal Entity Identifier''). A legal entity
identifier is a unique number that companies use to identify each
other in the financial marketplace. It is a number assigned by or on
behalf of an internationally recognized standards setting body and
it is required for reporting purposes by the U.S. Department of the
Treasury's Office of Financial Research or a financial regulator.
The legal entity identifier standard is still in development, and an
adviser may not have one. An adviser is required to respond to Item
1.P. only if it has a legal entity identifier.
\334\ Amended Form ADV, Part 1A, Item 3.A.
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We are also adopting three technical changes with respect to the
reporting of disciplinary events. First, with commenters' support, we
are adding a box to Item 11, as proposed, 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.\335\ Second, we are adding 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. One commenter supported this aspect of the
proposal.\336\ Third, we are amending 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. Advisers are required to include in brochure supplements
disclosure regarding hearings or formal adjudications relating to the
revocation or suspension of a professional attainment, designation, or
license of the supervised person by the designating authority.\337\
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\335\ Amended Form ADV, Part 1A, Item 11. See IAA General
Letter; Pickard Letter.
\336\ See NRS Letter.
\337\ As originally adopted, this item stated ``Any other
proceeding 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 his
attainment, designation, or license) in anticipation of such a
proceeding (and the adviser knows, or should have known, of such
resignation or relinquishment), disclose the event.'' (emphasis
added).
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Finally, we had requested comment in the Implementing Proposing
Release on whether we should accelerate the deadline for filing an
annual updating amendment to an adviser's Form ADV filing from 90 to 60
days after the adviser's fiscal year end.\338\ All of the commenters
who responded to the question opposed it.\339\ We are not adopting a
requirement to accelerate the
[[Page 42974]]
annual updating amendment deadline at this time.
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\338\ See Implementing Proposing Release, supra note 7, at
nn.207 and 208 and accompanying text.
\339\ Pickard Letter (citing additional burdens it would place
on advisory firm personnel and resources); IAA General Letter
(stating that many advisers need the full 90 days to ensure accurate
and complete disclosures); ICI Letter (urging the Commission to at
least give advisers time to become acclimated with all of the new
filing requirements before imposing an accelerated deadline); NRS
Letter (claiming it will add little benefit and will impose a
substantial burden); Schnase Letter.
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D. Other Amendments
1. Amendments to ``Pay to Play'' Rule
We are adopting amendments to rule 206(4)-5, the ``pay to play''
rule, to address certain consequences arising from the Dodd-Frank Act's
amendments to the Advisers Act and the Exchange Act.\340\ First, we are
amending the scope of the rule, as proposed, so that it applies both to
exempt reporting advisers and foreign private advisers.\341\ The rule
currently applies to advisers either registered with the Commission or
unregistered in reliance on the ``private adviser'' exemption under
section 203(b)(3) of the Advisers Act.\342\ The amendment prevents the
unintended narrowing of the application of the rule resulting from the
repeal of the ``private adviser'' exemption.\343\
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\340\ See amended rule 206(4)-5. We are not, however, adopting
an amendment we proposed 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 of ``covered
associate'' in the rule. Upon reflection, it would broaden the
application of the rule more than we intended. For example, because
political action committees (``PACs'') controlled by a covered
associate are themselves treated as covered associates, were we to
make this amendment, contributions by an adviser's parent company's
PAC could trigger the two-year time out. However, as we noted in the
release adopting the pay to play rule, depending on facts and
circumstances, there may be instances in which a supervisor of an
adviser's covered associate (who, for example, engages in
solicitation of government entity clients for the adviser) formally
resides at a parent company, but whose contributions should trigger
the two-year time out because they raise the same conflict of
interest issues that we are concerned about, irrespective of that
person's location or title. See Political Contributions by Certain
Investment Advisers, Investment Advisers Act Release No. 3043, n.
179 (Jul. 1, 2010) [75 FR 41018 (Jul. 15, 2010)] (``Pay to Play
Release'').
\341\ See amended rule 206(4)-5(a)(1); Implementing Proposing
Release, supra note 7, at section II.D.1. See also sections 403, 407
and 408 of the Dodd-Frank Act (replacing the ``private adviser''
exemption at section 203(b)(3) of the Advisers Act with an exemption
for ``foreign private advisers'' and adding exemptions for exempt
reporting advisers at sections 203(l) and 203(m) of the Advisers
Act).
\342\ See rule 206(4)-5(a).
\343\ Section 203(b)(3) was revised by the Dodd-Frank Act to
create a new exemption for foreign private advisers. See supra note
4.
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Commenters generally favored the amendment,\344\ although one
commenter opposed applying the rule to foreign private advisers and
foreign exempt reporting advisers, contending that the costs of doing
so would outweigh the benefits.\345\ However, many advisers that will
qualify for the foreign private adviser exemption are currently subject
to the pay to play rule, either because they are currently registered
with us or exempt under the ``private adviser'' exemption. We continue
to believe that the pay to play rule is necessary and appropriate to
prevent these advisers and others from engaging in fraudulent pay to
play practices in the U.S.
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\344\ See, e.g., Better Markets Letter; NRS Letter; NYSBA
Committee Letter; Schnase Letter.
\345\ See Dechert General Letter.
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Second, we are amending the rule to add municipal advisors to the
categories of registered entities--referred to as ``regulated
persons''--excepted from the rule's prohibition on advisers paying
third parties to solicit government entities.\346\ To qualify as a
``municipal advisor'' (and thereby a ``regulated person''), a solicitor
must be registered under section 15B of the Exchange Act and subject to
pay to play rules adopted by the Municipal Securities Rulemaking Board
(``MSRB'').\347\ Notably, for municipal advisors to qualify as
``regulated persons,'' we must find that applicable MSRB pay to play
rules: (i) impose substantially equivalent or more stringent
restrictions on municipal advisors than the pay to play rule imposes on
investment advisers; and (ii) are consistent with the objectives of the
pay to play rule.\348\
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\346\ See amended rule 206(4)-5(a)(2)(i)(A), (f)(9). ``Regulated
persons'' also include registered investment advisers and broker-
dealers subject to the rules of a registered national securities
association, such as the Financial Industry Regulatory Authority
(``FINRA''), that has adopted pay to play rules that the Commission
determines satisfy the criteria of amended rule 206(4)-
5(f)(9)(iii)(B).
\347\ See amended rule 206(4)-5(f)(9)(iii).
\348\ See amended rule 206(4)-5(f)(9)(iii)(B). The MSRB issued a
draft pay to play rule for municipal advisors and request for
comment on January 14, 2011. See MSRB, Request for Comment on Pay to
Play Rule for Municipal Advisors, MSRB Notice 2011-04 (Jan. 14,
2011) available at http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2011/2011-04.aspx?n=1. The Commission's authority
to consider rules proposed by a self-regulatory organization is
governed by section 19(b) of the Exchange Act [15 U.S.C. 78s(b)]
(``No proposed rule change shall take effect unless approved by the
Commission or otherwise permitted in accordance with the provisions
of this subsection.'').
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We had proposed to limit the exception to the third-party
solicitation ban to registered municipal advisors.\349\ But commenters
urged us to preserve the existing ``regulated person'' exception as
well.\350\ Commenters explained that affiliated broker-dealers or
investment advisers--which would not meet the statutory definition of a
``municipal advisor'' under section 15B(e)(4) of the Exchange Act if
they solicit government entities only on behalf of affiliates \351\--
are often paid by investment advisers to solicit on their behalf.\352\
While commenters recognized that adviser-affiliated solicitors may be
permitted to voluntarily register as municipal advisors, they argued
that voluntary registration of these solicitors would subject them to
regulatory requirements unrelated to pay to play practices and thus
impose significant additional costs, which they argued are unnecessary,
particularly when they already are subject to a comprehensive
regulatory regime as broker-dealers or advisers.\353\
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\349\ See Implementing Proposing Release, supra note 7, at
sections II.D.1.
\350\ See Comment letter of Debevoise & Plimpton LLP (Feb. 22,
2011) (``Debevoise Pay to Play Letter''); Dechert General Letter;
comment letter of Investment Adviser Association (by Monique S.
Botkin) (Jan. 24, 2011) (``IAA Pay to Play Letter''); ICI Letter;
comment letter of Securities Industry and Financial Markets
Association (Jan. 24, 2011) (``SIFMA Letter''); comment letter of T.
Rowe Price Associates, Inc. (Jan. 24, 2011) (``T. Rowe Letter'').
But see NRS Letter (supporting the proposal).
\351\ 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)). In recognition of this limitation, we separately
proposed to allow adviser-affiliated solicitors to register
voluntarily as municipal advisors. See Registration of Municipal
Advisors, Exchange Act Release No. 63576, at nn. 102-104 and
accompanying text (Dec. 20, 2010) [76 FR 824, (Jan. 6, 2011)]
(``Municipal Advisors Registration Release'').
\352\ See, e.g., IAA Pay to Play Letter; SIFMA Letter.
\353\ See Municipal Advisor Registration Release, supra note
351, at 831 (stating that solicitors acting on behalf of affiliates
may voluntarily register as municipal advisors).
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The amended rule retains the approach of the current rule by
permitting advisers to compensate persons that are ``regulated
persons'' for soliciting government entities if they are subject to
restrictions at least as stringent as the pay to play rule. We have
expanded ``regulated persons'' to include registered municipal
advisors. Accordingly, the pay to play rule continues to impose
critical restrictions on third-party solicitors and their personnel
designed to minimize the potential for their engaging in pay to play on
behalf of investment advisers. Advisers may only compensate third-party
solicitors that are subject to the Commission's regulatory oversight
and examination and to a regulatory regime that the Commission has
determined is
[[Page 42975]]
equally or more stringent than the pay to play rule.\354\
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\354\ Several commenters further urged the Commission to amend
the pay to play rule also to permit an adviser to pay any affiliate
and/or its employees to solicit clients on the adviser's behalf so
long as the adviser treats such solicitors as its own ``covered
associates.'' See Debevoise Pay to Play Letter; IAA Pay to Play
Letter; ICI Letter; NYSBA Committee Letter; comment letter of
Skadden, Arps, Slate, Meagher & Flom LLP (Mar. 8, 2011) (``Skadden
Letter''); T. Rowe Letter. In light of the approach we are adopting
(discussed above), we believe that such an amendment is unnecessary.
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Finally, we are extending the date by which advisers must comply
with the ban on third-party solicitation from September 13, 2011 to
June 13, 2012 due to the fact that we are modifying our proposal and
expanding the definition of ``regulated persons.'' \355\ This extension
will provide time for the MSRB and FINRA to adopt pay to play rules if
they choose to do so and give third-party solicitors additional time to
come into compliance with such rules.\356\
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\355\ See comment letter of American Council of Life Insurers
(Jan. 24, 2011) (``ACLI Pay to Play Letter''); IAA Pay to Play
Letter; ICI Letter (suggesting that the Commission extend the
compliance date for the third-party solicitation ban). See also
SIFMA Letter (suggesting that the Commission delay adoption of
amendments to the pay to play rule until it completes its municipal
advisor registration rulemaking).
\356\ The extension applies only to the third-party solicitation
ban and not to any other provisions in the pay to play rule. See
supra note 348 (referencing the MSRB's issuance of a draft pay to
play rule for municipal advisors).
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2. Technical and Conforming Amendments
a. Rules 203(b)(3)-1 and 203(b)(3)-2
We are rescinding rules 203(b)(3)-1 \357\ and 203(b)(3)-2 \358\
under the Advisers Act. These rules 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 Adopting Release, we are adopting a
new client counting rule, rule 202(a)(30)-1, for purposes of the new
foreign private adviser exemption.\359\
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\357\ Rule 203(b)(3)-1.
\358\ 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 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)]. That rule, and certain amendments to
rule 203(b)(3)-1 and other rules, were vacated by a Federal appeals,
but have remained in the CFR. See Goldstein v. SEC, 451 F.3d 873 (DC
Cir. June 23, 2006) (``Goldstein'').
\359\ See Exemptions Adopting Release, supra note 4, at section
II.C.1.
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b. Rule 204-2
We are adopting amendments to rule 204-2 under the Advisers Act,
the ``books and records'' rule. The first amendment updates 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 after the exemption is eliminated on July
21, 2011.\360\ Upon registration, these advisers will become subject to
the recordkeeping requirements of the Act, including the requirement to
keep certain records relating to performance.\361\ The amendment
clarifies that these advisers are not obligated to keep certain
performance-related records for any period when they were not
registered with the Commission; however, to the extent that these
advisers preserved these performance-related records even though they
were not required to keep them, they must continue to preserve
them.\362\ As discussed in section III, we are providing these advisers
with additional time to register and establish compliance with rules
under the Advisers Act to which they will become subject as registered
advisers, including rule 204-2.\363\ The second amendment modifies rule
204-2(e)(3)(ii) to cross-reference the new definition of ``private
fund'' added by the Dodd-Frank Act.\364\ The third amendment rescinds
rule 204-2(l) \365\ 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 approach in the Advisers
Act itself.\366\
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\360\ See amended rule 204-2(e)(3)(ii); Implementing Proposing
Release, supra note 7, at section III.D.2.b. Our proposal would have
applied the grandfathering provision only to those periods prior to
the date that the Dodd-Frank Act removes the ``private adviser''
exemption in section 203(b)(3)--July 21, 2011. However, as discussed
in section III of this Release, we are providing a transition period
for advisers relying on the ``private adviser'' exemption, requiring
that they register by March 30, 2012 and comply with all Advisers
Act provisions and rules by that date. To reflect this transition
period in the grandfathering provision in rule 204-2, we are
adopting a modification from our proposal to provide that the
grandfathering period applies to any period prior to such adviser's
registration.
\361\ See rule 204-2(a)(16).
\362\ See amended 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 your
registration, provided that 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.'' 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 decision by the U.S. Court of Appeals for the
District of Columbia Circuit in Goldstein are permitted to rely on
the grandfathering provision for periods during which they were
unregistered.
\363\ An adviser that must register with the Commission because
of the Dodd-Frank Act's elimination of the ``private adviser''
exemption and that files an application for registration on or
before the transition deadline of March 30, 2012, may rely on the
grandfathering provision for any period prior to registering, but
must begin keeping performance-related records in accordance with
the rule upon registering.
\364\ See rule 204-2(e)(3)(ii) (using the term ``private fund''
without reference to a definition). We are adding a parenthetical
noting that the term is defined in section 202(a)(29) of the
Advisers Act.
\365\ 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.
\366\ Section 404 of the Dodd-Frank Act (adding section
204(b)(2) to the Advisers Act, which states that ``[t]he 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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We received three comment letters in favor of the proposed
amendment to apply the grandfathering provision to advisers that will
be required to register due to the Dodd-Frank Act's elimination of the
``private adviser'' exemption.\367\
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\367\ See MFA Letter; NYSBA Committee Letter; Seward Letter.
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c. Rule 0-7
We are adopting, as proposed, an amendment to rule 0-7(a)(1) \368\
under the Advisers Act to update a cross reference to section
203A(a)(2) of the Advisers Act, which has been renumbered as section
203A(a)(3) by the Dodd-Frank Act.\369\
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\368\ Rule 0-7(a) defines ``small entities'' under the Advisers
Act for purposes of the Regulatory Flexibility Act.
\369\ See amended rule 0-7(a)(1) (stating that the term ``small
business'' or ``small organization'' for purposes of the Advisers
Act means an investment adviser that: ``Has assets under management,
as defined under Section 203A(a)(3) of the Act (15 U.S.C. 80b-
3a(a)(3)) 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. * * *''); Implementing
Proposing Release, supra note 7, at section II.D.2.c.
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d. Rule 222-1
We are replacing, as proposed, the term ``principal place of
business'' in rule 222-1(b) \370\ under the Advisers Act
[[Page 42976]]
with the term ``principal office and place of business'' to conform to
the Dodd-Frank Act's amendments to section 222 of the Advisers
Act.\371\ We are not modifying the definition.
---------------------------------------------------------------------------
\370\ Rule 222-1 contains definitions relevant to section 222 of
the Advisers Act's provisions regarding state regulation of
investment advisers. Amended rule 222-1(b) defines ``principal
office and place of business'' exactly as it defined ``principal
place of business'' of an investment adviser: ``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.''
\371\ 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 adopting, as proposed, amendments to rule 222-2 to define
``client'' for purposes of the national de minimis standard by cross-
referencing the definition of ``client'' in rule 202(a)(30)-1 rather
than the definition in rule 203(b)(3)-1. The cross-reference to rule
203(b)(3)-1 must be updated because we are rescinding rule 203(b)(3)-
1.\372\ We are also changing, as proposed, a cross-reference to
paragraph (b)(6) of rule 203(b)(3)-1 to paragraph (b)(4) of rule
202(a)(30)-1 to account for the changed location of that particular
provision.
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\372\ See supra section II.D.2.a. (discussing rescinding rule
203(b)(3)-1); new rule 202(a)(30)-1; Exemptions Adopting Release,
supra note 4, at section II.C.1. (discussing the definition of
``client'' in rule 202(a)(30)-1).
---------------------------------------------------------------------------
We are not adopting a proposed amendment to specify that, for
purposes of the national de minimis standard, an adviser is not
required to count as a client any person for whom the adviser provides
investment advisory services without compensation.\373\ We received a
comment letter opposing this amendment, citing the fact that under
proposed rule 202(a)(30)-1, an adviser would be required to count such
a person as a client for purposes of the ``foreign private adviser''
definition in section 202(a)(30) of the Act.\374\ The commenter stated
that it would be confusing and inconsistent to require an adviser to
count the same person as a client for purposes of the ``foreign private
adviser'' definition, but not for the national de minimis standard. We
agree. Thus, in the interests of consistency and clarity, advisers must
count such clients for both purposes.
---------------------------------------------------------------------------
\373\ See Implementing Proposing Release, supra note 7, at
section II.D.2.e.
\374\ See NASAA Letter; Exemptions Adopting Release, supra note
4, at section II.C.1.
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f. Rule 202(a)(11)-1
We are rescinding rule 202(a)(11)-1 under the Advisers Act.\375\
Although the rule was vacated by a federal appeals court (and is
therefore not in effect), it has remained in the CFR.\376\
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\375\ Rule 202(a)(11)-1. Rule 202(a)(11)-1 addressed the
application of the Advisers Act to broker-dealers offering certain
types of brokerage programs.
\376\ See Financial Planning Association v. SEC, 482 F.3d 481
(DC Cir. 2007).
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III. Effective and Compliance Dates
A. Effective Dates
The effective date of rules 204-4 and 203A-5(b) and (c), amendments
to rules 0-7, 203A-1, 203A-2, 203A-3, 204-1, 204-2, 206(4)-5, 222-1,
and 222-2, and amendments to Forms ADV, ADV-E, ADV-H, and ADV-NR is
September 19, 2011. The effective date of rule 203A-5(a) and the
amendment to rule 203-1 is July 21, 2011.\377\ Rules 202(a)(11)-1,
203(b)(3)-1, 203(b)(3)-2, and 203A-4 are rescinded effective September
19, 2011.
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\377\ See section IV infra (discussing certain administrative
law matters associated with the effective date for new rule 203A-
5(a) and amended rule 203-1(e)).
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B. Compliance Dates
1. Transition to State Registration and Form ADV
As discussed in section II.A.1 above, new rule 203A-5 provides 90
days from December 31, 2011 for each adviser registered with us to
determine whether it is eligible for Commission registration.\378\
Accordingly, the rule requires all registered advisers to file an
amended Form ADV by March 30, 2012,\379\ which for most of our
registrants will be their annual updating amendments that are due 90
days after their December 31, 2011 fiscal year ends.\380\ For an
adviser that is no longer eligible to remain registered with us, rule
203A-5 provides an additional 90 days for it to register in one or more
of the states and withdraw its registration with us.\381\ After January
1, 2012, any adviser filing an amendment to Form ADV to meet the filing
requirements of rule 203A-5 or for any other purpose will be required
to provide responses to the form revisions we are adopting today.\382\
Our staff is working closely with FINRA, our IARD contractor, to re-
program IARD and we understand that the system is expected to be able
to accept filings of revised Form ADV by January 1, 2012.\383\
Investment advisers filing initial applications for registration after
the IARD is re-programmed to accommodate filing of the revised Form ADV
must complete the revised form.
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\378\ See new rule 203A-5; supra section II.A.1.
\379\ See new rule 203A-5(b); supra section II.A.1.
\380\ Advisers not filing an annual updating amendment from
January 1 to March 30, 2012, must file an other than annual
amendment updating Form ADV.
\381\ See new rule 203A-5(c)(1). A mid-sized adviser that must
switch to state registration may not withdraw its SEC registration
until January 1, 2012. See new rule 203A-5(a); supra section II.A.1.
\382\ See supra note 25 and accompanying text.
\383\ As discussed in section II.B.1, we are also making
technical amendments to Forms ADV-H and ADV-NR to account for the
fact that exempt reporting advisers, along with registered advisers,
will file these forms.
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2. Advisers Previously Exempt Under Section 203(b)(3)
We are adopting a transition provision in rule 203-1 for advisers
that are newly required to register due to the Dodd-Frank Act's repeal
of the ``private adviser'' exemption in section 203(b)(3).\384\ Under
rule 203-1(e), an adviser that was relying on, and was entitled to rely
on, the ``private adviser'' exemption in section 203(b)(3) on July 20,
2011, may delay registering with the Commission until March 30,
2012.\385\ Because initial applications for registration can take up to
45 days to be approved, advisers relying on this transition provision
to remain unregistered until March 30, 2012 should file a complete
application, both Part 1 and a brochure(s) meeting the requirements of
Part 2 of Form ADV at least by February 14, 2012.\386\
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\384\ See amended rule 203-1(e); section 203(b)(3) of the
Advisers Act.
\385\ See amended rule 203-1(e). See also Letter from Robert E.
Plaze, Associate Director, Division of Investment Management, U.S.
Securities and Exchange Commission, to David Massey, Deputy
Securities Administrator, North Carolina Securities Division, and
President, NASAA (Apr. 8, 2011) available at http://www.sec.gov/rules/proposed/2010/ia-3110-letter-to-nasaa.pdf (stating that the
Commission would potentially consider extending the date by which
these advisers must register and come into compliance with the
obligations of a registered adviser until the first quarter of
2012).
\386\ See section 203(c)(2) of the Advisers Act (providing that
the Commission will grant registration or institute proceedings to
determine whether registration should be denied within 45 days of
the date an adviser files an application for registration).
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To qualify for the delayed transition under rule 203-1(e) an
adviser must, during the course of the preceding 12 months, have had
fewer than 15 clients and neither hold itself out generally to the
public as an investment adviser nor act as an adviser to a registered
investment company or business development company.\387\ The
[[Page 42977]]
transition period will provide these advisers with needed additional
time to work through any technical issues associated with applying for
registration and to establish compliance with Advisers Act provisions
and rules to which they are newly subject as advisers required to
register.\388\ As such, we believe that the temporary extension of the
registration deadline provided by rule 203-1(e) will assure an orderly
transition to registration that will minimize costs to these advisers
and their clients.
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\387\ See amended rule 203-1(e). An adviser relying on the
transition provision must come into compliance with Advisers Act
statutory provisions and rules applicable to registered advisers by
the time it is registered, which must occur no later than March 30,
2012. However, nothing in the transition provision exempts these
advisers from Advisers Act provisions and rules to which they are
currently subject. For example, the Advisers Act pay to play rule,
rule 206(4)-5, currently applies to advisers exempt from
registration under the ``private adviser'' exemption in section
203(b)(3) of the Act. See supra section II.D.1. (discussing our
amendments to the pay to play rule, one of which is designed so that
advisers exempt from registration under the ``private adviser''
exemption in section 203(b)(3) continue to be subject to the pay to
play rule after the Dodd-Frank Act eliminates the exemption).
\388\ We received a number of comment letters requesting that
these advisers have additional time after July 21, 2011 (the date
the Dodd-Frank Act's repeal of the section 203(b)(3) private adviser
exemption becomes effective) to become registered and to establish
compliance with all provisions of the Advisers Act and rules
thereunder to which they are newly subject by virtue of their
required registration. See CompliGlobe Letter; MFA Letter; Schnase
Letter; Shearman Letter. We are using our authority under section
206A of the Act to implement this transition to registration. We
believe that providing advisers newly required to register with this
additional transition period is necessary or appropriate in the
public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the
Advisers Act.
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3. Exempt Reporting Advisers
Exempt reporting advisers must file their first reports on Form ADV
through IARD between January 1 and March 30, 2012. We originally
proposed to require exempt reporting advisers to file initial reports
by August 20, 2011.\389\ However, we are further delaying the
compliance date to accommodate re-programming of the IARD system on
which these reports will be filed.\390\ The extended deadline of March
30, 2012 will also address concerns raised by commenters that advisers
will not have sufficient time to determine whether they qualify for the
new exemptions, familiarize themselves with Form ADV and IARD, collect
the data necessary to file an initial report, and to file the
report.\391\
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\389\ See Implementing Proposing Release, supra note 7, at
section II.B.4.
\390\ See supra section II.A.1. (discussing the expectation that
the IARD will be re-programmed in November 2011).
\391\ See ABA Committees Letter; Merkl Implementing Letter.
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4. Other Amendments
As discussed in section II.A.5., advisers may rely on our
amendments to rule 203A-2 beginning on September 19, 2011.\392\ These
include our amendments to increase the threshold for pension
consultants from $50 million to $200 million and to create a uniform
threshold for small and mid-sized advisers that permits them to
register with the Commission if they are required to register in 15 or
more states.\393\ Advisers may begin relying on our amendment to the
buffer in rule 203A-1 on September 19, 2011. In addition, as discussed
in section II.D.1, we are extending the compliance date for the pay to
play rule's ban on third-party solicitation from September 13, 2011 to
June 13, 2012. Advisers must comply with any other amendments not
discussed in this section III.B by their effective dates.
---------------------------------------------------------------------------
\392\ See supra note 118.
\393\ See supra section II.A.5.
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IV. Certain Administrative Law Matters
As discussed in section III.A above, the effective date for rule
203A-5(a) and the amendment to rule 203-1 is July 21, 2011. The
Administrative Procedure Act generally requires that an agency publish
a final rule in the Federal Register not less than 30 days before its
effective date.\394\ However, this requirement does not apply if the
rule is a substantive rule which grants or recognizes an exemption or
relieves a restriction, if the rule is interpretive, or if the agency
finds good cause to make the rule effective less than 30 days after its
date of publication in the Federal Register.\395\ Effective July 21,
2011, the Dodd-Frank Act amends section 203A of the Advisers Act to
prohibit certain mid-sized advisers from registering with the
Commission, and eliminates the ``private adviser'' exemption in section
203(b)(3), requiring advisers relying on that exemption to register as
of July 21, 2011.\396\ Rule 203A-5(a) provides a temporary extension of
the deadline by which certain mid-sized advisers must withdraw their
Commission registration, and rule 203-1(e) provides a temporary
extension of the registration deadline for advisers relying on the
``private adviser'' exemption in section 203(b)(3).\397\ Thus, both
rule 203A-5(a) and rule 203-1(e) recognize an exemption or relieve a
restriction. Furthermore, as discussed in sections II.A and III.B.2 of
this Release, we believe that these temporary extensions are necessary
to facilitate an orderly process for advisers relying on the ``private
adviser'' exemption in section 203(b)(3) to apply for registration and
for mid-sized advisers to withdraw from registration, and to provide
sufficient time for the re-programming of IARD. Thus, we find good
cause to make rules 203A-5(a) and 203-1(e) effective on July 21, 2011.
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\394\ See 5 U.S.C. 553(d).
\395\ See id.
\396\ See sections 403, 410, and 419 of the Dodd-Frank Act;
sections 203(b)(3), 203A(a)(2) of the Advisers Act; supra sections I
and II.A.
\397\ See amended rule 203-1(e) and new rule 203A-5(a); supra
section II.A and section III.B.2.
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V. Cost-Benefit Analysis
We are sensitive to the costs and benefits imposed by our rules,
and understand that there will be costs associated with compliance with
the new rules and rule amendments. The new rules and amendments we are
adopting are designed 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
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 adopting amendments to the Advisers Act
pay to play rule, rule 206(4)-5. Additionally, we are identifying the
advisers that may be subject to the Dodd-Frank Act's requirements
concerning certain incentive-based compensation arrangements. Because
many of the new rules and rule amendments will implement or clarify
provisions of the Dodd-Frank Act, they will not create benefits and
costs separate from the benefits and costs considered by Congress in
passing the Dodd-Frank Act.\398\ However, certain of the rules and rule
amendments that we are adopting will generate costs and benefits
independent of those generated by the Dodd-Frank Act itself. These
costs and benefits are discussed below.\399\
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\398\ See Dodd-Frank Act, supra note 2; Conference Committee
Report, supra note 136; Senate Committee Report, supra note 18;
supra section I. Rules and amendments not generating costs and
benefits independent of those generated by the Dodd-Frank Act
include the amendments to rules 0-7, 204-2, 222-1, 222-2 and our
rescinding of rules 202(a)(11)-1, 203(b)(3)-1, and 203(b)(3)-2.
\399\ To indicate the scale of the market which is addressed by
Title IV of the Dodd-Frank Act and the amendments to Advisers Act
rules we are adopting today--the market for investment advisory
services--based on IARD data as of April 7, 2011, our staff
estimates that SEC-registered advisers manage approximately $43.822
trillion in assets.
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In the Implementing Proposing Release, we requested comment on the
proposed rules and amendments, suggestions for additional changes to
the existing rules, and comment on other matters that might have an
effect on our proposals. We received approximately 73 comment letters
on the proposal. Commenters generally supported our approach
facilitating mid-sized advisers' transition from Commission to state
registration, and our amendments to
[[Page 42978]]
Form ADV requiring disclosure of additional information about private
funds. Many, however, urged us to take a different approach to revising
the pay to play rule.
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 category of ``mid-sized advisers'' and
shifts primary responsibility for their regulatory oversight to the
states. Specifically, section 410 prohibits an investment adviser from
registering with the Commission if the adviser is required to be
registered and is subject to examination as an investment adviser in
the state in which it maintains its principal office and place of
business, and has assets under management between $25 million and $100
million.\400\ We are adopting rules and rule amendments that provide us
with a means of identifying advisers that must transition to state
regulation, clarify the application of new statutory provisions, and
modify certain exemptions we previously adopted under section 203A of
the Act.
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\400\ See supra notes 18-19 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 adopting new rule 203A-5, which requires each investment
adviser registered with us on January 1, 2012 to file an amendment to
its Form ADV no later than March 30, 2012, and withdraw from Commission
registration by June 28, 2012, if no longer eligible.\401\ As a
consequence of section 410 of the Dodd-Frank Act, we estimate that
approximately 3,200 SEC-registered advisers will be required to
withdraw their registration and register with one or more state
securities authorities.\402\ We believe this filing is necessary for
each adviser to confirm its current eligibility for Commission
registration in light of multiple statutory changes (as well as changes
to the rules that we are today adopting) that could affect whether the
adviser may register with the Commission.\403\ Given this significant
realignment of regulatory authority over numerous advisers, requiring
all advisers to file the new Form ADV and complete all items also will
allow us and the state securities authorities to easily and efficiently
identify the advisers that are subject to our regulatory authority and
which advisers have switched to state registration after the
implementation of the Dodd-Frank Act's amendment to section 203A of the
Advisers Act. Additionally, the filing will help minimize any potential
uncertainty among investors and other market participants about the
effects of the Dodd-Frank Act on the registration status of a
particular adviser by providing a simple, efficient means of
determining an adviser's registration status after the implementation
of the Dodd-Frank Act through the IARD as of a specific date. This
could help minimize any disruption in advisory business that such
uncertainty could provoke. One commenter agreed with our expectation
that the transition rule will benefit advisers, noting that the rule
will ``assist mid-sized advisers in transitioning from federal to state
registration.'' \404\
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\401\ New rule 203A-5(b)-(c); supra section II.A.1. Mid-sized
advisers registered with the Commission as of July 21, 2011 must
remain registered with the Commission (unless an exemption from
Commission registration otherwise is available) until January 1,
2012. New rule 203A-5(a). See supra note 28.
\402\ See supra note 22 and accompanying text.
\403\ In addition, we believe that requiring advisers to
complete all of the items will provide the Commission and the state
regulatory authorities with essential information about the advisers
that are transitioning to state registration and the advisers that
are remaining registered with the Commission. See infra section
II.C.
\404\ Pickard Letter.
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Rule 203A-5 that we are adopting today differs from the one we
proposed in several respects. First, rule 203A-5 requires advisers
already registered with the Commission to refile Form ADV beginning on
January 1, 2012, instead of beginning on July 21, 2011 as
proposed.\405\ We stated in the Implementing Proposing Release that a
delay might be necessary if the IARD was not re-programmed to reflect
the revised Form ADV by July 21.\406\ We now understand that beginning
in November 2011, the IARD will be updated to reflect the revisions to
Form ADV that we are adopting today.\407\ Several commenters agreed
with our approach to delay the transition instead of adopting
alternative requirements, such as requiring interim paper filings, to
reduce burdens for both advisers and regulators.\408\ Additionally, we
believe that delaying the beginning of the transition until January 1,
2012 will allow the Commission and state regulators to manage the
transition of mid-sized advisers in an orderly manner, and will
accommodate the re-programming of the IARD that eliminates the need and
cost of alternatives such as interim paper filings.
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\405\ See new rule 203A-5(b); proposed rule 203A-5(a); supra
section II.A.1.
\406\ Implementing Proposing Release, supra note 7, at section
II.A.1.
\407\ FINRA informed us that the IARD will be updated to reflect
the revisions to Form ADV that we are adopting today beginning in
November. See supra section II.A.1.
\408\ See Dezellem Letter (urging the Commission to wait for the
IARD to be reprogrammed because it is efficient and reduces risks of
misplacing paper documents and possible filing errors); NASAA Letter
(``the benefits of electronic filing, including easy public access
to the documents, are significant and would outweigh any
disadvantages imposed by a delay in filing deadlines.''); NRS Letter
(urging Commission not to ``regress to paper filings'' which would
be ``a huge step into the past'' and ``appears to be counter to
Dodd-Frank Act purposes of transparency and consistency.''). See
also NYSBA Committee Letter.
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Second, rule 203A-5 provides a 180-day transition period, which is
longer than the 90-day period we proposed.\409\ Advisers will be
required to file an amended Form ADV by March 30, 2012 (instead of
August 20, 2011, as proposed), and mid-sized advisers no longer
eligible for Commission registration will be required to withdraw by
June 28, 2012 (instead of October 19, 2011, as proposed).\410\ Changing
the deadline for advisers to refile amended Form ADV to March 30, 2012,
which coincides with most advisers' required annual updating amendment,
significantly reduces the burden of rule 203A-5 by eliminating the
costs associated with a special one-time filing requirement for most
registered advisers.\411\ In addition, the change in deadline to refile
also coincides with the filing deadline for newly registering private
fund advisers, which, as one commenter pointed out, eliminates the need
for these advisers also to file Form ADV solely for the purposes of
determining eligibility for registration.\412\ Also, the June 28, 2012
deadline to withdraw from registration
[[Page 42979]]
will provide additional time for advisers to complete the switch to
state registration and to comply with their obligations under state
law, and will reduce administrative burdens for the state securities
authorities that must review and process mid-sized adviser state
registrations, as underscored by several commenters.\413\ Several
commenters expressed concerns about the burdens of requiring all
advisers to amend all of Form ADV solely to indicate their eligibility
to register \414\ and requiring mid-sized advisers to switch to state
registration within 90 days after July 21, 2011.\415\ The revised
transition discussed above should allay these concerns. We believe that
providing advisers with 180 days, rather than 90 days, to transition to
state registration will allow them to do so in a more orderly
manner.\416\ It will provide them greater time to collect the
information necessary for state registration and to assess and to come
into compliance with state regulations governing advisers. As such, it
may promote efficiency and reduce advisers' costs.
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\409\ See new rule 203A-5(b)-(c); proposed rule 203A-5(a)-(b)
and supra section II.A.1.
\410\ See new rule 203A-5(b)-(c); proposed rule 203A-5(a)-(b);
Implementing Proposing Release, supra note 7, at section II.A.1.
\411\ See, e.g., CMC Letter (suggesting ``timing of the
transition from Federal to state registration could be centered
around renewals for 2012''). As of April 7, 2011, 10,636 SEC-
registered advisers had a fiscal year ending on December 31. We
expect that these advisers will comply with new rule 203A-5(b)'s
Form ADV filing requirement by submitting their annual updating
amendment. The 868 SEC-registered advisers not required to file an
annual updating amendment between January 1, 2012 and March 30, 2012
will file an other-than-annual amendment, but they will complete all
of the items on the form (not just the items required to be updated
in a typical other-than-annual amendment). See supra note 48.
\412\ See MFA Letter.
\413\ Many commenters urged us to provide additional time for
mid-sized advisers to complete the switch to state registration. See
ABA Committees Letter; Altruist Letter; CMC Letter; Dezellem Letter;
Dinel Letter; FSI Letter; Klein Letter; NRS Letter; NYSBA Committee
Letter; Sadis Letter; Schnase Letter; Seward Letter; Shearman
Letter. Several commenters echoed concerns about timely state
processing of applications, noting, in particular, additional
registration and compliance requirements in many states and expected
delays to approve state registrations given the increase in filings
as a result of the Dodd-Frank Act. See ABA Committees Letter (``some
states may be unable to process such filings in a timely and
efficient manner.''); Altruist Letter (noting that it took 122 days
for a state to approve its application). See also CMC Letter;
Dezellem Letter; Klein Letter; NRS Letter; NYSBA Committee Letter;
Schnase Letter; Seward Letter. One commenter, while supporting the
method and timeline for transition contained in proposed rule 203A-
5, suggested that it would be prudent to include in the rule
flexibility to extend this timeline if necessary. See NASAA Letter.
\414\ See, e.g., ICI Letter; MFA Letter; NYSBA Committee Letter;
Shearman Letter.
\415\ See, e.g., ABA Committees Letter; Altruist Letter; CMC
Letter; Dezellem Letter; Dinel Letter; FSI Letter; Klein Letter; NRS
Letter; NYSBA Committee Letter; Sadis Letter; Schnase Letter; Seward
Letter; Shearman Letter. Only one commenter supported the proposed
90-day grace period. Pickard Letter.
\416\ Our current rules provide 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). Several commenters recommended the Commission
match the current 180-day period. See Altruist Letter; Dezellem
Letter; FSI Letter; Klein Letter; NYSBA Committee Letter; Schnase
Letter; Seward Letter; Shearman Letter.
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Finally, we are providing additional flexibility for an adviser to
choose the date by which it must calculate its assets under management
that it reports on Form ADV by requiring the same 90 day period as in
Form ADV today, instead of 30 days, as proposed.\417\ This change will
make an additional administrative burden unnecessary for the majority
of advisers that already value assets on a quarterly basis, as
underscored by several commenters.\418\
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\417\ See new rule 203A-5(b); amended Form ADV: Instructions for
Part 1A, instr. 5.b.(4); supra section II.A.1.
\418\ Several commenters recommended that advisers be able to
calculate assets under management as of the quarter-end. See
Altruist Letter; NYSBA Committee Letter; Seward Letter; Shearman
Letter.
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Switching Between State and Commission Registration
Rule 203A-1 is designed to prevent 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. We are amending the rule to eliminate the current
buffer for advisers with assets under management between $25 million
and $30 million that permits these advisers to remain regulated by the
states, and we are replacing it with a similar buffer for mid-sized
advisers with assets under management of close to $100 million.\419\
The rule raises the threshold above which a mid-sized adviser must
register with the Commission to $110 million; but, once registered with
the Commission, an adviser need not withdraw its registration until it
has less than $90 million of assets under management.\420\ Commenters
did not object to elimination of the current buffer, but several argued
that we need to include a new buffer for mid-sized advisers that have
close to $100 million of assets under management.\421\ These comments
persuaded us to adopt a buffer that, as discussed below, may prevent
costs and disruption to advisers that otherwise may have had to switch
between federal and state registration frequently.\422\ The rule also
maintains the 180-day grace period from the adviser's fiscal year end
for advisers no longer eligible to switch to state registration,\423\
which further addresses commenters' concerns about advisers frequently
having to switch registration.\424\
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\419\ See amended rule 203A-1(a); supra note 103 and
accompanying text.
\420\ See amended rule 203A-1(a); supra note 106.
\421\ See Altruist Letter; Dezellem Letter; Dinel Letter; FSI
Letter; ICW Letter; JVL Associates Letter; Merkl Implementing
Letter; NASAA Letter; NRS Letter; NYSBA Committee Letter; Wealth
Coach Letter; WJM Letter.
\422\ Several commenters discussed the costs of switching
frequently between Federal and state registration. See, e.g.,
Altruist Letter; ICW Letter; JVL Associates Letter; NRS Letter;
Wealth Coach Letter.
\423\ See amended rule 203A-1(b)(2); supra note 104 and
accompanying text.
\424\ See Altruist Letter; Dezellem Letter; Dinel Letter; FSI
Letter; ICW Letter; JVL Associates Letter; Merkl Implementing
Letter; NRS Letter; NYSBA Committee Letter; Wealth Coach Letter; WJM
Letter.
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We are eliminating the current $5 million buffer, as proposed,
because, as one commenter noted, it seems ``unnecessary and potentially
confusing,'' \425\ particularly in light of Congress's determination
generally to require most advisers having between $25 million and $100
million of assets under management to be registered with the
states.\426\ Elimination of the current buffer 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.
---------------------------------------------------------------------------
\425\ ABA Committees Letter.
\426\ See supra note 18.
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The new buffer yields several benefits, also identified by
commenters, including enhancing efficiency because it will prevent
advisers from frequently switching to and from Commission registration
due to market fluctuations.\427\ The buffer also will eliminate the
additional costs and resulting competitive disadvantages these advisers
would therefore incur (such as paying filing fees and changing
compliance programs to reflect a different regulatory regime).\428\ The
amendment operates to provide a buffer of 20 percent of the $100
million
[[Page 42980]]
statutory threshold for registration with the Commission, which is the
same percentage as the current buffer. We believe a 20 percent buffer
is appropriate because it is large enough to create a flexible regime
that accommodates market fluctuations or the departure of one or more
clients, and does not substantially increase or decrease the $100
million threshold set by Congress in the Dodd-Frank Act.\429\
Commenters further asserted that the buffer will reduce burdens for
investors, clients and regulators,\430\ and will provide regulatory
flexibility.\431\
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\427\ Commenters said a 20 percent buffer should prevent
advisers from having to switch as a result of changes in market
values due to volatility in the securities markets. See, e.g.,
Dezellem Letter; Dinel Letter; WJM Letter. See also Altruist Letter;
FSI Letter; ICW Letter; Merkl Implementing Letter; NYSBA Committee
Letter. Several advisers with close to $100 million of assets under
management asserted that a buffer is necessary to prevent them from
switching to and from Commission registration. ICW Letter (for three
years, adviser's assets under management have fluctuated above and
below $100 million due to market volatility); JVL Associates Letter
(adviser's assets under management have fluctuated around $100
million since 2007). See also Wealth Coach Letter (from October 2008
through March 2009, adviser's total assets under management fell
over 25 percent).
\428\ See ICW Letter (having to switch back and forth ``would
create a disproportionate regulatory burden and cost structure'' and
would ``place them at a significant operating and financial
disadvantage to advisory firms clearly exposed to only one
regulatory regime that is not likely to change.''); WJM Letter (not
having a buffer potentially puts an unreasonable and unfair burden
on the smaller SEC advisers and could mean they would re-register
several times before getting into a ``safe'' zone). See also
Dezellem Letter; FSI Letter; Wealth Coach Letter.
\429\ See supra note 117.
\430\ See Dezellem Letter (arguing new registrations are time
consuming and costly for regulators and advisers, and adopting a
buffer will decrease investor confusion); FSI Letter (arguing a
buffer will reduce costs associated with re-registration that would
be passed on to investors); Wealth Coach Letter (arguing different
registrations could overwhelm clients, and the resources required to
change registration could negatively impact an adviser's client
services and portfolio management); WJM Letter (arguing clients
would be ``puzzled or concerned'' by registration changes, and
multiple re-registrations would put additional burdens on states).
\431\ See NASAA Letter (arguing a buffer ``provides an element
of regulatory flexibility.'').
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Exemptions From the Prohibition on Registration With the Commission
We are amending three of the exemptions from the prohibition on
registration in rule 203A-2 to reflect developments since their
original adoption, including the enactment of the Dodd-Frank Act.\432\
First, we are eliminating the exemption in rule 203A-2(a) from the
prohibition on Commission registration for NRSROs.\433\ Currently, no
advisers indicate that they are NRSROs by marking Item 2.A.(5) of Part
1A of Form ADV.\434\ Given that NRSROs do not currently rely on the
exemption and Congress excluded certain NRSROs from the Act's
definition of ``investment adviser'' since we adopted this
exemption,\435\ the amendment will not generate any benefits or costs
and will not impact efficiency, competition or capital formation,
separate from the benefit of simplifying our rules and, as one
commenter noted, will increase ``consistency across legislative and
regulatory requirements.''\436\
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\432\ See amended rule 203A-2; supra section II.A.5. We are also
renumbering and making minor conforming changes to rule 203A-2(c),
(d) and (f). See amended rule 203A-2(b), (c) and (e). Each of the
exemptions from the prohibition on registration in rule 203A-2
(including those we are not amending) also apply to mid-sized
advisers, which one commenter asserted ``promotes uniformity,
clarity and a consistent standard for all.'' NRS Letter. See supra
note 119.
\433\ See supra section II.A.5.a.
\434\ Based on IARD data as of April 7, 2011.
\435\ See supra notes 121-122.
\436\ NRS Letter (asserting that the proposal is consistent with
the Credit Rating Agency Reform Act, which amended the Advisers Act
to exclude NRSROs and to provide for a separate regulatory regime
for them under the Exchange Act). See also Pickard Letter (asserting
that continued availability of the NRSRO exemption is causing
confusion among advisers).
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Second, we are amending the exemption available to pension
consultants in rule 203A-2(b) to increase the minimum value of plan
assets on which an adviser must consult from $50 million to $200
million.\437\ We are increasing the 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, and to maintain the same ratio as today
of plan assets to the statutory threshold for registration.\438\ This
amendment will provide the benefit to these firms of registering with a
single securities regulator, and will 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.\439\
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\437\ See amended rule 203A-2(a); supra section II.A.5.b.
\438\ See supra note 127.
\439\ One commenter expressed support for the $200 million
threshold. See NRS Letter (agreeing that the $200 million threshold
would continue to ensure that the activities of a pension consultant
registered with the Commission are significant enough to have an
impact on national markets).
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Finally, we are amending the multi-state adviser exemption to align
the rule with the multi-state exemption Congress provided for mid-sized
advisers in section 410 of the Dodd-Frank Act.\440\ Amended rule 203A-
2(d) permits all investment advisers who are required to register as an
investment adviser with 15 or more states to register with the
Commission, rather than 30 states, as currently required.\441\ An
adviser relying on the rule must withdraw from registration with the
Commission when it is no longer required to register with 15
states.\442\ We believe this change reflects the Congressional
determination to set the threshold at 15 states.\443\ 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.\444\ 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.\445\ We also are rescinding,
as proposed, the provision in the current 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 adopting a similar
cushion for the 15-state threshold.\446\ We do not see any significant
benefit of retaining this buffer, and we believe it is unnecessary
because advisers elect to rely on the exemption and we are lowering the
number of states from 30 to 15. As one commenter observed, eliminating
the buffer also simplifies the requirements of the exemption.\447\
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\440\ See amended rule 203A-2(d); supra section II.A.5.c.
\441\ See supra note 131.
\442\ See supra note 132.
\443\ See supra note 136.
\444\ See Seward Letter, and Shearman Letter (in each case
supporting the 15-state threshold we proposed, and suggesting the
burdens of maintaining multiple state registrations can be
significant). See also NEA Letter. One of these commenters also
would support further decreasing the number of states to five and
requiring advisers relying on the exemption to have at least $25
million of assets under management. Seward Letter. Another ``would
support an even lower threshold.'' Shearman Letter.
\445\ NASAA Letter (supporting amendment ``as an effort to be
more consistent in the registration requirements for all advisers
when analyzing the thresholds for registration with the SEC or the
states.''); NRS Letter (``Establishing one uniform standard for all
advisers of a 15-state requirement provides a uniform and clear
standard.''). See also NEA Letter (strongly recommending the 15-
state threshold be applied to both small and mid-sized advisers).
\446\ See rule 203A-2(e)(1); supra section II.A.5.c.
\447\ See NRS Letter (``The Dodd-Frank Act has addressed the
multi-state adviser exemption to simplify the requirements of this
exemption.'').
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Elimination of Safe Harbor
We are rescinding, as proposed, rule 203A-4, which has provided 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.\448\ As
discussed above, the safe harbor was designed for smaller advisory
businesses with assets under management of less than $30 million, which
may not employ the same tools or otherwise have a need to calculate
assets as precisely as advisers with greater assets under
management.\449\ We also believe that the revisions we are adopting to
the Form ADV instructions to implement a uniform method for advisers to
calculate assets under management will clarify the requirements and
reduce confusion
[[Page 42981]]
among advisers.\450\ Moreover, the rule is a safe harbor only from our
enforcement actions, and to our knowledge few, if any, advisers have
relied upon it in the 14 years since it was adopted.\451\ We believe
rescinding the safe harbor will simplify our rules in general, thereby
marginally reducing costs of compliance, and will have little, if any,
other effect on efficiency, competition or capital formation.
---------------------------------------------------------------------------
\448\ See rule 203A-4; supra section II.A.6.
\449\ See supra note 140.
\450\ See supra note 141.
\451\ See supra note 142.
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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.\452\ We are providing in the instructions to Form
ADV an explanation of how we construe these statutory provisions.\453\
Our instructions are intended to clarify the meaning of these
provisions, promoting efficiency by mitigating uncertainty about their
meaning. For example, as underscored by commenters, because we are
identifying to advisers filing on the IARD the states that do not
subject advisers to examination, a mid-sized adviser will not be
required to independently determine whether it is subject to
examination in a particular state.\454\ 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.
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\452\ See supra note 145.
\453\ See amended Form ADV: Instructions for Part 1A, instr.
2.b.; supra section II.A.7.
\454\ See NRS Letter (noting ``the wide range of state
regulatory regimes and processes'' and supporting ``efforts to
verify those states which do or will subject advisers to
examinations.''); Sadis Letter (noting different state examination
practices and arguing that clarification of registration
requirements ``is vital to the compliance of mid-sized advisers in
states * * * which do not have routine examination programs in place
for its investment advisers.'').
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2. Exempt Reporting Advisers: Sections 407 and 408
Congress gave us broad authority under sections 203(l) and 203(m)
of the Advisers Act to require exempt reporting advisers to file
reports as necessary or appropriate in the public interest or for the
protection of investors.\455\ To implement these new sections of the
Advisers Act, we are adopting new rule 204-4, as proposed, that
requires exempt reporting advisers to submit to us, and to periodically
update, reports that consist of a limited subset of items on Form
ADV.\456\ We are also adopting the amendments we proposed to Form ADV
to permit the form to serve as both a reporting and registration form
and to specify the seven items that exempt reporting advisers must
complete.\457\
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\455\ See sections 407 and 408 of the Dodd-Frank Act, codified
as new sections 203(l) and 203(m) of the Advisers Act.
\456\ New rule 204-4(a); amended Form ADV: General Instructions
3 and 4. See supra section II.B.
\457\ See supra section II.B.2.
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While the benefits of the reporting requirement under new rule 204-
4 are difficult to quantify, we believe they are substantial. The
information exempt reporting advisers provide on Form ADV will be
beneficial to both the Commission and investors. This information will
help us to identify exempt reporting advisers, their owners, and their
business models and will provide us with information as to whether
these advisers or their activities might present concerns sufficient to
warrant our further attention in order to protect their clients,
investors, and other market participants.\458\ The reports, which will
be publicly available, will also provide investors with some basic
information about these advisers and their businesses. Several
commenters agreed, expressing general support for the proposed
reporting requirements.\459\
---------------------------------------------------------------------------
\458\ One commenter agreed. ABA Committees Letter.
\459\ See, e.g., AFL-CIO Letter; CII Letter; NRS Letter; Better
Markets Letter; ABA Committees Letter; NASAA Letter.
---------------------------------------------------------------------------
Under rule 204-4, exempt reporting advisers are required to file
their Form ADV reports electronically through the IARD.\460\ We believe
that using Form ADV and the IARD for exempt reporting adviser reports
will yield several important benefits. For instance, using Form ADV and
the IARD creates efficiencies that benefit both us and filers by taking
advantage of an established and proven filing system, while avoiding
the expense and delay of developing a new form and filing system.
Several commenters agreed,\461\ and one explained that, in its view,
there is ``no reason to create a new form or filing system when the
existing ones have been designed for use by advisers and are suitable
for that purpose.'' \462\ In addition, because an exempt reporting
adviser 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
exempt reporting advisers because they can satisfy multiple filing
obligations through a uniform form.\463\ Commenters agreed with our
expectation that 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.\464\ Finally, certain items in Form ADV Part 1
are also linked to Form BD, which will create efficiencies if the
exempt reporting adviser were to apply for broker-dealer
registration.\465\
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\460\ New rule 204-4(b) and (d).
\461\ See, e.g., AFL-CIO Letter; Better Markets Letter; NRS
Letter; NASAA Letter. Responding to our request for comment
regarding the possible use of EDGAR in place of the IARD, one
commenter argued that ``[s]uch an approach would be confusing and
burdensome for any adviser that transitions between [exempt
reporting adviser] and SEC-registered status.'' ABA Committees
Letter.
\462\ ABA Committees Letter.
\463\ See supra note 170 and accompanying text.
\464\ See ABA Committees Letter; Better Markets Letter; NRS
Letter; NASAA Letter. Form ADV, as amended, permits 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. See amended Form ADV: General Instruction 15
(providing procedural guidance to advisers that no longer meet the
definition of exempt reporting adviser).
\465\ Form BD is the Uniform Application for Broker-Dealer
Registration. 17 CFR 249.501.
---------------------------------------------------------------------------
Requiring exempt reporting advisers to file their reports through
the IARD will also benefit investors, prospective investors, and other
members of the public who can readily access the information, without
cost, through the Commission's Web site on the Investment Adviser
Public Disclosure (IAPD) system. Investors will have access to some
information that may have been previously unavailable or not easily
attainable, such as whether an exempt reporting adviser has certain
disciplinary events and whether its affiliates present conflicts of
interest or allow broader access to other financial services.
Several commenters supported the public availability of exempt
reporting adviser reports as beneficial to the protection of
investors.\466\ Investor advocacy groups, for instance, lauded the
Commission's initiative to create, for the first time, a database of
public information on advisers to private investment funds.\467\ Others
added that an investor would be better able to perform due diligence if
the information were made available to the public,\468\
[[Page 42982]]
and could make an informed decision regarding the integrity of a
prospective adviser if he or she were able to review the disciplinary
history of the exempt reporting adviser and its employees.\469\ In
addition, requiring 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 amendments
to Form ADV below.\470\
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\466\ AFL-CIO Letter; CII Letter; Better Markets Letter.
\467\ Id.
\468\ Merkl Implementing Letter.
\469\ CII Letter.
\470\ See infra notes 483-488 and accompanying text.
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We have considered the broad public interest in making this
information generally available, and we agree with commenters who
assert there will be important benefits of providing information about
these advisers to the public. In addition to furnishing us with
important data about the private funds advised by exempt reporting
advisers that we can use to identify practices that may harm
investors,\471\ and to administer our regulatory programs, these
reports will create a publicly accessible foundation of basic
information that could aid investors and prospective investors in
conducting due diligence and could further help investors and other
industry participants protect against fraud.\472\ The easy availability
of information about these advisers and their advisory affiliates may
also 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.
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\471\ For instance, census data about a private fund's
gatekeepers, including administrators and auditors, would be
available on amended 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); 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).
\472\ See infra section V.A.3.
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Electronic reporting by exempt reporting advisers of certain items
within Form ADV will give us better access to information about these
advisers, which will improve the administration of our regulatory
programs and allow us to identify advisers whose activities suggest a
need for closer scrutiny. We routinely use the IARD to generate reports
on the advisory industry, its characteristics and trends. These reports
would help us anticipate regulatory problems, identify potential
conflicts of interest, allocate our resources, and more fully evaluate
various regulatory actions we may consider taking, which should
increase both the efficiency and effectiveness of our programs and thus
increase investor protection.
We are also amending 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.\473\ As amended, rule 204-1 requires an exempt
reporting adviser, like a registered adviser, to amend its reports on
Form ADV: (i) at least annually, within 90 days after the end of the
adviser's fiscal year; and (ii) more frequently, if required by the
instructions to Form ADV. Similarly, we are amending General
Instruction 4 to Form ADV to require an exempt reporting adviser, like
a registered adviser, to update promptly Items 1 (Identification
Information), 3 (Form of Organization), and 11 (Disciplinary
Information) if they become inaccurate in any way, and to update Item
10 (Control Persons) if it becomes materially inaccurate.\474\
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\473\ Amended rule 204-1. See supra section II.B.4.
\474\ See Form ADV: General Instruction 4.
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Requiring advisers to amend and update their reports assures that
we have access to updated information. For example, these updates will
allow us to know when an exempt reporting adviser has added or no
longer advises a private fund client or has reported a disciplinary
event, which will provide us with the information necessary to assess
whether the adviser might present sufficient concerns to warrant our
further inquiry. Updated information also benefits investors,
prospective investors, and other members of the public that could use
this information in evaluating, for example, whether to invest in a
venture capital fund managed by an exempt reporting adviser. Many
commenters who addressed updating and amendment requirements agreed
with our approach to update the report annually and to amend it
according to the same schedule as is applicable to registered
advisers.\475\
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\475\ See NRS Letter (expressing general support); Merkl
Implementing Letter (stating that less frequent reporting would
result in information that is less useful or materially inaccurate);
CII Letter (expressing general support); ABA Committees Letter
(asserting that information reported by exempt reporting advisers
that is allowed to become significantly outdated or inaccurate would
not serve the Commission's or public's interest or protect investors
as mandated by the Dodd-Frank Act, and could be misleading).
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When an adviser ceases to be an exempt reporting adviser, new rule
204-4 requires the adviser to file an amendment to its Form ADV to
indicate that it is filing a final report.\476\ Final report filings
will allow us and the public to distinguish such a filer from one that
is failing to meet its filing obligations.\477\ Commenters who
addressed the proposal to require a final report endorsed the
Commission's approach.\478\
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\476\ New rule 204-4(f); Form ADV: General Instruction 15. See
section II.B.5.
\477\ New rule 204-4(f). Advisers filing a final report are
required only to update Item 1 of Part 1A of Form ADV and are not
required to pay a filing fee. An adviser that failed to file a final
report would violate rule 204-4(f).
\478\ ABA Committees Letter (agreeing that a final report is a
reasonable way for an exempt reporting adviser to notify the
Commission that it is no longer an exempt reporting adviser and
endorsing the concept of allowing exempt reporting advisers that are
transitioning to registration to use a single Form ADV filing for
the purposes of submitting their final report and their application
for registration); Merkl Implementing Letter (indicating that the
Commission should not require some other approach than a final
report when an adviser ceases to be an exempt reporting adviser).
---------------------------------------------------------------------------
To accommodate their use by exempt reporting advisers, we also are
making technical amendments to Form ADV-H, the form advisers use to
request a hardship exemption from electronic filing,\479\ and Form ADV-
NR, the form certain non-resident advisers use to appoint the Secretary
of the Commission as an agent for service of process.\480\ Rule 204-
4(e) and the amendments to Form ADV-H benefit exempt reporting advisers
by allowing them to avoid non-compliance with reporting requirements
based purely on unanticipated technical difficulties. The amendments to
Form ADV-NR 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. Commenters did not
[[Page 42983]]
specifically address these changes to Form ADV-H and ADV-NR.
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\479\ New rule 204-4(e) allows exempt reporting advisers having
unanticipated technical difficulties that prevent submission of a
filing to the IARD to request a temporary hardship exemption from
electronic filing requirements.
\480\ See amended Form ADV-H; amended Form ADV-NR; amended Form
ADV: General Instruction 19. The amendments to Form ADV-H and Form
ADV-NR 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.
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3. Form ADV Amendments
As discussed above, we are adopting amendments to Form ADV that
will require advisers to provide us additional information about: (i)
The private funds they advise, (ii) their advisory business and
conflicts of interest, and (iii) their non-advisory activities and
financial industry affiliations.\481\ We are also adopting 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, which addresses certain incentive-based
compensation arrangements.
---------------------------------------------------------------------------
\481\ See supra section II.C.
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Private Fund Reporting Requirements
We are adopting amendments to Item 7.B. and Schedule D of Form ADV
that expand the information advisers must report to us about the
private funds they advise. This reporting will 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 markets. The information will also assist
us in identifying particular practices that may harm investors and will
allow us to conduct targeted examinations of private fund advisers
based on these practices or other criteria. The amended reporting 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. Responses to the service provider questions will
also allow us to identify private funds that do not make use of
independent service providers and provide other key information
regarding the identity and role of these private fund gatekeepers.
Advisers are required to report the gross asset value of the fund,
which will help us understand the scope of its operations.\482\ While
no particular item of information may by itself indicate an elevated
risk of a compliance failure, the reporting as a whole 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.
---------------------------------------------------------------------------
\482\ See amended Form ADV, Part 1A, Schedule D, Section
7.B.(1)A., question 11.
---------------------------------------------------------------------------
Several commenters agreed with our assessment that the new
information will allow us to identify harmful practices, improve risk
assessment and more efficiently target examinations,\483\ and a U.S.
Senator added that the data would aid the Financial Stability Oversight
Council in monitoring systemic risk.\484\ In its comment letter, NASAA
wrote that ``the information required of these advisers will be of
critical importance to regulators in identifying practices that may
harm investors.'' One commenter who criticized certain aspects of the
proposal nonetheless conceded that ``these disclosures would assist the
Commission in seeking to achieve these goals [protecting against fraud
and assisting in systemic risk evaluation].'' \485\
---------------------------------------------------------------------------
\483\ See infra note 265.
\484\ Sen. Levin Letter.
\485\ Seward Letter.
---------------------------------------------------------------------------
Prospective and current private fund investors will also benefit
from the public disclosure of this expanded private fund reporting.
Private fund advisers must report information about their business,
affiliates, owners, gatekeepers, and disciplinary history. This will
create a publicly accessible foundation of basic information that could
aid investors in conducting due diligence and could further help
investors and other industry participants protect against fraud. For
example, investors (and their consultants) will be able to compare
representations made on Schedule D with those made in private offering
documents or other materials provided to prospective investors. Fund
service providers, such as administrators and auditors, may review the
information that advisers report in order to uncover false
representations regarding the identity of service providers.\486\ Some
commenters agreed that the public availability of private fund data
would aid investors.\487\ We continue to believe that public disclosure
of this information will be valuable to investors precisely because
they will be able to compare the Form ADV information to the
information they have received in offering documents and as a result of
due diligence.\488\
---------------------------------------------------------------------------
\486\ See Implementing Proposing Release, supra note 7, at n.149
and accompanying text.
\487\ See, e.g., AFL-CIO Letter; CII Letter; Better Markets
Letter (each lauding the Commission's initiative to create, for the
first time, a database of public information on private investment
funds).
\488\ See supra note 270. See, e.g., Merkl Implementing Letter
(noting that a potential investor would be better able to perform
due diligence if the information were made available to the public).
---------------------------------------------------------------------------
The expanded private fund reporting will also benefit investors and
market participants by providing us and other policy makers with
improved data. This data will 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 industry, including for the protection of private fund investors.
Today, we frequently have to rely on data from other sources, when
available. Private fund reporting will provide us with important
information about this rapidly growing segment of the U.S. financial
system.
Other Amendments to Form ADV
We are adopting other amendments to Form ADV that refine or expand
existing questions. These changes will give us a more complete picture
of an adviser's practices, help us better understand an adviser's
operations, business and services, and provide us with more information
to determine an adviser's risk profile and prepare for examinations.
The information reported will help us to identify practices that may
harm clients, including by detecting data or patterns that suggest
further inquiry may be warranted and distinguishing additional
conflicts of interest that advisers may face. For example, the new
reporting on related persons will allow us to link disparate pieces of
information to which we have access 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 amendment that requires advisers to switch from ranges to
approximate numbers of employees; although this change refines data we
previously received, it will enable us to better develop risk-based
profiles of advisers. The expanded list of activities in which an
adviser might engage will help us better understand the operations of
advisers. Additionally, requiring advisers to report whether they have
$1 billion or more in assets will help us to identify the advisers that
could be subject to rules regarding certain excessive incentive-based
compensation arrangements required by section 956 of the Dodd-Frank
Act. Overall, the information to be collected on amended Form ADV is
designed to improve our risk-assessment capabilities and help us
improve our allocation of examination resources. Commenters who
addressed these proposed amendments to Form
[[Page 42984]]
ADV expressed general support.\489\ One commenter, for instance, agreed
that these amendments will improve our ability to gather data about
firms, to conduct appropriate inquiries, inspections, and other
activities based on that data, and to focus examination and enforcement
resources on those advisers that appear to present greater compliance
risks.\490\ Another indicated that the additional information the
amended form will collect would assist the Commission to identify fund
advisers, to verify the existence and location of assets and to carry
out general market surveillance.\491\
---------------------------------------------------------------------------
\489\ See supra note 216.
\490\ See IAA General Letter.
\491\ See CPIC Letter.
---------------------------------------------------------------------------
Advisory clients and prospective clients will also benefit from the
changes to Form ADV. As one commenter indicated, information reported
on Form ADV is publicly available, allowing investors to use the IAPD
as a resource in evaluating potential managers and understanding their
practices.\492\ For example, clients and prospective clients will be
able to see whether an adviser or one of its control persons is a
public reporting company registered under the Exchange Act and then
access additional public information about the adviser and/or the
control person on the EDGAR system. Requiring an adviser to report
whether it has $1 billion or more of assets helps to inform the
adviser, its clients and the public whether or not the adviser may be
subject to section 956 of the Dodd-Frank Act and any rules or
guidelines thereunder. The additional information about the adviser's
related persons will assist investors that 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 will also be able
to access the new information reported in filings of the amended form,
allowing academics, businesses, and others to access additional
information about registered investment advisers and exempt reporting
advisers, which they can use to study the advisory industry.
---------------------------------------------------------------------------
\492\ CPIC Letter.
---------------------------------------------------------------------------
Among the amendments to Form ADV are improvements to its
instructions. We expect these changes to assist advisers in determining
their regulatory assets under management and whether they are eligible
or required to register with us, which may result in cost savings for
some advisers because they may more readily be able to make this
determination.\493\ Eliminating the choices we have given advisers in
the Form ADV instructions for calculating assets under management, for
example, provides for a uniform method of determining assets under
management for purposes of the form and the new exemptions from
registration under the Advisers Act. These updates will also include,
for the first time, specific instructions on how to determine the
amount of private fund assets an adviser has under management. We
expect that these changes will promote competition, increase certainty
when an adviser chooses to rely on an exemption from registration, and
improve consistency in reporting across the industry.\494\ Some of the
technical amendments we are adopting, such as those to Item 9, are
designed, at commenter request, to alleviate adviser confusion.\495\
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\493\ See section II.A.3.
\494\ See id. See also Exemptions Adopting Release at sections
II.B.2., II.C., II.C.5. (discussing exemption for foreign private
advisers and certain private fund advisers).
\495\ See supra section II.C.5. We are also making a technical
amendment to Form ADV-E to reflect the requirement that the
accountant's report be filed electronically. Staff notified advisers
in November 2010 that the IARD system had been programmed to accept
Form ADV-E. See 2009 Custody Release, supra note 310 at n.53 and
accompanying text (establishing the requirement for Form ADV-E to be
filed electronically, explaining that accountants performing
surprise examinations should continue paper filing of Form ADV-E
until the IARD system is programmed to accept Form ADV-E, and noting
that advisers would be informed when that programming was
completed). This technical change will alleviate adviser confusion
about the appropriate filing method for this form.
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4. Amendments to Pay to Play Rule
We are making two amendments to the pay to play rule that we
believe are appropriate as a result of the enactment of the Dodd-Frank
Act.\496\ First, we are amending the rule to make it continue to apply
to advisers that previously relied on the ``private adviser''
exemption, including exempt reporting advisers and foreign private
advisers.\497\ We are making 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.\498\ We do not believe that this amendment
will create any benefits (or costs) beyond those created by the rule as
originally adopted,\499\ but rather will merely assure that the rule
continues to apply to the same advisers as we intended when we adopted
the rule.
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\496\ See section II.D.1.
\497\ Rule 206(4)-5(a). See section II.D.1.
\498\ See supra section II.D.1. 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 note 4,
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.
\499\ See Pay to Play Release, supra note 340, at section IV.
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Second, we are amending the rule to add municipal advisors to the
categories of registered entities--referred to as ``regulated
persons''--excepted from the rule's prohibition on advisers paying
third parties to solicit government entities.\500\ To qualify as a
``municipal advisor'' (and thereby a ``regulated person''), a solicitor
must be registered under section 15B of the Securities Exchange Act and
subject to pay to play rules adopted by the MSRB.\501\ Notably, for
municipal advisors to qualify as ``regulated persons,'' we must find
that applicable MSRB pay to play rules: (i) impose substantially
equivalent or more stringent restrictions on municipal advisors than
the pay to play rule imposes on investment advisers; and (ii) are
consistent with the objectives of the pay to play rule.\502\
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\500\ See amended rule 206(4)-5(a)(2)(i)(A), (f)(9). ``Regulated
persons'' also include registered investment advisers and broker-
dealers subject to the rules of a registered national securities
association, such as FINRA, that has adopted pay to play rules that
the Commission determines satisfy the criteria of amended rule
206(4)-5(f)(9)(iii)(B).
\501\ See amended rule 206(4)-5(f)(9)(iii).
\502\ See amended rule 206(4)-5(f)(9)(iii)(B).
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Our amendment will continue to permit advisers to pay two other
categories of persons to solicit government entities on their behalf--
investment advisers and broker-dealers--so long as such third parties
are registered with us and subject to pay to play rules of their
own.\503\ Due to the fact that the definition of a municipal advisor
may include categories of persons other than registered investment
advisers and broker-dealers, our amendment may increase the number of
solicitors that an adviser could hire.\504\ This could benefit
[[Page 42985]]
advisers by increasing competition in the market for solicitation
services and reducing the cost of such services. It could also benefit
those solicitors that are not registered investment advisers or broker-
dealers, but may meet the municipal advisor definition, by allowing
advisers to hire them.
---------------------------------------------------------------------------
\503\ Pay to Play Release, supra note 340, at section
II.B.2.(b).
\504\ Our current ``regulated person'' definition does not
include, for example, advisers prohibited from registering with the
Commission under section 203A of the Advisers Act, such as state-
registered advisers, or advisers unregistered in reliance on an
exemption other than section 203(b)(3) of the Act. 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 allowing advisers to choose from a broader set of
potential third party solicitors, we believe our amendments may
promote efficiency and competition in the market for advisory
services to the extent third party solicitors that are not
registered investment advisers or broker-dealers participate.
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5. Advisers Previously Exempt Under Section 203(b)(3)
We are adopting a transition provision in rule 203-1 for advisers
that are newly required to register due to the Dodd-Frank Act's repeal
of the ``private adviser'' exemption in section 203(b)(3).\505\
Specifically, under rule 203-1(e), an adviser that was relying on, and
was permitted to rely on, the ``private adviser'' exemption in section
203(b)(3) on July 20, 2011, may delay registering with the Commission
until March 30, 2012.\506\ The transition period will provide these
advisers with needed additional time to work through any technical
issues associated with applying for registration and to establish
compliance with Advisers Act provisions and rules to which they are
newly subject as advisers required to register.\507\ As such, we
believe that the temporary extension of the registration deadline
provided by rule 203(e)-1 will assure an orderly transition to
registration that will minimize costs to these advisers--costs that
could otherwise be passed on to clients. We believe that maintaining an
orderly transition process promotes efficiency and may reduce the costs
of filing an initial application for registration and coming into
compliance with Advisers Act provisions and rules to which these
advisers are newly subject.
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\505\ See rule 203-1(e); section 203(b)(3) of the Advisers Act;
supra section III.B.2.
\506\ See rule 203-1(e); supra note 385.
\507\ We received a number of comment letters requesting that
these advisers have additional time after July 21, 2011 (the date
the Dodd-Frank Act's repeal of the section 203(b)(3) private adviser
exemption becomes effective) to become registered and to establish
compliance with all provisions of the Advisers Act and rules
thereunder to which they are newly subject by virtue of their
required registration. See CompliGlobe Letter; MFA Letter; Schnase
Letter; Shearman Letter.
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B. Costs
1. Eligibility To Register With the Commission: Section 410
Transition to State Registration
Rule 203A-5 will impose one-time costs on certain 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.\508\ According to IARD data,
approximately 11,500 investment advisers are registered with us and
will be required to file an amended Form ADV,\509\ and approximately
3,200 of those advisers will be required to withdraw their registration
and register with one or more state securities authorities.\510\ As we
discuss below, although all SEC-registered advisers will be required to
file Form ADV, we estimate that only 3,900 of them will have to make an
additional filing not in the usual course of business.\511\
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\508\ See new rule 203A-5; supra section II.A.1.
\509\ Based on IARD data as of April 7, 2011, 11,504 investment
advisers are registered with the Commission. We have rounded this
number to 11,500 for purposes of our analysis.
\510\ According to data from the IARD as of April 7, 2011, 3,531
SEC-registered advisers either: (i) had assets under management
between $25 million and $90 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
$90 million and are not relying on an exemption from registration.
We estimate that 350 of these advisers will not switch to state
registration because their principal office and place of business is
located in Minnesota, New York, or Wyoming. See supra note 152
(according to IARD data as of April 7, 2011, there were 63 mid-sized
advisers in Minnesota, 286 in New York, and 1 in Wyoming). As a
result, we estimate that approximately 3,200 advisers will switch to
state registration. 3,531 SEC-registered advisers--350 advisers not
switching to state registration = 3,181 advisers. In the
Implementing Proposing Release, we estimated that approximately
4,100 SEC-registered advisers would be required to withdraw their
registrations and register with one or more state securities
authorities, based on IARD data as of September 1, 2010. See
Implementing Proposing Release, supra note 7, at n.15. We have
lowered our estimate by 900 advisers to account for the advisers
that have between $90 million and $100 million of assets under
management that may remain registered with us as a result of the
amendments we are adopting to rule 203A-1, the advisers that have
withdrawn their registrations with us since that time, and as
discussed above, the advisers that will not switch registration
because they have a principal office and place of business in
Minnesota, New York or Wyoming. See supra note 22.
\511\ Based on IARD data as of April 7, 2011, 10,636 advisers
reported on Form ADV a December 31 fiscal year end, of which we
estimate approximately 3,013 will file a Form ADV to comply with the
Form ADV filing requirement of new rule 203A-5 before switching to
state registration because they reported assets under management of
less than $90 million and either: (i) they did not indicate on Part
1A of Form ADV that they are relying on an exemption from the
prohibition on Commission registration; or (ii) they do not have a
principal office and place of business in Minnesota, New York or
Wyoming. Additionally, 868 advisers reported a fiscal year end other
than December 31 and will file an additional, other-than-annual
amendment to comply with new rule 203A-5. 3,013 + 868 = 3,881. We
have rounded this number to 3,900 for purposes of our analysis. The
revised PRA burden for Form ADV includes the annual amendment filing
by the approximately 7,623 advisers with a December 31 fiscal year
end that we estimate will remain registered with us after the switch
because they reported assets under management of more than $90
million, indicated on Part 1A of Form ADV that they are relying on
an exemption from the prohibition on Commission registration, or
have a principal office and place of business in Minnesota, New York
or Wyoming. See infra section VI.B. We have rounded this number to
7,600 for purposes of our analysis.
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Some commenters argued that we should decrease the costs of
proposed rule 203A-5 by exempting advisers unaffected by the statutory
changes from the Form ADV filing requirement,\512\ or only requiring
advisers to report their assets under management.\513\ As discussed
above, we believe there are significant benefits of requiring all
advisers to file Form ADV, including having each adviser confirm its
eligibility for Commission registration in light of multiple statutory
and rule changes, and allowing us and the state regulatory authorities
to easily and efficiently identify the advisers that are transitioning
to state registration and the advisers that are remaining registered
with the Commission.\514\ We also note that commenters' concerns also
should be allayed by the new March 30, 2012 deadline for filing Form
ADV that will coincide with most advisers' required annual updating
amendment, eliminating the requirement that they file an additional
amendment to their Form ADV,\515\ and that will coincide with the
filing requirements for newly registering private fund advisers.\516\
In addition, providing additional flexibility for an adviser to choose
the date by which it must calculate its assets under management
reported on Form ADV further reduces the cost of the filing and
promotes uniformity by
[[Page 42986]]
requiring the same 90 day period as in Form ADV today.\517\ We believe
that the rule will have little impact on competition among advisers
registered with us because they will all be subject to these
requirements, but the rule could have an impact of limited duration on
competition between advisers registered with us as of July 21, 2011 who
are subject to the rule, and state-registered advisers who are
not.\518\ We also believe that the rule will have little, if any,
effect on capital formation.
---------------------------------------------------------------------------
\512\ ICI Letter (recommending exempting advisers that do not
rely on assets under management to register with the SEC); MFA
Letter (recommending exempting private fund advisers that file an
initial Form ADV by July 21); NYSBA Committee Letter (recommending
exempting advisers who will continue to be eligible for Commission
registration and advisers relying on the section 203(b)(3) exemption
that we proposed would have to register with the Commission by July
21, 2011).
\513\ Shearman Letter.
\514\ See supra section II.C.
\515\ See supra note 511.
\516\ See MFA Letter (``Requiring private fund managers to file
two Form ADV's would be costly, inefficient and potentially
confusing.''). See also supra section III.
\517\ See new rule 203A-5(b); Form ADV: Instructions for Part
1A, instr. 5.b.(4). Several commenters that requested more
flexibility asserted that the use of end of quarter numbers
precludes an administrate burden for many advisers that value assets
on a quarterly basis because most advisers already value assets
quarterly to calculate fees. See, e.g., Altruist Letter; NYSBA
Committee Letter; Seward Letter; Shearman Letter.
\518\ For example, the rule requires mid-sized advisers
registered with us on July 21, 2011 to remain registered (unless an
exemption from Commission registration is available) until they
switch to state registration in 2012. See supra note 23. All of
these advisers must file an amended Form ADV with us by March 30,
2012, and any advisers maintaining dual registrations with the SEC
and states will incur renewal fees and compliance costs to maintain
both registrations until the beginning of 2012. See, e.g., infra
note 543. Mid-sized advisers that are not registered with us on July
21, 2011 will not have similar costs.
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For purposes of calculating the currently approved Paperwork
Reduction Act (``PRA'') burden for Form ADV, we estimated that an
annual updating amendment will take each adviser approximately 6
hours,\519\ and we estimate the one-time transition amendment will have
a similar burden. In addition, for purposes of the increased PRA burden
for Form ADV, we estimate that the amendments to Part 1A of Form ADV
will take each adviser approximately 4.5 hours, on average, to
complete.\520\ As a result, we estimate a total average time burden of
10.5 hours for each adviser completing the amendment to Form ADV
required by rule 203A-5 (excluding private fund information which is
addressed below).\521\ We estimate that each adviser will incur average
costs of approximately $2,667.\522\
---------------------------------------------------------------------------
\519\ See infra section VI.B.2.a.iii.
\520\ See infra sections VI.B.1.a.
\521\ 6 hours (Form ADV amendment) + 4.5 hours (new Form ADV
items) = 10.5 hours.
\522\ 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 Securities Industry Financial
Markets Association's Management & Professional Earnings in the
Securities Industry 2010 (``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 $235 and $273 per hour, respectively. (5.25
hours x $235 = $1,233.75) + (5.25 hours x $273 = $1,433.25) =
$2,667.
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Proposed rule 203A-5 would have required all advisers registered
with us on July 21, 2011 to file a Form ADV amendment, in addition to
the amendment that each adviser is required to file annually,\523\ and
we estimated that 11,850 advisers would file the form.\524\ To address
commenters' concerns about the burdens of an additional filing,\525\ we
modified the rule so that approximately 7,600 advisers that will remain
registered with the SEC after the transition will satisfy the Form ADV
filing requirement by filing their annual amendment following their
fiscal year ending on December 31, 2011.\526\ This reduces the number
of advisers that will file an additional Form ADV attributable to the
rule 203A-5 to approximately 3,900.\527\ As a result, the total
aggregate cost of the Form ADV filing requirement will be approximately
$10,401,300.\528\ In addition, of these 3,900 registered advisers, we
estimate that 850 advise one or more private funds and will have to
complete the private fund reporting requirements.\529\ We expect this
will take 8,373 hours,\530\ in the aggregate, for a total cost of
$2,126,742.\531\ As a result, the total estimated costs associated with
filing amended Form ADV as required by rule 203A-5 will be
$12,528,042.\532\
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\523\ See proposed rule 203A-5(a).
\524\ See Implementing Proposing Release, supra note 7, at n.293
and accompanying text.
\525\ See supra note 414 and accompanying text.
\526\ See supra note 511.
\527\ See id.
\528\ 3,900 advisers x $2,667 = $10,401,300.
\529\ Based on IARD data as of April 7, 2011, 839 advisers out
of the estimated 3,700 current SEC-registered advisers that advise
private funds do not have a December fiscal year end or are expected
to switch to state registration. We have rounded this number to 850
for purposes of this analysis.
\530\ Based on IARD data as of April 7, 2011, we estimate that
approximately 52 percent of these 850 private fund advisers, or 442,
currently advise an average of 3 private funds each; 43 percent, or
365 advisers, currently advise an average of 10 private funds each;
and the remaining 5 percent, or 43 advisers, currently advise an
average of 79 private funds each. See infra note 697 and
accompanying text. (442 advisers x 3 funds x 1 burden hour per fund)
+ (365 x 10 funds x 1 burden hour per fund) + (43 advisers x 79
funds x 1 burden hour per fund) = 1,326 hours + 3,650 hours + 3,397
hours = 8,373 hours.
\531\ (4,186.5 hours x $235) + (4,186.5 x $273) = $983,827.5 +
$1,142,914.5 = $2,126,742. 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 522.
\532\ $10,401,300 (total cost for Form ADV filing excluding
private fund reporting) + $2,126,742 (total cost for private fund
reporting) = $12,528,042 (total cost for Form ADV filing).
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For the estimated 3,200 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.\533\ An adviser will likely use compliance clerks to prepare the
filings and review the prepared Form ADV-W.\534\ We estimate that each
adviser will incur average costs of approximately $16.75 \535\ to
comply with the Form ADV-W filing requirements, for a total one-time
cost of $53,600.\536\ As a result, rule 203A-5 will result in a total
one-time cost of $12,581,642.\537\
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\533\ Form ADV-W is designed to accommodate the different types
of withdrawals an investment adviser may file. An investment adviser
ceasing operations will complete the entire form to withdraw from
all of the 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 will omit certain items
that we do not need from an adviser continuing in business as a
state-registered adviser. We expect that advisers required to file
Form ADV-W will 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.
\534\ We have assumed for purposes of the current approved PRA
burden for rule 203-2 and Form ADV-W that advisers will use clerical
staff to file a partial withdrawal. Data from the Securities
Industry Financial Markets Association's Office Salaries in the
Securities Industry 2010 (``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 $67.
\535\ 0.25 hours x $67 (hourly wage for clerk) = $16.75 (total
cost for Form ADV-W filing).
\536\ $16.75 x 3,200 = $53,600.
\537\ $12,528,042 (total cost for Form ADV filing) + $53,600
(total cost for Form ADV-W filing) = $12,581,642 (total cost for new
rule 203A-5).
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Switching Between State and Commission Registration
We are adopting amendments to rule 203A-1 to eliminate the $5
million buffer that 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.\538\ Specifically, the
amendment will require advisers with between $25 million and $30
million in assets under management that relied on the buffer to switch
their registration to the states.\539\ As of April 7, 2011,
approximately 300 advisers registered
[[Page 42987]]
with the Commission had between $25 million and $30 million of assets
under management.\540\ Because the Dodd-Frank Act has amended section
203A to prohibit approximately 240 of these advisers from registering
with the Commission, we believe that 240 advisers will see increased
costs as a result of the amendment.\541\ 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 240 advisers are
included in our discussion above of the Form ADV-W filing requirement
under rule 203A-5.\542\ These advisers also will incur the costs of
state registration and of compliance with state laws and regulations,
which we expect will vary widely depending on the number of, and which,
states with which each adviser is required to register. For example,
individual state registration fees generally range from approximately
$60 to $400 annually, and some states require advisers to submit
documentation in addition to Form ADV.\543\
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\538\ See amended rule 203A-1(a); supra section II.A.4.
\539\ See supra section II.A.4. Under the Dodd-Frank Act, a mid-
sized adviser (with at least $25 million of assets under management)
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 will
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.
\540\ Based on IARD data as of April 7, 2011, 305 advisers
registered with the Commission had between $25 million and $30
million of assets under management. We have rounded this number to
300 for purposes of this analysis.
\541\ See supra section II.A. (discussing new section 203A(a)(2)
of the Advisers Act, which prohibits certain mid-sized advisers from
registering with the Commission). Based on IARD data as of April 7,
2011, 242 advisers registered with the Commission had between $25
million and $30 million of assets under management. For purposes of
this analysis, we have rounded this number to 240 and assume that
all of these advisers will not remain eligible to register with the
Commission because they will 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 Advisers Act section 203A(a)(2) (as amended by the
Dodd-Frank Act); supra section II.A.7.b. (discussing the fact that
each state securities commissioner (or official with similar
authority) advised our staff whether investment advisers registered
in the state will be subject to examination as an investment adviser
by that state's securities commissioner (or agency or office with
similar authority)). All state securities authorities other than
Minnesota, New York, and Wyoming have advised our staff that
advisers registered with them are subject to examination. See supra
note 152.
\542\ See supra notes 533-536 and accompanying text (addressing
the costs of filing Form ADV-W for advisers that will be required to
withdraw their registrations).
\543\ See, e.g., 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; Ohio Rev. Code Sec. 1707.17(B)(3) (2010) ($100
registration fee); Ark. Code Sec. 23-42-304(a)(3) (2010) ($300
registration fee); Texas State Securities Board, Check Sheet For a
Sole Proprietor Corporation LLC or Partnership Applying For
Registration as an Investment Adviser ($275 registration fee and
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; 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) (among other things, states review registrants'
disclosure history, financial status, business practices, and
provisions in client contracts).
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The buffer we are adopting for mid-sized advisers with assets under
management of close to $100 million may marginally increase costs for
advisers initially as they determine how to comply with the new
requirements and complete the amended Form ADV,\544\ but, as
underscored by several commenters, the buffer decreases costs for
advisers in the aggregate.\545\ As discussed above, the buffer permits
mid-sized advisers to determine whether and when to switch between
state and Commission registration, which will prevent costs and
disruption for these advisers to frequently switch their
registrations.\546\ We believe these amendments will have little, if
any, effect on capital formation.
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\544\ The PRA burdens for Form ADV and rule 203A-5 include a
burden of 4.5 hours per adviser to complete the amended Form ADV,
including the assets under management calculation and eligibility
requirements. See infra sections IV.B.1. and IV.C.
\545\ Several commenters argued that the buffer would decrease
costs, for example, by preventing advisers with close to $100
million of assets under management from having to switch to and from
Commission registration frequently. See, e.g., Altruist Letter;
Dezellem Letter; Dinel Letter; FSI Letter; ICW Letter; JVL
Associates Letter; Merkl Implementing Letter; NRS Letter; Wealth
Coach Letter; and WJM Letter.
\546\ See supra notes 427-428 and accompanying text.
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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 \547\ may
impose costs on some of the approximately 325 advisers that currently
rely on the exemption.\548\ These costs, which include those associated
with withdrawing their registration with the Commission and registering
with the states, if required, will 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 325 advisers relying
on the exemption will 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.\549\ We have estimated that a partial withdrawal imposes
an average burden of approximately 0.25 hours for an adviser.\550\
Thus, we estimate that the amendment to rule 203A-2(b) associated with
filing Form ADV-W will generate a burden of 12.5 hours \551\ at a cost
of approximately $840.\552\ 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.\553\ We believe the amendment will have little, if any,
effect on capital formation.
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\547\ See amended rule 203A-2(a); supra section II.A.5.b.
\548\ Based on IARD data as of April 7, 2011, 322 SEC-registered
advisers, which we rounded to 325, indicated that they rely on the
exemption for pension consultants by marking Item 2.A.(6) on Part 1A
of Form ADV. 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, therefore, may have to register with the state
securities authorities as a result of the amendment. It is also
difficult to determine whether such advisers will 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.
\549\ Based on IARD data as of April 7, 2011, approximately 190
pension consultants reported assets under management of less than
$90 million, and 166 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 amendment to be one quarter of the advisers with
less than $25 million of assets under management, or 42 advisers
(which is approximately 15 percent of all advisers relying on this
exemption). We have rounded this number to 50 for purposes of our
analysis. We expect that advisers that will be required to file Form
ADV-W will file only a partial withdrawal because they will be
registering with the states. See supra note 533. 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.
\550\ See supra note 533.
\551\ 50 responses on Form ADV-W x 0.25 hours = 12.5 hours.
\552\ 12.5 hours x $67 = $837.50.
\553\ See supra note 543.
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As discussed above, the amendment to the multi-state adviser
exemption in rule 203A-2(e) will reduce costs for advisers in the
aggregate because more
[[Page 42988]]
advisers will be permitted to register with one securities regulator--
the Commission--rather than being required to register with multiple
states.\554\ Advisers newly relying on the amended exemption will 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. In addition, these advisers will incur costs of
complying with the Advisers Act and our rules.
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\554\ See amended rule 203A-2(d); supra section II.A.5.c.
Several commenters suggested that the burdens of maintaining
multiple state registrations can be significant. See Seward Letter;
Shearman Letter. See also NEA Letter.
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We estimate that, in addition to the approximately 40 advisers that
rely on the exemption currently, approximately 115 will rely on the
exemption as amended.\555\ For purposes of the PRA, we have estimated
that these advisers will 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.\556\ We further estimate that a senior
operations manager will maintain the records at an hourly rate of $331,
resulting in average initial and annual recordkeeping costs associated
with our amendments to rule 203A-2(e) of $2,648 per adviser,\557\ and
total increased costs of approximately $304,520 per year.\558\ Advisers
newly relying on the amended exemption will 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 will incur an average amortized hour burden of approximately
13.58 hours per year,\559\ resulting in costs of approximately $3,450
per adviser \560\ and total increased costs of approximately $396,750
per year.\561\ Additionally, we estimate that approximately 30 of the
newly registering advisers will use outside legal services, and 60 will
use outside compliance consulting services, to assist them in preparing
their Part 2 brochures,\562\ for a cost of $132,000, and $300,000,
respectively, resulting in a total non-labor cost among the newly
registering advisers of $432,000.\563\ The rule 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 will have little, if any, effect on capital
formation.
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\555\ Based on IARD data as of April 7, 2011, of the
approximately 11,500 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 $90 million of assets under management,
approximately 100 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 registration is mandatory
and where registration is voluntary. In addition, we estimate that
15 advisers currently registered with 15 or more states could rely
on the exemption and register with us. Thus, we estimate that
approximately 155 advisers will rely on the exemption (40 currently
relying on it + estimated 100 advisers eligible based on IARD data +
15 advisers required to be registered in 15 or more states that are
not registered with us today).
\556\ These estimates are based on an estimate that each year an
investment adviser will 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 665 and accompanying text.
\557\ 8 hours x $331 = $2,648. The $331 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.
\558\ 115 new advisers relying on the exemption x $2,648 =
$304,520.
\559\ See infra note 695 and accompanying text.
\560\ We expect that the performance of this function will most
likely be equally allocated between a senior compliance examiner at
$235 per hour and a compliance manager at $273 per hour. See infra
note 579. (6.79 hours x $235 = $1,596) + (6.79 hours x $273 =
$1,854) = $3,450.
\561\ 115 advisers relying on the exemption x $3,450 = $396,750.
\562\ We estimate that a quarter of medium-sized advisers seek
the help of outside legal services and half seek the help of
compliance consulting services. See section VI.B.2.a.iv. As
discussed above, we have estimated that 115 new advisers will begin
relying on the exemption, in addition to the 40 advisers that
currently rely on it. See supra note 555. 0.25 x 115 new advisers
relying on the exemption = 28.75 advisers seeking outside legal
services. 0.5 x 115 new advisers relying on the exemption = 57.5
advisers seeking compliance consulting services. We have rounded
these numbers to 30 and 60, respectively, for the purpose of this
analysis.
\563\ We estimate that the initial cost related to preparation
of Part 2 of Form ADV would be $4,400 for legal services and $5,000
for compliance consulting services for those medium-sized advisers
who engage legal counsel or consultants. See infra note 729 and
accompanying text. (30 advisers seeking outside legal services x
$4,400 for legal services) + (60 advisers seeking compliance
consulting services x $5,000 for compliance consulting services) =
$132,000 for legal services + $300,000 for compliance consulting
services = $432,000. The currently approved burden associated with
Form ADV already accounts for similar estimated costs to be incurred
by current registrants. See id.
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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 are providing in Form
ADV an explanation of how we construe these provisions.\564\ We do not,
however, believe that they will generate costs independent of any costs
associated with Congress' enactment of section 203A(a)(2), and will
have little, if any, effect on capital formation.
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\564\ See supra section II.A.7.
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2. Exempt Reporting Advisers: Sections 407 and 408
While we believe that our approach to implementing the Dodd-Frank
Act's reporting provisions applicable to exempt reporting advisers will
minimize costs inherent in such reporting, we acknowledge that it will
impose costs on these advisers.\565\ These costs include filing fees,
although not significant, paid for submitting initial and annual
filings through the IARD. We anticipate that filing fees, which the
Commission will consider separately, will be the same as those for
registered investment advisers, which currently range from $40 to $225
based on the amount of assets an adviser has under management.\566\ In
order to estimate the costs associated with filing fees, we assume for
purposes of this analysis that exempt reporting advisers will pay a fee
of $225 per initial or annual report.\567\ We estimate that
approximately 2,000 advisers will qualify as exempt reporting advisers
pursuant to section 203(l) of the Advisers Act, as added by the Dodd-
Frank Act, and rule 203(m)-1 thereunder, and will have to file Form ADV
on the IARD.\568\ As a result, we
[[Page 42989]]
expect exempt reporting advisers to incur a total annual cost of
approximately $450,000 in filing fees.\569\
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\565\ See amended rule 204-1 and new rule 204-4; amended Form
ADV, Part 1A; supra section II.B.
\566\ The current fee schedule for registered advisers may be
found on our Web site at http://www.sec.gov/divisions/investment/iard/iardfee.shtml. We amended this fee schedule in December 2010.
See Order Approving Investment Adviser Registration Depository
Filing Fees, Investment Advisers Act Release No. 3126 (Dec. 22,
2010), available at http://www.sec.gov/rules/other/2010/ia-3126.pdf.
\567\ This is the fee applicable to registered advisers with
$100 million or more in assets under management. There will be no
fee for filing an other-than-annual amendment to a report.
\568\ See infra note 734. 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 in
advance the precise number of these advisers that will choose to
register rather than report. Therefore, in order to avoid under-
estimating the costs of these amendments, we are using the total
number of potential exempt reporting advisers in our estimates.
\569\ 2,000 exempt reporting advisers x $225 per year =
$450,000. Advisers pay for initial Form ADV submissions and for
annual amendments; there is no charge for an interim amendment.
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In addition to filing fees, exempt reporting advisers will incur
internal costs associated with collecting, reviewing, reporting, and
updating a limited subset of Form ADV items in Part 1A, including Items
1, 2.B., 3, 6, 7, 10, 11 and corresponding schedules. We expect this
cost to be substantially less than that incurred by registered advisers
because exempt reporting advisers are not required to complete the
remainder of Part 1A or Part 2 of Form ADV. The costs of completing the
relevant items of Form ADV will vary from adviser to adviser, depending
in large part on the number of private funds an adviser manages.
We believe, and several commenters confirmed, that the information
these items require should be readily available to any adviser
(particularly the identifying, private fund and control person
information required by Items 1, 3, 7.B. and 10), which mitigates the
costs and burdens of reporting.\570\ Similarly, Item 6 requires the
adviser to indicate if it engages in other specific business
activities, information which we believe should also be readily
available to these advisers. Item 2.B. elicits the information an
exempt reporting adviser would already have gathered for purposes of
determining if it is eligible for an exemption from registration under
section 203(l) of the Act or rule 203(m)-1 thereunder, and as such,
this item should impose few, if any, costs to complete. Commenters who
addressed Section 7.A. of Schedule D urged that we limit the reporting
of related persons, which could be significant in the case of advisers
that are part of a large organization.\571\ Many of these commenters
pointed out that in some cases the adviser and its clients have no
business dealings with some affiliates and thus there is less of a
chance of conflicts developing.\572\ We agree and have revised the
proposed item to permit an adviser to omit reporting about certain
related persons in a manner that is similar to the approach suggested
by a commenter.\573\ We are neither reducing nor eliminating the
disciplinary reporting requirements that we proposed in Item 11, and no
commenters suggested that we do so.\574\ Although we believe, as noted
above, that the information an adviser needs to complete Section
7.B.(1) is readily available in fund offering documents, we acknowledge
that this Section of Form ADV could be time-consuming to complete,
particularly for an exempt reporting adviser's initial filing,
depending on the number of funds the exempt reporting adviser manages.
The primarily check-the-box style of this item and most of the other
items exempt reporting advisers must complete, as well as some of the
features of the IARD (such as drop-down boxes for common responses and
the ability to pre-populate responses) should help decrease the average
completion time for these advisers. Based on views expressed by some
commenters,\575\ we expect the changes we are adopting to Section
7.B.(1) (including the removal of some of the questions that commenters
identified as most burdensome) that reduce the amount of information
required in respect of private funds \576\ will also alleviate concerns
that the reports require too much information or that the requirements
will impose excessive burdens.\577\
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\570\ See ABA Committees Letter (``We expect that most [exempt
reporting advisers] will already have most of the information
requested by Form ADV Part 1 readily available.''); Merkl
Implementing Letter (confirming that the disclosure requirements
would not impose a significant burden on advisers). See also, with
respect to private fund reporting under Item 7.B. specifically,
Katten Foreign Advisers Letter (``Virtually all of the requested
information would already have been provided to investors in the
fund through an offering document or follow up status reports.'')
and NRS Letter (arguing that the expanded private fund disclosures
on Schedule D would ``replicate the due diligence questionnaire
information * * * '').
\571\ See, e.g., Shearman Letter.
\572\ See IAA General Letter.
\573\ See supra note 300 and accompanying text.
\574\ Indeed, one commenter that urged us to substantially
reduce the amount of information these advisers are required to
report did not advocate to eliminate disciplinary reporting. Village
Ventures Letter.
\575\ See supra note 570.
\576\ See supra section II.C.1. We are adopting Form ADV with
several other changes from the proposal, some of which will affect
the reporting by exempt reporting advisers. See section II.C. for
details concerning these changes to Form ADV.
\577\ AIMA Letter; Avoca Letter; BCLBE Letter; Shearman Letter;
Village Ventures Letter. A broader discussion about the costs
associated with Section 7.B.(1) appears below. See infra section
V.C.3.
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For purposes of the PRA, we estimate that exempt reporting
advisers, in the aggregate, will spend 16,000 hours to prepare and
submit their initial reports on Form ADV.\578\ Based on this estimate,
we expect that exempt reporting advisers will incur costs of
approximately $4,064,000 to prepare and submit their initial report on
Form ADV.\579\ Additionally, for PRA purposes, we estimate that exempt
reporting advisers in the aggregate will spend 2,200 hours per year on
amendments to their filings and on final filings.\580\ Based on this
estimate, we expect that exempt reporting advisers will incur costs of
approximately $558,800 to prepare and submit annual amendments to their
reports on Form ADV and final filings.\581\ One commenter argued that
these estimates should include costs of retaining outside counsel to
review the disclosures.\582\ We disagree. Exempt reporting advisers are
only required to complete a limited subset of Part 1A of Form ADV. As
noted above, this part of the form generally calls for readily
available information to be reported as approximate numerical
responses, as short answers, or by checking a box. Unlike Part 2 of
Form ADV, which requires free-form narrative responses, we do not
believe that advisers will require outside legal advice in order to
provide the factual information that Part 1A requires.\583\ Commenters
who asserted that our estimates were too low did not provide empirical
data by which to recalculate our estimates, making it difficult to
evaluate these assertions or determine the magnitude by which their
estimates would differ from ours.\584\ The changes we are making from
the proposal will reduce the amount of information that advisers must
file and
[[Page 42990]]
result in decreased burdens for advisers from the proposal. However, in
light of the general comments we received about burdens we are not
reducing our burden estimates.\585\
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\578\ See infra note 738; infra section VI.B.1.b.
\579\ 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 $235 and $273 per hour, respectively.
(8,000 hours x $235 = $1,880,000) + (8,000 hours x $273 =
$2,184,000) = $4,064,000. 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.
\580\ See infra note 744.
\581\ (1,100 hours x $235 = $258,500) + (1,100 hours x $273 =
$300,300) = $558,800.
\582\ See BCLBE Letter.
\583\ Certain items in Part 1A of Form ADV call for information
about which an adviser may consult with outside legal counsel, such
as the exemption on which the adviser relies (Item 2.B.) or the
exemption on which the adviser's private fund relies (Section
7.B.(1) of Schedule D, question 4). These determinations, however,
are part of the adviser's compliance burdens associated with and
accounted for as a part of other regulatory requirements (e.g., rule
203(m)-1) and are not, therefore, costs associated with the
reporting requirements we are adopting today.
\584\ See, e.g., Village Ventures Letter (asserting that the
Commission's ``relatively modest cost estimates * * * understate the
true costs that will be required to assure compliance * * *''); AV
Letter; Avoca Letter; Debevoise Letter.
\585\ See supra notes 246, 247, 262, 300, 302 and accompanying
text for a discussion of these modifications. Some of the estimates
provided in this section differ from those provided in the
Implementing Proposing Release, but these differences reflect
updated information regarding employment costs and the number of
advisers subject to the reporting, not a change in the estimated
time an adviser would spend on the reporting or the out-of-pocket
costs an adviser would incur.
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In the Implementing Proposing Release we discussed that the
reporting requirements we are adopting may result in other non-
quantifiable additional costs for exempt reporting advisers. For
example, the new disclosure requirements could influence the business
or other decisions of exempt reporting advisers, such as whether to
form additional private funds or manage private funds at all. In
addition, some of the information made available to the public, such as
the identification of owners of the adviser or disciplinary
information, may 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 was not typically made available to
others previously. Commenters neither agreed nor disagreed with these
costs.\586\
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\586\ Several commenters argued that while the reporting may be
valuable to the Commission, making the information publicly
available would provide little benefit to investors, and they
asserted that the benefits were insufficient to justify the costs.
See BCLBE Letter; NRS Letter; Seward Letter.
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Several commenters argued that public reporting would be
inconsistent with the intent of the Dodd-Frank Act exemptions for these
advisers.\587\ They did not, however, identify any specific costs
associated with these concerns. As discussed above, we do not believe
public reporting is inconsistent with the intent of the Dodd-Frank Act.
Congress sought to protect only certain proprietary or sensitive
information submitted by advisers about their private funds in reports
for the assessment of systemic risk.\588\
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\587\ Avoca Letter; ABA Committees Letter; Shearman Letter.
\588\ See supra notes 196-197 and accompanying text.
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Some commenters expressed concern that certain of the information
we proposed be publicly reported also could include proprietary or
competitively sensitive information regarding private funds.\589\ One
such commenter's competitive concerns related to such things as access
to human resource talent among venture capital fund advisers, and
composition of a venture capital fund's investor base, control persons
and strategic relationships.\590\ These commenters, however, did not
identify any specific costs associated with these concerns. As
discussed elsewhere in this Release, we have responded to these
concerns by declining to adopt questions we had proposed that
commenters found most burdensome and persuaded us may likely be
proprietary or competitively sensitive.\591\
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\589\ See, e.g., MFA Letter; NVCA Letter; O'Melveny Letter.
Another commenter, however, refuted these competitive concerns,
stating that none of the items that exempt reporting advisers would
complete would require the disclosure of proprietary or
competitively sensitive information. Merkl Implementing Letter.
\590\ NVCA Letter. As noted above, while this information could
result in competitive effects among these advisers, the effects are
not unique to these advisers, and they may result in benefits. See
supra note 200.
\591\ See supra notes 238-247 and accompanying text.
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Finally, some commenters expressed concern that access to this
information by the general public may cause confusion because an exempt
reporting adviser's information would be displayed using the same
search function in the IAPD that is used to search registered
advisers.\592\ These commenters, however, did not identify any specific
costs associated with these concerns. We are working with FINRA, our
IARD contractor, to ensure that the IAPD search results distinguish
between an exempt reporting adviser and a registered adviser.
---------------------------------------------------------------------------
\592\ Shearman Letter; Seward Letter. See also supra note 172
and accompanying text.
---------------------------------------------------------------------------
Completing and filing Form ADV-H and Form ADV-NR will also impose
costs on exempt reporting advisers. In the Implementing Proposing
Release, we estimated that approximately two exempt reporting advisers
would file Form ADV-H annually and that it would impose an average
burden per response of one hour, for an increase in the total annual
hour burden associated with Form ADV-H of two hours.\593\ We did not
receive comments on these estimates and continue to believe they are
appropriate. We further estimate that for each hour required by the
form, professional staff time will comprise 0.625 hours, and clerical
staff time will comprise 0.375 hours. We estimate the hourly wage for a
compliance manager to be $273 per hour,\594\ and the hourly wage for
general clerks to be $50 per hour.\595\ Accordingly, we estimate the
average cost per response imposed on exempt reporting advisers by rule
204-4 and amended Form ADV-H will be $189,\596\ for a total annual cost
of $378.\597\ This represents a decrease of $28 from our estimate in
the Implementing Proposing Release, which is attributable to updated
wage and salary information.
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\593\ See Implementing Proposing Release, supra note 7, at
sections IV.B, V.F. 2 responses x 1 hour = 2 hours.
\594\ 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 $273 per hour.
\595\ 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 $50 per
hour.
\596\ (0.625 hours x $273) + (0.375 hours x $50) = approximately
$189.
\597\ $189 per response x 2 responses annually = $378.
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With regard to Form ADV-NR, we continue to estimate that exempt
reporting advisers will file Form ADV-NR at the same annual rate (0.17
percent) as advisers registered with us.\598\ Thus, we estimate that
the amendments will be filed by approximately three exempt reporting
advisers annually,\599\ imposing an annual burden of approximately
three hours.\600\ We further estimate that for each hour required by
the form, compliance clerk time will comprise 0.75 hours and general
clerk time will comprise 0.25 hours.\601\ Therefore, we estimate that
the amendments to Form ADV-NR will impose approximately $188 in total
additional annual costs for exempt reporting advisers.\602\ This
represents an increase from our estimate in the Implementing Proposing
Release, which is attributable to updated wage and salary information.
---------------------------------------------------------------------------
\598\ See infra text accompanying note 776.
\599\ 0.17% (rate of filing) x 2,000 estimated exempt reporting
advisers = 3 exempt reporting advisers filing Form ADV-NR.
\600\ 3 exempt reporting advisers filing Form ADV-NR x 1 hour
per Form ADV-NR = approximately 3 hours. In calculating the costs of
our amendments to Form ADV-NR in the Implementing Proposing Release,
we subtracted cost savings resulting from the Dodd-Frank Act's
reduction in the number of total registered advisers (and the
commensurate reduction in Form ADV-NR filings) from the total costs
associated with completing and filing Form ADV-NR. See Implementing
Proposing Release, supra note 7, at section IV.B. We now believe,
however, that it is more accurate to calculate the costs of our
amendments to Form ADV-NR without subtracting these savings directly
attributable to the Dodd-Frank Act.
\601\ 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 $50 per
hour and cost for a Compliance Clerk is approximately $67 per hour.
\602\ 3 hours x ((0.75 hours x $67) + (0.25 hours x $50)) =
approximately $188.
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[[Page 42991]]
3. Form ADV Amendments
The costs of completing these new and amended items will vary among
advisers.\603\ One-time monetary costs we expect certain current
registrants to incur to complete the amendments we are adopting to 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 (1) 7,600 current registrants with a December 31 fiscal year end
that we expect to remain registered with us,\604\ or (2) 700 \605\
advisers we expect will register with us within the next year as a
result of normal annual growth of our population of registered
advisers.\606\ We estimate these 8,300 advisers will spend, on average,
4.5 hours to respond to the new and amended questions we are adopting
today (other than the private fund reporting, which is discussed
below),\607\ at an aggregate cost of $9,486,900.\608\
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\603\ We note that we do not estimate there to be costs
associated with the technical amendment we are making to Form ADV-E
to reflect the obligation that the accountant's report be filed
electronically because those costs were addressed in the 2009
Custody Release. Staff notified advisers in November 2010 that the
IARD system had been programmed to accept Form ADV-E. See 2009
Custody Release, supra note 310 at n.53 and accompanying text
(establishing the requirement for Form ADV-E to be filed
electronically, explaining that accountants performing surprise
examinations should continue paper filing of Form ADV-E until the
IARD system is programmed to accept Form ADV-E, and noting that
advisers would be informed when that programming was completed).
\604\ See supra note 511.
\605\ See infra note 691.
\606\ Of the 9,750 advisers we estimate will remain registered
or will be newly registered with us after the transition filing, the
one-time monetary costs of filing Form ADV that we estimate will be
borne by approximately 700 advisers with a fiscal year end other
than December 31 are discussed above in section V.B.1. The one-time
monetary costs that we estimate will be borne by the remaining 9,050
advisers are discussed here (8,300 discussed in this paragraph + 750
discussed in the next). For a discussion of our PRA estimate of
9,750 advisers, see note 655 below and section VI.B.2.a.i. below.
\607\ See infra section VI.B.1.a. 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
adopting 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.
\608\ 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 $235 and $273 per hour, respectively.
8,300 advisers x 4.5 hours = 37,350 hours. (18,675 hours x $235 =
$4,388,625) + (18,675 hours x $273 = $5,098,275) = $9,486,900.
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In our PRA analysis, we also project that 750 new advisers will
register with us as a result of the Dodd-Frank Act's elimination of the
private adviser exemption.\609\ Because this group of advisers was not
formerly required to register with us, we have not previously accounted
for the costs to them of completing and submitting Form ADV. As a
result, rather than the incremental burden of 4.5 hours per adviser
used in our estimates above, we expect that these advisers will spend
the full 40.74 hours per adviser filing their initial reports on Form
ADV (other than the private fund reporting, which is discussed
separately below).\610\ These advisers will also spend time preparing
and filing interim updating amendments to the form, preparing brochure
supplements and delivering codes of ethics to clients. In the
aggregate, we expect that these 750 private fund advisers will spend
37,905 hours on these activities,\611\ for a total cost of
$9,627,871.\612\
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\609\ See Implementing Proposing Release, supra note 7, at n.375
and accompanying text.
\610\ See infra IV.B.1. of this Release.
\611\ 750 advisers x (40.74 hours per adviser to complete entire
form (except private fund reporting requirements) + (1 annual
updating amendment x 6.0 hours) + (1 interim updating amendment per
year x 0.5 hours) + 1 hour on new brochure supplements + 1 hour on
interim amendments to brochure supplements + 1.3 hours delivering
codes of ethics to clients) = 37,905 hours. See infra notes 679,
709, 710 and accompanying text.
\612\ (18,952.5 hours x $235 = $4,453,838) + (18,952.5 hours x
$273 = $5,174,033) = $9,627,871. 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 608.
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Commenters that addressed burdens associated with amendments to
Form ADV (other than private fund reporting discussed separately below)
focused on costs associated with gathering information necessary to
complete proposed Item 5.D. and Section 7.A. of Schedule D.\613\ These
commenters did not specifically address our estimates or provide
empirical data by which to recalculate these estimates. We are making
changes from the proposal that will reduce the amount of information
that advisers must file and result in decreased burdens for advisers
from the proposal.\614\ However, in light of the general comments we
received about burdens we are not reducing our burden estimates.
---------------------------------------------------------------------------
\613\ See, e.g., IAA General Letter; Shearman Letter.
\614\ See supra sections II.C.2 and II.C.3.
---------------------------------------------------------------------------
In addition to the costs to complete Form ADV for which we account
above, some registered advisers will be required to file information
regarding the private funds they advise. Specifically, filings will be
required by: (i) 2,850 of the 7,600 current registrants with a December
31 fiscal year end that we expect to remain registered with us; \615\
(ii) 200 of the 700 advisers we expect will register with us within the
next year as a result of normal annual growth of our population of
registered advisers; \616\ and (iii) 750 private fund advisers
registering as a result of the elimination of the private adviser
exemption. We estimate this will take 33,500 hours \617\ for a total
cost of $8,509,000.\618\ Most of the commenters that addressed Form ADV
costs focused on these private fund reporting requirements,
particularly where valuation or ownership information would be
required.\619\ Several commenters wrote that the burden of the proposed
reporting would be significant.\620\ As a whole, these commenters
suggested that the costs of the proposed amendments would outweigh the
benefits, but only a few disagreed with the Commission's estimates of
those costs, which they considered too low.\621\ Although we believe,
as noted above, that the information an adviser needs to complete
Section 7.B.(1) is readily available in fund offering documents, we
acknowledge that this Section of Form ADV could be time-consuming to
complete, particularly for an adviser's initial filing, depending on
the number of funds the adviser manages. The primarily check-the-box
and short-answer style of Section 7.B.(1), as well as some of the
features of the IARD (such as drop-down boxes for common responses and
ability to pre-populate responses) should help to decrease the average
completion time for these advisers. Based on views expressed by some
commenters,\622\ we expect these factors will alleviate concerns of
other commenters, who argued that the reports require too much
information or that the requirements would impose
[[Page 42992]]
significant burdens.\623\ In addition, as discussed above, we are
adopting Section 7.B.(1) with several changes (including the removal of
some of the questions that commenters persuaded us may likely be
proprietary or competitively sensitive) that reduce the amount of
information required in respect of private funds.\624\
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\615\ See infra note 696.
\616\ See infra note 699.
\617\ See infra note 703.
\618\ (16,750 hours x $235 = $3,936,250) + (16,750 hours x $273
= $4,572,750) = $8,509,000. 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 608.
\619\ See AIMA Letter; Avoca Letter; BCLBE Letter; Shearman
Letter; Village Ventures Letter.
\620\ See, e.g., AIMA Letter; AV Letter; BCLBE Letter; Debevoise
Letter; Dechert Foreign Adviser Letter; Gunderson Letter; Katten
Foreign Adviser Letter; NRS Letter; Seward Letter; Shearman Letter;
VVL Letter. Several of these commenters were writing with respect to
exempt reporting adviser reporting, but some of their comments would
apply equally to registered advisers. See supra Section V.B.2. for a
discussion of the estimated costs of reporting for exempt reporting
advisers.
\621\ Id.
\622\ See supra note 570.
\623\ AIMA Letter; Avoca Letter; BCLBE Letter; Shearman Letter;
Village Ventures Letter.
\624\ See section II.C.1.
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Based on the foregoing estimates, we expect that the total costs
associated with the completion and submission of all of the amendments
we are adopting to Form ADV, other than estimated costs above related
to the transition described below,\625\ therefore, are
$27,623,771.\626\
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\625\ See section V.B.1.
\626\ $9,486,900 in one-time monetary costs of complying with
amendments we are adopting today for current registrants and newly
registering advisers as a result of normal growth + $9,627,871 in
costs of completing and filing Form ADV (other than private fund
reporting) for the 750 newly registering private fund advisers as a
result of the elimination of the private adviser exemption +
$8,509,000 in aggregate private fund reporting costs attributable to
the foregoing filers = $27,623,771.
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In addition, we estimate for purposes of the PRA that approximately
a quarter (or 350) of the 1,450 advisers estimated to register with us
as a result of normal annual growth and as a result of the elimination
of the private adviser exemption will use outside legal services, and
half (or 725) will use outside compliance consulting services, to
assist them in preparing their Part 2 brochures, for a total cost of
$1,540,000, and $3,625,000, respectively, resulting in a total non-
labor cost among all these newly registering advisers of
$5,165,000.\627\
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\627\ See infra note 732 an accompanying text. 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 section VI.B.2.iv.
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A few commenters objected to the amount of information required by
Form ADV as a result of the amendments we proposed and suggested
streamlining the form or eliminating what they saw as duplicative
reporting.\628\ We acknowledge some overlap in information required to
be reported, but note that the two parts of Form ADV serve different
purposes and that overlap in some cases may be necessary so that
investors receiving a brochure are provided with full information about
a practice or conflict, and that we are able to collect data on the
matter for regulatory purposes. We believe that the information
required by most of these items should be readily available to any
adviser, and several commenters confirmed our belief.\629\ The check-
the-box style of most of these items, as well as some of the features
of the IARD (such as drop-down boxes for common responses) should also
help minimize costs by reducing the average completion time. The
changes we are making from the proposal will, as a whole, reduce the
amount of information that advisers must file and result in decreased
burdens for advisers.\630\ However, in light of the general comments we
receive about burdens we are not reducing our burden estimates.
---------------------------------------------------------------------------
\628\ See IAA General Letter (citing page 48 of the Implementing
Proposing Release and stating that it ``do[es] not agree that the
new requirements `should impose few additional regulatory burdens.'
''). See also NRS Letter and Seward Letter, arguing that parts of
the proposed amendments would result in duplicative reporting.
\629\ See, e.g., supra note 570.
\630\ See supra notes 245-247, 262, 286, 300, 302 and
accompanying text for a discussion of these modifications. Some of
the estimates provided in this section differ from those provided in
the Implementing Proposing Release, but these differences reflect
updated information regarding employment costs and the number of
advisers subject to the reporting, not a change from the proposed
estimate of time an adviser would spend on the reporting or the out
of pocket costs an adviser would incur.
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The amendments to Form ADV that we are adopting will also result in
other costs, none of which commenters specifically addressed. For
instance, changes to the instructions on calculating regulatory assets
under management, and rule 203A-3(d), will cause some advisers to
report greater assets under management than they do today and 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 revised instructions, they would
report $100 million or more in assets under management.\631\
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\631\ 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 are also amending Form ADV to require advisers to private funds
to use the market value of private fund assets, or the fair value of
private fund assets where market value is unavailable, for determining
regulatory assets under management.\632\ Advisers to private funds that
do not use fair value methodologies will likely incur costs to comply
with the requirement to report the fair value of those assets on Form
ADV, which could (but is not required to) include reliance on a third
party or outside valuation service. We anticipate that these costs will
vary, but 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.\633\ Based on registered advisers'
responses to Items 5.D., 7.B., and 9.C. of Form ADV,\634\ we estimate
that approximately 3% of registered advisers have at least one private
fund client that may not be audited.\635\ These advisers therefore may
incur costs to fair value their private fund assets.\636\ We estimate
that approximately 4,270 registered advisers have, or after registering
with us will have, at least one private fund client.\637\ We therefore
estimate that approximately 130
[[Page 42993]]
registered advisers may incur costs as a result of the fair value
requirement.\638\ We estimated in the Implementing Proposing Release
that an adviser without the internal capacity to value specific
illiquid assets would obtain pricing or valuation services from an
outside administrator or other service provider at a cost ranging from
$250 to $75,000 annually.\639\ Commenters did not address these
estimates and for reasons discussed above, we continue to believe they
are accurate.\640\ Accordingly, we estimate that the 130 advisers would
incur costs of $37,625 each on an annual basis, which is the middle of
the range of estimated fair value costs, for an aggregate annual cost
of $4,891,250.\641\
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\632\ See Form ADV: Instructions for Part 1A, inst. 5.b.(4).
\633\ For example, an adviser to a hedge fund 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 a
private equity fund 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 with respect to private fund assets.
\634\ Item 5.D. asks advisers to identify the types of clients
they have, including clients that are pooled investment vehicles.
Item 7.B. asks if the adviser or its related person is a general
partner in an investment-related limited partnership or manager of
an investment-related limited liability company, or if the adviser
advises any other ``private fund.'' Item 9.C. asks whether an
independent public accountant audits annually the pooled investment
vehicles that the adviser manages and if audited financial
statements are distributed to investors in the pools.
\635\ A fund that is relying on the audit provision in our
custody rule will have provided the fair value of its assets in its
audited financial statements that are prepared in accordance with
GAAP.
\636\ We note, however, that at least some of these advisers may
currently fair value private fund assets. For instance, funds that
do not prepare financial statements in accordance with GAAP (which
is required to rely on an exception in our custody rule) may
nonetheless use a fair value standard other than that specified in
GAAP and thus may not incur any additional costs. See supra notes
98-99 and accompanying text (explaining that while many advisers
will calculate fair value in accordance with GAAP or another
international accounting standard, other advisers acting
consistently and in good faith may utilize another fair valuation
standard).
\637\ Based on IARD data as of April 7, 2011. 3,320 current SEC-
registered advisers to private funds remaining registered with the
SEC + 750 newly registering private fund advisers as a result of the
elimination of the private adviser exemption + 200 additional
advisers to private funds each year = 4,270 advisers.
\638\ 4,270 x 0.03 = 128.1.
\639\ See Implementing Proposing Release, supra note 7, at n.369
and accompanying text.
\640\ See supra section II.A.3.
\641\ 130 x $37,625 = $4,891,250.
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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.
There may also be, as discussed below, competitive effects of this
change and other of the amendments to Form ADV. We believe these
changes will have little, if any, effect on capital formation.
In addition, some of the amendments to Form ADV could impose costs,
including potential competitive effects, as information that may not
typically be provided to others becomes publicly available. For
example, for advisers that may previously have only disclosed to
certain clients and prospective clients, or only upon request,
information such as census data about the private funds and the amount
of private fund assets that the adviser manages, disclosure of state
registrations of the adviser's employees, financial industry
affiliates, and the service providers to each private fund that the
adviser manages could be costly. As noted above, some commenters voiced
these types of concerns with respect to private fund disclosures they
consider competitively sensitive or proprietary.\642\ As also discussed
above, we have adopted certain modifications from our proposal that are
designed to address some of these concerns.\643\ The competitive
effects of Form ADV reporting requirements, however, could create
benefits as well as costs. For instance, unregistered advisers will not
incur the expense of producing and reporting publicly this information,
but clients and investors may have greater confidence in advisers that
provide more fulsome disclosure and are subject to our oversight.
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\642\ See supra note 238 and accompanying text.
\643\ See supra notes 245-247 and accompanying text.
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4. Amendment to Pay To Play Rule
Our amendment to include registered municipal advisors in the
definition of ``regulated persons'' excepted from the pay to play
rule's ban on third-party solicitation may result in additional costs
to comply with the rule.\644\ Specifically, advisers that have created
compliance programs based on the original ``regulated person''
definition, which included only registered investment advisers and
broker-dealers, may have to make adjustments to those programs to
account for the broadened definition. But, as explained above, our
amendment will allow them greater latitude in hiring placement agents.
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\644\ See amended rule 206(4)-5(a)(2), (f)(9). As discussed in
section V.A.4., we believe that our amendment to rule 206(4)-5 to
make it apply to exempt reporting advisers and foreign private
advisers will not generate new costs.
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As discussed in section II.D.1 of this Release, we received a
number of comment letters opposing our proposal to replace the
exception for `` regulated persons'' with an exception for registered
municipal advisors.\645\ Among other things, commenters argued that the
amendment would force persons soliciting only on behalf of affiliated
investment advisers to register as municipal advisors, which they
argued would subject them to regulatory requirements unrelated to pay
to play practices and thus impose significant additional and
unnecessary costs.\646\ We are persuaded by commenters and have instead
modified the definition of ``regulated person'' to include registered
municipal advisors, which we believe is a lower-cost means to recognize
this new category of registrant in our rule.
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\645\ See Better Markets Letter; Debevoise Letter; Dechert
General Letter; IAA Pay to Play Letter; ICI Letter; NYSBA Letter;
SIFMA Letter; T. Rowe Price Letter. But see NRS Letter (supporting
the proposal).
\646\ See, e.g., IAA Pay to Play Letter; SIFMA Letter. See also
supra section II.D.1.
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5. Advisers Previously Exempt Under Section 203(b)(3)
The transition provision in rule 203-1(e) for advisers exempt under
the private adviser exemption will impose costs. It will delay the
public disclosure of information about these advisers on Form ADV. As
such, current clients and potential clients will not have access to
this information as quickly as they would without the transition
period.\647\ In addition, rule 203-1(e) will delay the deadline for
these advisers to comply with all of our rules under the Advisers Act
applicable to registered advisers, and thus will delay the full
protection of these rules for clients and potential clients. However,
we believe that providing a short transition period to effect an
orderly transition to registration and full compliance for these
advisers is appropriate. Furthermore, notwithstanding the transition
period, these advisers continue to be subject to the Adviser's Act's
antifraud provisions.\648\
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\647\ We note, however, that the IARD system will not be updated
to reflect our revisions to Form ADV, including the amendments
requiring additional disclosure about private funds, until November.
See infra note 759. Thus, even without regard to rule 203-1(e),
disclosure of this information would be delayed.
\648\ See, e.g., Advisers Act section 206. They are also subject
to antifraud provisions of other Federal securities laws, including
rule 10b-5 under the Securities Exchange act of 1934. See 17 CFR
240.10b-5.
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VI. Paperwork Reduction Act Analysis
Certain provisions of the rules and rule amendments that the
Commission is adopting today contain ``collection of information''
requirements within the meaning of the PRA. In the Implementing
Proposing Release, the Commission solicited comment on the proposed
collection of information requirements. The Commission also submitted
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 adopting
or amending are: (i) ``Exemption for Certain Multi-State Investment
Advisers (Rule 203A-2(d));'' \649\ (ii) ``Form ADV''; (iii) ``Rule
203A-5;'' (iv) ``Rule 0-2 and Form ADV-NR under the Investment Advisers
Act of 1940;'' (v) ``Rule 203-2 and Form ADV-W under the Investment
Advisers Act of 1940;'' (vi) ``Form ADV-H;'' \650\ and (vii) ``Rule
204-2 under the Investment Advisers Act of 1940.'' \651\
[[Page 42994]]
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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\649\ The current title for this collection of information is
``Exemption for Certain Multi-State Investment Advisers (Rule 203A-
2(e))'' which we are re-titling ``Exemption for Certain Multi-State
Investment Advisers (Rule 203A-2(d))'' to reflect the renumbering of
this provision.
\650\ 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 re-titling the collection of information simply ``Form ADV-H.''
\651\ We note that the PRA analysis associated with the
requirement that an accountant's report be filed electronically was
included in our adoption of substantive amendments to that form.
Today, we are making only a technical amendment to Form ADV-E to
conform to that prior rulemaking. See 2009 Custody Release, supra
note 310 at section IV.C.
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While our new rules and rule amendments will 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 number 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 approximately 3,200 registered advisers
switching from Commission to state registration.\652\ 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.\653\ Based on IARD data as of April 7, 2011, we
estimate that approximately 11,500 advisers are currently registered
with the Commission. We further estimate that approximately 700
additional advisers register with the Commission each year.\654\
Therefore, for purposes of 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 9,750.\655\
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\652\ See supra section II.A. (discussing the Dodd-Frank Act's
amendments to section 203A). Based on IARD data as of April 7, 2011,
we estimate that approximately 3,200 will switch to state
registration because they have assets under management of less than
$90 million. This estimate includes approximately 5 advisers that
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.
See supra note 422.
\653\ See Exemptions Adopting Release at section I. (discussing
elimination of the private adviser exemption in section 203(b)(3)).
\654\ 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
approximately 700 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. (3,200 (SEC advisers
withdrawing)/11,500 (total SEC advisers)) x 1000 (number of new
advisers each year) = 0.28 x 1000 = 280 (number of additional new
advisers registering with the states, not the SEC). 1000-280 = 720.
We have rounded this number to 700 for purposes of our analysis.
\655\ 11,500 (total SEC advisers)-3,200 (SEC advisers
withdrawing) + 750 (private advisers registering with the SEC) + 700
(new SEC advisers each year) = 9,750.
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A. Rule 203A-2(d)
Rule 203A-2(d), as amended, exempts certain multi-state investment
advisers from section 203A's prohibition on registration with the
Commission. We have renumbered and amended the exemption to permit all
investment advisers who are required to register as an investment
adviser with 15 or more states to register with the Commission, rather
than 30 states, as currently required.\656\ An adviser relying on this
exemption is 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 for a period of
not less than five years from the filing of a Form ADV relying on the
rule.\657\ We submitted this collection of information to OMB for
review, and OMB has not yet assigned this collection a control number.
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\656\ See amended rule 203A-2(d).
\657\ See amended rule 203A-2(d)(3). An investment adviser
relying on this exemption also will 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 will be required by the laws
of fewer than 15 states to register as an investment adviser with
the state. See amended rule 203A-2(d)(2). The increase in the PRA
burden for Form ADV reflects these requirements. See infra section
VI.B.
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Respondents to this collection of information will be investment
advisers who would be required to register in 15 or more states absent
the exemption (that rely on amended rule 203A-2(d) to register with the
Commission). This collection of information is mandatory for those
advisers. The records kept by investment advisers in compliance with
the rule are necessary for the Commission staff to use in its
examination and oversight program, and the information in these records
generally will be kept confidential.\658\
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\658\ See section 210(b) of the Advisers Act.
---------------------------------------------------------------------------
The amendments to the rule that we are adopting today do not differ
from our proposed amendments. Commenters did not discuss the rule's
collection of information requirements, but generally agreed with our
proposal to align our multi-state exemption for small advisers with the
statutory exemption for mid-sized advisers.\659\ A few, however,
recommended a lower threshold of required state registrations for
eligibility for the multi-state exemption,\660\ but we have determined
not to lower the threshold further in light of the Congressional
determination to set the threshold at 15 states and our stated purpose
to align the rule with the Dodd-Frank Act.\661\
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\659\ See NASAA Letter; NEA Letter; NRS Letter; Pickard Letter;
Seward Letter; Shearman Letter.
\660\ See NEA Letter; Seward Letter; Shearman Letter.
\661\ See supra note 136.
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In the Implementing Proposing Release, the Commission estimated
that approximately 150 advisers would rely on the exemption.\662\ As of
April 7, 2011, there were approximately 40 advisers relying on the
multi-state exemption.\663\ Although it is difficult to determine a
precise number of advisers that will rely on the exemption as amended
because such reliance is entirely voluntary, we estimate that
approximately 155 advisers will rely on the exemption.\664\ These
advisers will 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 will 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
[[Page 42995]]
these records.\665\ Accordingly, the revised total initial and annual
burden of the recordkeeping requirements of rule 203A-2(d) will be
1,240 hours (an additional 920 hours).\666\
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\662\ See Implementing Proposing Release, supra note 7, at
n.382.
\663\ Based on IARD data as of April 7, 2011, of the
approximately 11,500 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.
\664\ Based on IARD data as of April 7, 2011, 100 of the
advisers that have less than $90 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 amended
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 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 155 advisers will rely on the exemption (40
currently relying on it + estimated 100 eligible based on IARD data
+ 15 advisers required to be registered in 15 or more states that
are not registered with us today).
\665\ 0.5 hours x 15 states = 7.5 hours + 0.5 hours = 8 hours.
\666\ 155 advisers relying on the exemption x 8 hours = 1,240
hours. 1,240 new burden hours-320 current burden hours = 920
additional burden hours.
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B. Form ADV
Form ADV (OMB Control No. 3235-0049) is the two-part investment
adviser registration and exempt adviser reporting 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 collected on Form ADV
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 204-4 requires
exempt reporting advisers to file reports with the Commission by
completing a limited subset of items on Form ADV. Rule 204-1 requires
each registered and exempt reporting 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, 275.204-4, and 279.1 and are mandatory.
The paperwork burdens associated with rules 203-1 and 204-1 are, and
the paperwork burdens associated with rule 204-4 will be, 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
exempt reporting advisers.
As discussed above, in order to give effect to provisions in Title
IV of the Dodd-Frank Act, we are amending Part 1A of Form ADV to
reflect the new statutory threshold for registration with the
Commission and to accommodate filings by exempt reporting advisers. In
addition, to enhance our ability to oversee investment advisers, we are
amending Part 1A of Form ADV to require advisers to provide us
additional information regarding: (i) The private funds they advise;
(ii) their advisory business and business practices that may present
significant conflicts of interest; and (iii) their non-advisory
activities and financial industry affiliations.\667\ We are also
adopting certain additional amendments 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, which addresses
certain incentive-based compensation arrangements.
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\667\ See supra section II.C. In addition, we are adopting
several clarifying or minor amendments based on frequently asked
questions we receive from advisers and our experience administering
the form.
---------------------------------------------------------------------------
The currently approved total annual burden of completing, amending,
and filing Parts 1 and 2 of Form ADV is 268,457 hours.\668\ The
currently approved burden is based on an average total hour burden of
36.24 hours per adviser for the first year that an adviser completes
Form ADV. The currently approved total annual cost burden for Form ADV
is $22,775,400, consisting of costs for outside legal and consulting
services associated with initial preparation of Part 2.\669\
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\668\ See section VI of the Part 2 Release at notes 341 and 342
and accompanying text. The approved burden is comprised of 12,658
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.
\669\ These costs are expected to vary based on the size of the
adviser, and we have assumed that fewer than all advisers will use
these services in connection with preparing their initial Part 2
brochures. 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 668, for a discussion of these estimates.
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The amendments we are adopting will increase the information
requested in Part 1A of Form ADV, and we expect that this will
correspondingly increase the average burden to an adviser filing Form
ADV. As we explained in the Implementing Proposing Release, however, we
expect that the total annual burden associated with Form ADV will
experience a net decrease because the reduction in burden resulting
from the decrease in the number of respondents that are registered
advisers will have a greater effect on the total burden than the
increase resulting from the use of the form by exempt reporting
advisers and the additional information required by the amendments to
the form.\670\ We provided initial estimates of the revised burdens and
requested comment on these estimates and our initial PRA analysis in
the Implementing Proposing Release.\671\ As discussed in detail in
sections II.B., II.C., V.A.2., V.A.3., V.B.2 and V.B.3. of this
Release, we received a number of comments that addressed whether the
amendments to the collection of information are necessary for the
proper performance of our functions, whether there are ways to enhance
the quality, utility, and clarity of the information to be collected,
and whether we could further minimize the burden. Only a few commenters
addressed the accuracy of our burden estimates for the proposed
collection of information, and suggesting in general terms that our
estimates were too low.\672\ These commenters did not provide empirical
data or suggest alternatives by which to recalculate our estimates,
making it difficult to evaluate these assertions or determine the
magnitude by which their estimates differ from ours.
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\670\ See Implementing Proposing Release, supra note 7, at
section V.B.
\671\ Id.
\672\ AIMA Letter; BCLBE Letter; Gunderson Letter; IAA General
Letter. See also supra notes 577, 584, 613, 619 and 620.
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To address these and other comments we received, we are adopting
Form ADV with a number of changes that improve the clarity and utility
of the information collected and reduce the amount of information
required by the amendments.\673\ Many of these changes include removing
or re-formulating proposed questions that commenters identified as most
burdensome.\674\ We continue to believe that the check-the-box style of
most of the Form ADV items, as well as some of the features of the IARD
(such as drop-down boxes for common responses and the ability to pre-
populate data), will mitigate the reporting burden, and several
commenters confirmed our assumption that much of the information
required by the amendments should be readily available to most
advisers.\675\ The changes we are making from the proposal will reduce
the amount of information that advisers must file and result in
decreased burdens for advisers from the proposal. However, in light of
the general comments we received about burdens, we are also not
reducing our burden estimates.\676\
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\673\ See section II.C.
\674\ See supra notes 245-247, 262, 286, 300, 302 and
accompanying text.
\675\ See supra note 570.
\676\ Some of the estimates provided in this section differ from
those provided in the Implementing Proposing Release, but these
differences reflect updated information regarding employment costs
and the number of advisers subject to the reporting, not a change to
the proposed estimate of time an adviser would spend on the
reporting or the out-of-pocket costs an adviser would incur.
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[[Page 42996]]
We discuss below, in three sub-sections, the estimated revised
collection of information requirements for Form ADV: first, we provide
estimates for the revised and new burdens resulting from the amendments
to Part 1A; second, we determine how those estimates will be reflected
in the annual burdens attributable to Form ADV; and third, we calculate
the total revised burdens associated with Form ADV.
1. Changes in Average Burden Estimates and New Burden Estimates
a. Estimated Change in Burden Related to Part 1A Amendments (Not
Including Private Fund Reporting)
We are adopting amendments to several items in Part 1A, some that
are merely technical changes or very simple in nature, and others that
will require more of an adviser's time. The paperwork burdens of filing
an amended Part 1A of Form ADV will, 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 will vary among advisers, we believe that the revisions to Part
1A will impose few additional burdens on advisers in collecting
information because advisers should have ready access to all the
information necessary to respond to the revised 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 the amended Form ADV on the 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.
As we explained in the Implementing Proposing Release, in large
part, the changes we are making to Part 1A of Form ADV, including those
to account for the statutory increase in the threshold for Commission
registration, primarily refine or expand existing questions or request
information advisers already have for compliance or fund offering
purposes. For instance, some of the changes to Item 5 require advisers
to provide numerical responses to certain questions about their
employees. An adviser likely already had this information in order to
respond to those questions in the previous version of the form by
checking boxes that correspond to a range of numbers. Likewise, the
amendments to Item 8 require an adviser to expand on information it
provided in response to Item 8 in the previous version of the form,
such as whether the broker-dealers the adviser recommends or has
discretion to select for client transactions are related persons of the
adviser. Other questions expand upon existing requirements to elicit
information advisers already have available for compliance purposes,
such as whether the soft dollar benefits they reported receiving under
the previous version of 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 requires an adviser to report to us its
basis for registration or reporting, as already determined for
compliance purposes. Other amendments to Items 5, 6 and 7 expand lists
of information advisers already provided to us on the previous version
of Form ADV, such as types of advisory activities the advisers perform
and other types of business engaged in by advisers and their related
persons. Amendments to Item 9 better align the information required to
be reported with information advisers have for purposes of complying
with rule 206(4)-2. Finally, we believe that several of the new
questions merely require advisers to provide readily available or
easily accessible information.\677\
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\677\ For example, Item 1 requires advisers to provide contact
information for their Chief Compliance Officers and report whether
they have $1 billion or more in assets; Item 3 requires advisers to
indicate their form of organization. See supra section II.C.6.
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We anticipate that other amended 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 new items will likely present greater burdens for
some advisers but not others, depending on the nature and complexity of
their businesses, such as the requirement to provide a list of the
Commission file numbers of investment companies they advise or
providing expanded information about related person financial industry
affiliates.\678\
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\678\ Advisers may, however, omit certain related persons from
their Schedule D reporting requirements in accordance with our
revised instruction. We expect this change from the proposal will
significantly reduce burdens associated with this item. See supra
note 300.
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We estimate that these amendments, taken as a whole, will require
an average of approximately 4.5 hours per adviser to complete. We have
arrived at this estimate, in part, by comparing the relative complexity
and availability of the information elicited by the amended 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 that the average total collection of
information burden will increase to 40.74 hours per adviser for the
first year that an adviser completes Form ADV (Part 1 and Part 2).\679\
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\679\ 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 Private Fund Reporting Requirements
Revised Item 7.B. and Section 7.B. of Schedule D will provide us
with basic census data on private funds and will permit us to conduct a
more robust risk assessment of private fund advisers for purposes of
targeting our examinations. As discussed in the Implementing Proposing
Release, the information will include fund data such as basic
organizational, operational, and investment characteristics of the
fund; the gross amount of assets held by the fund; and the fund's
service providers, or gatekeepers. We believe much of this information
is 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 the kind of information
that is often included in a private placement memorandum offering fund
shares, and commenters confirmed our understanding.\680\
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\680\ See, with respect to private fund reporting under Item
7.B. specifically, Katten Foreign Advisers Letter (``Virtually all
of the requested information would already have been provided to
investors in the fund through an offering document or follow up
status reports.'') and NRS Letter (arguing that the expanded private
fund disclosures on Schedule D would ``replicate the due diligence
questionnaire information.* * *''). See also ABA Committees Letter
(``We expect that most [exempt reporting advisers] will already have
most of the information requested by Form ADV Part 1 readily
available.''); Merkl Implementing Letter (confirming that the
disclosure requirements would not impose a significant burden on
advisers). See also supra note 570.
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Although we understand that the required information is readily
available to private fund advisers, we expect that these amendments
could subject advisers, particularly those with many private funds, to
a significantly increased paperwork burden. For this reason, as we
explained in the Implementing Proposing Release, we have included
several measures to minimize the increased burden associated with
private fund reporting. First, an adviser will be permitted to
[[Page 42997]]
exclude from its reporting on Section 7.B.(1) of Schedule D any private
fund for which another adviser is filing Section 7.B.(1).\681\ Second,
an adviser managing a master-feeder arrangement will be permitted to
submit a single Schedule D for the master fund and all of the feeder
funds if separately submitted data would otherwise be substantially
identical.\682\ Finally, an adviser with a principal office and place
of business outside the United States may omit from Section 7.B.(1) of
Schedule D any private fund that, during the adviser's last fiscal
year, was not a United States person, was not offered in the United
States and was not beneficially owned by any United States person.\683\
We are also working with FINRA to implement measures in the IARD
intended to minimize the burden for advisers filing amended Form ADV,
such as the ability to automatically pre-populate private fund service
provider information provided for other funds managed by the same
adviser. In addition, although we are generally expanding the
information previously required in Section 7.B.(1), we have removed the
requirement that advisers report the funds that their related persons
manage.
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\681\ See supra note 223.
\682\ See supra note 224 and accompanying text.
\683\ See supra note 225 and accompanying text.
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Considering the changes to Item 7.B. and Section 7.B. of Schedule D
as a whole, as well as our efforts to mitigate the reporting burden and
to make technological upgrades to the IARD, we estimate that each
adviser managing private funds will spend, on average, 1 hour per
private fund to complete these questions.
c. New Estimated Burden Related to Exempt Reporting Adviser Reporting
Requirements
Exempt reporting advisers are required to complete a limited number
of items in Part 1A of Form ADV (consisting of Items 1, 2.B., 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, and
commenters agreed.\684\ As we noted in the Implementing Proposing
Release, the check-the-box style of most of these items, as well as
some of the features of the IARD (such as drop-down boxes for common
responses) should also keep the average completion time for these
advisers to a minimum.\685\ Moreover, in our staff's experience, the
types of advisers that will meet the criteria for exempt reporting
advisers are unlikely to have significantly large numbers of
affiliations, and we do not expect that they will need to report
disciplinary events at a greater rate than currently registered
advisers.\686\ We estimate that these items, other than Item 7.B., will
take each exempt reporting adviser approximately 2 hours to complete.
We anticipate that, like registered advisers, exempt reporting advisers
will each spend 1 additional hour per private fund to complete Item
7.B. and Section 7.B of Schedule D.
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\684\ See supra notes 570 and 680.
\685\ See Implementing Proposing Release, supra note 7, at
section V.B.1.c.
\686\ As of April 7, 2011, approximately 13% of SEC-registered
investment advisers reported a disclosure in Item 11 of Form ADV.
---------------------------------------------------------------------------
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,\687\ we
expect the total number of registered advisers responding to this
collection of information will be 9,750.\688\ Approximately 11,500
investment advisers are currently registered with the Commission.\689\
We expect 3,200 will withdraw from registration.\690\ We expect about
750 advisers who currently rely on the private adviser exemption to
apply for registration with us, and we estimate that approximately 700
new advisers will register with us each year following effectiveness of
the Dodd-Frank Act amendments.\691\
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\687\ See supra section V.B.1.
\688\ See supra note 655.
\689\ Based on IARD data as of April 7, 2011.
\690\ As a consequence of section 410 of the Dodd-Frank Act, we
estimate that approximately 3,200 advisers currently registered with
the Commission will be required to withdraw their registration and
register with one or more state securities authorities. See supra
section V.B.1.
\691\ (3,200 (SEC advisers expected to withdraw from
registration)/11,500 (total SEC advisers)) x 1000 (average number of
new advisers registered with the Commission each year) = 0.28 x 1000
= 280 (number of additional new advisers registering with the
states, not the SEC). 1000-280 = 720. We have rounded this number to
700 for purposes of our analysis. See also supra note 609 and infra
note 734.
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The estimated total annual burden applicable to these registered
advisers, including new registrants, but excluding private fund
reporting requirements, is 397,215 hours.\692\ As discussed in the
Implementing Proposing Release, we believe that most of the paperwork
burden will be incurred in advisers' initial submission of the new and
amended items of Part 1A of Form ADV, and that over time this burden
will decrease substantially because advisers will generally only need
to report updating information.\693\ Amortizing this total burden over
a three-year period to reflect the anticipated average period of time
that advisers will use the revised form will result in an average
estimated burden of 132,405 hours per year,\694\ or 13.58 hours per
year for each new applicant and for each currently registered adviser
that will remain registered with the Commission.\695\
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\692\ 40.74 per-adviser burden x 9,750 = 397,215 hours.
\693\ See Implementing Proposing Release, supra note 7, at
section V.B.2.a.i.
\694\ 397,215/3 = 132,405.
\695\ 132,405/9,750 = 13.58.
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ii. Estimated Initial Hour Burden Applicable to All Registered Advisers
to Private Funds
The amount of time that a registered adviser managing private funds
will incur to complete Item 7.B. and Section 7.B. of Schedule D will
vary depending on the number of private funds the adviser manages. Of
the advisers currently registered with us, we estimate that
approximately 2,850 advise private funds, will remain registered with
us following effectiveness of the Dodd-Frank Act amendments and have a
December 31 fiscal year end.\696\ Based on these advisers' Form ADV
filings, we estimate that 52% of them, or approximately 1,480,
currently advise an average of 3 private funds each; 43%, or
approximately 1,230 advisers, currently advise an average of 10 private
funds each; and the remaining 5%, or approximately 140 advisers,
currently advise an average of 79 private funds each.\697\ As we
discussed above, we estimate that private fund advisers will spend, on
average, 1 hour per private fund completing Item 7.B. and Section 7.B.
of Schedule D. As a result, the
[[Page 42998]]
private fund reporting requirements that will be applicable to
registered investment advisers will add 27,800 hours to the overall
annual burden applicable to registered advisers.\698\
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\696\ IARD data as of April 7, 2011 show that 3,700 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, we estimate that 850 of these 3,700
advisers have a fiscal year end other than December 31 or will
switch to state registration. See supra note 529. With respect to
these 850 advisers, the burden of reporting this information is
accounted for under rule 203A-5. See infra note 768. 3,700-850 =
2,850.
\697\ Based on IARD data as of April 7, 2011. 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.
\698\ (1,480 advisers x 3 hours (3 funds x 1 hour per fund)) +
(1,230 advisers x 10 hours (10 funds x 1 hour per fund)) + (140
advisers x 79 hours x 1 hour per fund)) = 4,440 + 12,300 + 11,060 =
27,800.
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In addition to currently registered private fund advisers, we
estimate that about 200 new private fund advisers will register with us
annually \699\ and that 750 advisers will register with us that
previously relied on the private adviser exemption. We believe that
these 950 newly registering private fund advisers will, on average, be
similar to the currently registered private fund advisers. However, in
contrast to the currently registered advisers, this group is unlikely
to include any advisers managing a large number of private funds. For
example, among the 750 advisers that currently rely on the private
adviser exemption, we would not expect any of them to have more than 14
private fund clients, the most that had been allowed under the
exemption provided by section 203(b)(3) of the Advisers Act. In
addition, for the 200 new private fund advisers that we expect to
register each year, the elimination of the private adviser exemption
means that they will be subject to registration requirements even if
they have only a single private fund client as long as they are not
eligible for another exemption. As a result, we estimate that the
average newly registering private fund adviser will (like the average
currently registered private fund adviser) manage approximately 6
private funds,\700\ but we do not anticipate that any subgroup of these
new registrants will manage a large number of private funds (unlike the
5% of currently registered private fund advisers that we estimate
manage an average of 79 private funds each). Based on these estimates,
we expect that private fund reporting requirements will add 4,500 hours
attributable to the 750 advisers registering because of the elimination
of the private adviser exemption \701\ and 1,200 hours attributable to
private fund advisers registering as a result of normal growth.\702\
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\699\ About 30% of current registrants report that they advise
one or more private funds. (3,700 advisers to private funds/11,500
registered advisers). Applying the same proportion to the 700 new
registrants that we have estimated will register with us annually
results in approximately 200 additional advisers to private funds
each year. (700 x 0.30 = 210).
\700\ 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 April 1, 2010 and reported a fund
reported five or fewer private funds. The average number of private
funds reported by new registrants in the past year is about 6 funds.
\701\ 750 advisers x 6 private funds on average x 1 hour/private
fund = 4,500.
\702\ 200 advisers x 6 private funds on average x 1 hour/private
fund = 1,200.
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The total annual burden related to private fund reporting by
registered advisers is 33,500 hours.\703\ As we discussed in the
Implementing Proposing Release, we believe that most of the paperwork
burden will 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.\704\ 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, results in an average estimated
burden of 11,167 hours per year,\705\ or 2.94 hours per year for each
new private fund adviser and for each private fund adviser currently
registered with the Commission.\706\
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\703\ 27,800 for existing registered advisers + 4,500 for no
longer exempt advisers + 1,200 for estimated new registrants due to
growth = 33,500.
\704\ See Implementing Proposing Release, supra note 7, at
section V.B.2.a.ii.
\705\ 33,500/3 = 11,167.
\706\ 11,167/(2,850 + 200 + 750) = 2.94.
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iii. Estimated Annual Burden Associated With Amendments, New Brochure
Supplements and Delivery Obligations
The currently approved collection of information burden for Form
ADV has three elements not discussed above: (i) The annual burden
associated with annual and other amendments to Form ADV; (ii) the
annual burden associated with creating new Part 2 brochure supplements
for advisory employees and filing interim amendments to existing
brochure supplements throughout the year; and (iii) 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 the amendments we are adopting to Form ADV will 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.\707\
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\707\ We anticipate that the clarification we are making to the
brochure supplement (Part 2B) would not affect this burden estimate.
See note 337 and accompanying text for a discussion of this
clarifying amendment.
---------------------------------------------------------------------------
Based on IARD data, we continue to estimate that, on average, each
adviser filing Form ADV through the IARD will amend its form two times
during the year.\708\ On average, these consist of 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.
In addition, we estimate that each adviser will, on average, spend 1
hour per year making interim amendments to brochure supplements and an
additional 1 hour per year to prepare new brochure supplements as
required by Part 2.\709\ We also expect advisers to continue to spend
an average of 1.3 hours annually to meet obligations to deliver codes
of ethics to clients.\710\ These obligations will add 95,550 hours
annually to the collection of information, consisting of 63,375 hours
attributable to annual and interim updating amendments,\711\ 9,750
hours attributable to interim amendments to brochure supplements,\712\
9,750 hours attributable to the creation of new brochure
supplements,\713\ and 12,675 hours for delivery of codes of
ethics.\714\
---------------------------------------------------------------------------
\708\ Based on IARD data regarding the number of filings of Form
ADV amendments. See Part 2 Release, supra note 67 at n.329.
\709\ See Part 2 Release, supra note 668 at nn.333, 336-37 and
accompanying text.
\710\ Id.
\711\ (9,750 advisers x 0.5 hours/other than annual amendment) +
(9,750 advisers x 6 hours/annual amendment) = 63,375.
\712\ 9,750 advisers x 1 hour = 9,750.
\713\ 9,750 advisers x 1 hour = 9,750.
\714\ 9,750 advisers x 1.3 hours = 12,675.
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iv. Estimated Annual Cost Burden
The currently 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 the amendments we are
adopting to Form ADV will affect the per adviser cost burden estimates
for outside legal and compliance consulting fees, the Dodd-Frank Act's
amendments to sections 203A and 203(b)(3) of the Advisers Act will
result in a significant change to our estimates of the number of
advisers subject to these costs. We discuss this aspect of the annual
cost burden more fully below. In addition to the estimated legal and
compliance consulting fees, we also anticipate that some registered
advisers may incur additional outside costs related to the Form ADV
amendments we are adopting today that require advisers to
[[Page 42999]]
report the fair value of private fund assets.\715\
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\715\ See Form ADV: Instructions for Part 1A, instr. 5.b.(4).
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Advisers to private funds that do not use fair value methodologies
will likely incur costs to comply with the requirement to report the
fair value of those assets on Form ADV, which could (but is not
required to) include reliance on a third party or outside valuation
service. We anticipate that these costs will vary, but 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.\716\ Based on registered advisers' responses to Items 5.D.,
7.B., and 9.C. of Form ADV,\717\ we estimate that approximately 3% of
registered advisers have at least one private fund client that may not
be audited.\718\ These advisers therefore may incur costs to fair value
their private fund assets.\719\ As explained above, we estimate that
approximately 4,270 registered advisers have, or after registering with
us will have, at least one private fund client.\720\ We therefore
estimate that approximately 130 registered advisers may incur costs as
a result of the fair value requirement.\721\ We estimated in the
Implementing Proposing Release that an adviser without the internal
capacity to value specific illiquid assets would obtain pricing or
valuation services from an outside administrator or other service
provider at a cost ranging from $250 to $75,000 annually.\722\
Commenters did not address these estimates, and we continue to believe
they are accurate. Accordingly, we estimate that the 130 advisers would
incur costs of $37,625 each on an annual basis, which is the middle of
the range of estimated fair value costs, for an aggregate annual cost
of $4,891,250.\723\
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\716\ For example, an adviser to a hedge fund 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 a
private equity fund 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 with respect to private fund assets.
\717\ Item 5.D. asks advisers to identify the types of clients
they have, including clients that are pooled investment vehicles.
Item 7.B. asks if the adviser or its related person is a general
partner in an investment-related limited partnership or manager of
an investment-related limited liability company, or if the adviser
advises any other ``private fund.'' Item 9.C. asks whether an
independent public accountant audits annually the pooled investment
vehicles that the adviser manages and if audited financial
statements are distributed to investors in the pools.
\718\ A fund that is relying on the audit provision in our
custody rule will have provided the fair value of its assets in its
audited financial statements that are prepared in accordance with
GAAP.
\719\ We note, however, that at least some of these advisers may
currently fair value private fund assets. For instance, funds that
do not prepare financial statements in accordance with GAAP (which
is required to rely on an exception in our custody rule) may
nonetheless use a fair value standard other than that specified in
GAAP and thus may not incur any additional costs. See supra notes
98-100 and accompanying text (explaining that an adviser may adopt a
fair valuation standard other than GAAP or another international
accounting standard that will satisfy the requirement, if developed
and applied in good faith).
\720\ See supra note 637.
\721\ 4,270 x 0.03 = 128.1.
\722\ See Implementing Proposing Release, supra note 7, at n.369
and accompanying text.
\723\ 130 x $37,625 = $4,891,250.
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With respect to outside legal assistance or outside consulting
services, the currently approved collection of information burden is
based on an estimate that some, but not all, registered advisers will
elect to obtain these services on a one-time basis to draft the new
narrative brochure for a total cost of $22,775,400.\724\ By the time
the amendments to Form ADV that we are adopting today become effective,
substantially all 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.\725\ As a result, the only respondents that we expect will
incur legal and consulting costs for the initial drafting of Part 2 of
Form ADV, subsequent to the effective date of the amendments to Form
ADV we are adopting today, will consist of the estimated 700 new
advisers that we expect to register annually and the estimated 750
advisers that will have to register as a result of the elimination of
the private adviser exemption.\726\
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\724\ See Part 2 Release, supra note 67, at text accompanying
n.328. We estimated that a total of 2,941 advisers would elect to
obtain outside legal assistance and that 3,441 advisers would elect
to obtain outside consulting services.
\725\ See id. at section V.
\726\ See supra note 691 and text following note 699.
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For purposes of estimating the currently approved amount of this
one-time cost, we divided advisers into three groups--small, medium and
large--based on their number of employees. Different costs per adviser
were assigned based on the group to which the adviser belongs.\727\ We
expect that the 750 newly registering private fund advisers and 700 new
advisers registering annually will be medium-sized.\728\ In the Part 2
Release, we estimated that the initial cost related to preparation of
Part 2 of Form ADV would be $4,400 for legal services and $5,000 for
compliance consulting services, in each case, for those medium-sized
advisers who engaged legal counsel or consultants.\729\ The currently
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
350 of these advisers would use outside legal services, for a total
cost burden of $1,540,000,\730\ and 725 advisers would use outside
compliance consulting services, for a total cost burden of
$3,625,000,\731\ resulting in a total cost burden among all respondents
of $5,165,000 for outside legal and compliance consulting fees related
to drafting narrative brochures.\732\
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\727\ 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 668, at
nn.301 and 324.
\728\ We would not expect these advisers to be large in this
sense because advisers are likely to have become subject to
registration obligations before engaging 1,000 or more employees.
Some of these advisers may be small, but the increase in the
threshold for registration with the Commission will limit the number
of small advisers registering with us.
\729\ See Part 2 Release, supra note 67, at text accompanying
nn.324 and 325.
\730\ 25% x (750 private fund advisers + 700 new advisers
registering annually) = approximately 350 advisers. $4,400 for legal
services x 350 advisers = $1,540,000.
\731\ 50% x (750 private fund advisers + 700 new advisers
registering annually) = 725 advisers. $5,000 for consulting services
x 725 advisers = $3,625,000.
\732\ $1,540,000 + $3,625,000 = $5,165,000.
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Together, we estimate that the total cost burden among all
respondents for outside legal and compliance consulting fees related to
drafting narrative brochures and for third party or outside valuation
services to be $10,056,250.\733\
---------------------------------------------------------------------------
\733\ $5,165,000 (legal and consulting services) + $4,891,250
(third party fair valuation services) = $10,056,250
---------------------------------------------------------------------------
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
[[Page 43000]]
submit reports to us on Form ADV.\734\ As we explained in the
Implementing Proposing Release, the paperwork burden applicable to
these new exempt reporting advisers will 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.\735\ We estimated the
burden to complete the subset of items in Part 1A applicable to exempt
reporting advisers to be 2 hours, which would result in an annual
burden of approximately 4,000 hours.
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\734\ This estimate was collectively derived from various
sources including the National Venture Capital Association's 2010
Yearbook (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
were not available, but the information located did inform the staff
to the probable number of exempt reporting advisers.
\735\ See Implementing Proposing Release, supra note 7, at
section V.B.2.b.i.
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As discussed above, we estimate the private fund reporting
requirements of the form to be 1 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 6 private funds.\736\ Accordingly, we attribute an additional
12,000 burden hours to exempt reporting advisers' private fund
reporting requirements.\737\
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\736\ 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 6 private funds on
average. Approximately 2,000 exempt reporting advisers x 6 private
funds/adviser = 12,000 private funds. This represents an increase
from our estimate of 10,000 private funds in the Implementing
Proposing Release, which is attributable to updated IARD data that
indicate each private fund adviser now advises approximately 6
funds, instead of 5. Compare supra note 700 with Implementing
Proposing Release, supra note 7, at n.406.
\737\ 2,000 exempt reporting advisers x 6 private funds/adviser
x 1 hour/private fund = 12,000.
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The estimated total annual hour burden applicable to exempt
reporting advisers is 16,000 hours.\738\ We believe that most of the
paperwork burden will be incurred in respect of the initial submission
of Form ADV, and that over time this burden will 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 for
registered advisers, results in an average burden of an estimated 5,330
hours per year,\739\ or 2.67 hours per year, on average, for each
exempt reporting adviser.\740\
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\738\ 4,000 hours attributable to the portions of Form ADV that
these advisers are required to file other than the private fund
reporting + 12,000 hours attributable to private fund reporting =
16,000 hours.
\739\ 16,000/3 = 5,330.
\740\ 5,330/2,000 = 2.67.
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ii. Estimated Annual Burden Associated With Amendments and Final
Filings
In addition to the burdens associated with initial completion and
filing of the portion of the form that exempt reporting advisers will
be required to prepare, as in the Implementing Proposing Release, we
estimate that, on average: (i) Each exempt reporting adviser will
prepare an annual updating amendment; (ii) 20% of these advisers will
file an interim updating amendment; \741\ and (iii) 5% of these
advisers will file a final filing.\742\
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\741\ Approximately 20% of advisers with a fiscal year end of
December that filed an other-than-annual amendment changed Item 1 or
11 between April 1, 2009, and December 31, 2009 (period between
annual amendment filing time).
\742\ Approximately 5% of advisers withdrew their SEC
registrations in 2010 and did not switch to state registration,
based on IARD data. We are assuming the same percentage of exempt
reporting advisers will submit final reports and not simultaneously
apply for registration with the Commission. Exempt reporting
advisers filing a final report because they are applying for
registration are not included in this count because there is no
independent burden associated with making this type of final filing;
they are, therefore, included in the number of advisers expected to
register each year as a result of normal annual growth. See supra
note 691.
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With respect to an exempt reporting adviser's annual updating
amendment of Form ADV, we expect that advisers will not need to spend a
significant amount of time entering responses into the electronic
version of the form to file their annual updating amendments because
the 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 will be required to complete and update only a limited number
of items in Part 1A of the form. We also estimate that 20% of the
exempt reporting advisers will file an interim updating amendment to
Items 1, 3, 10 or 11 of Form ADV,\743\ and we estimate that each such
amendment will require 0.5 hours. Based on the foregoing estimates, the
total paperwork burden of amendments to Form ADV and final filings on
Form ADV will be 2,200 hours per year for all exempt reporting
advisers.\744\
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\743\ See amended Form ADV: General Instruction 4.
\744\ 2,000 advisers x 1 hour = 2,000 hours per year for annual
amendments. (2,000 advisers x 20%) x 0.5 hours = 200 hours per year
for interim amendments. 200 + 2,000 = 2,200 hours. Exempt reporting
advisers are not required to complete Part 2 of Form ADV and so will
not incur an hour burden to prepare new brochure supplements or the
cost burden that registered advisers will incur with respect to that
part of the form. Exempt reporting advisers also will not be
required to meet obligations to deliver codes of ethics to clients,
as is required of registered advisers.
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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 239,122 hours per year.\745\ This represents a decrease
of 29,335 hours from the currently approved burden.\746\ This decrease
is primarily attributable to the anticipated withdrawal of 3,200
advisers from SEC registration.
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\745\ 132,405 hours per year attributable to initial preparation
of Form ADV + 11,167 hours per year attributable to initial private
fund reporting requirements + 63,375 hours per year for amendments
to Form ADV + 9,750 hours per year for brochure supplements for new
employees + 9,750 hours per year for brochure interim amendments +
12,675 hours per year to meet code of ethics delivery obligations =
239,122 hours.
\746\ Current approved burden of 268,457 hours-revised burden
239,122 hours = 29,335 decrease in hours.
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Registered investment advisers are also expected to incur an annual
cost burden of $10,056,250, a reduction from the current approved cost
burden of $22,775,400. The decrease in annual cost burden is
attributable to the nature of the costs, which are one-time initial
costs to draft the narrative brochure. The transition to the narrative
brochure will have substantially been completed, so the newly incurred
one-time costs arise solely from new registrants.
We further estimate that 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 and final filings, will be 7,530 hours.\747\
---------------------------------------------------------------------------
\747\ 5,330 hours per year attributable to initial preparation
of Form ADV + 2,200 hours per year for amendments = 7,530 hours.
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Based on the foregoing, the total annual hour burden for Form ADV
will
[[Page 43001]]
decrease by 21,805 hours to 246,652.\748\ Accordingly, we estimate that
the blended average per adviser amortized burden for Form ADV will be
20.99 hours,\749\ consisting of an average annual amortized burden of
24.52 hours for the estimated 9,750 registered advisers and 3.77 hours
for the estimated 2,000 exempt reporting advisers.\750\
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\748\ 239,122 + 7,530 = 246,652.
\749\ 246,652/11,750 = 20.99.
\750\ Registered advisers (239,122/9,750 = 24.52), exempt
reporting advisers (7,530/2,000 = 3.77).
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C. Rule 203A-5
Rule 203A-5 requires each investment adviser registered with us on
January 1, 2012 to file an amendment to its Form ADV no later than
March 30, 2012, and withdraw from Commission registration by June 28,
2012, if no longer eligible.\751\ The amendments to Form ADV will,
among other things, require each adviser to declare whether it remains
eligible for Commission registration and to report the market value of
its assets under management determined within 90 days of the
filing.\752\ The respondents to this information collection are all
investment advisers registered with the Commission on January 1, 2012.
Compliance with this collection of information is mandatory, and the
information collected on Form ADV is not kept confidential.
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\751\ New rule 203A-5(b)-(c). See supra section II.A.1. Advisers
registered with us on July 21, 2011 that have at least $25 million
in assets under management will be exempt from the new prohibition
on Commission registration for mid-sized advisers until 2012, when
the rule will require them to switch to state registration and
withdraw their registration with us. See new rule 203A-5(a); supra
section II.A.1., note 28.
\752\ See supra sections II.A.1. and II.A.2.
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Rule 203A-5 that we are adopting today differs from our proposed
rule in several respects. First, the transition period begins on
January 1, 2012, not the July 21, 2011 effective date of the Dodd-Frank
Act, as proposed.\753\ Second, advisers will be required to file an
amended Form ADV by March 30, 2012 (instead of August 20, 2011, as
proposed), and mid-sized advisers no longer eligible for Commission
registration will be required to withdraw by June 28, 2012 (instead of
October 19, 2011, as proposed), which provides 180 days instead of the
90 days we proposed.\754\ Third, we are providing additional
flexibility for an adviser to choose the date by which it must
calculate its assets under management that it reports on Form ADV by
requiring the same 90 day period as in Form ADV today, instead of 30
days, as proposed.\755\
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\753\ See proposed rule 203A-5(a)-(b); supra section II.A.1.
\754\ See proposed rule 203A-5(b)-(c); supra section II.A.1.
\755\ See new rule 203A-5(b); amended Form ADV: Instructions for
Part 1A, instr. 5.b.(4); supra section II.A.1.
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As noted above, we requested comment on the PRA analysis contained
in the Implementing Proposing Release. Several commenters expressed
general concerns about the paperwork burdens of requiring all advisers
to make an additional one-time filing of Form ADV.\756\ Some commenters
argued that we should decrease the paperwork burden by exempting
advisers unaffected by the statutory changes from the Form ADV filing
requirement,\757\ or only requiring advisers to report their assets
under management.\758\ Several commenters agreed with us that the
transition should be delayed until the IARD is able to accept filings
of reviewed Form ADV, instead of implementing an alternative, such as
requiring interim paper filings that would increase the paperwork
burdens.\759\
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\756\ See, e.g., ICI Letter; MFA Letter; NYSBA Committee Letter;
Shearman Letter.
\757\ ICI Letter (recommending exempting advisers that do not
rely on assets under management to register with the SEC); MFA
Letter (recommending exempting private fund advisers that file an
initial Form ADV by July 21); NYSBA Committee Letter (recommending
exempting advisers who will continue to be eligible for Commission
registration and advisers relying on the section 203(b)(3) exemption
that we proposed would have to register with the Commission by July
21, 2011).
\758\ Shearman Letter.
\759\ See NASAA Letter (``the benefits of electronic filing,
including easy public access to the documents, are significant and
would outweigh any disadvantages imposed by a delay in filing
deadlines.''); NRS Letter (urging Commission not to ``regress to
paper filings'' which would be ``a huge step into the past'' and
``appears to be counter to Dodd-Frank Act purposes of transparency
and consistency.''). See also Dezellem Letter (the IARD is efficient
and reduces risks of misplacing paper documents and possible filing
errors); NYSBA Committee Letter (the IARD is the ``most efficient
mechanism for advisers and exempt reporting advisers to meet their
filing obligations and make such filings to the public.''). FINRA
informed us that the IARD will be updated to reflect the revisions
to Form ADV that we are adopting today beginning in November. See
supra section II.A.1.
---------------------------------------------------------------------------
Changing the deadline under rule 203A-5 for advisers to re-file
amended Form ADV to March 30, 2012, which coincides with most advisers'
required annual updating amendment, significantly reduces the paperwork
burden of rule 203A-5 by eliminating the requirement that these
advisers incur the costs associated with a special one-time filing
requirement.\760\ This deadline also coincides with the filing deadline
for newly registering private fund advisers, which, as one commenter
points out results in ``a single, comprehensive Form ADV filing to
register with the Commission'' instead of requiring two filings that
``would be costly, inefficient and potentially confusing.'' \761\
---------------------------------------------------------------------------
\760\ See supra note 511. See also CMC Letter (suggesting
``timing of the transition from Federal to state registration could
be centered around renewals for 2012'').
\761\ See MFA Letter.
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We estimate that there will be approximately 3,900 respondents to
this collection of information filing an amendment to Form ADV.\762\
Each respondent will respond once. For purposes of the collection of
information burden for Form ADV, we estimate that the amendment will
take each adviser approximately 6 hours per amendment, on average,\763\
and that the proposed amendments to Part 1A of Form ADV will take each
adviser approximately 4.5 hours, on average, to complete.\764\ We
estimated that the total one-time burden for completing the proposed
Form ADV amendments to be 124,425 hours, plus an additional 33,350
hours for private fund reporting, for a total of 157,775 hours.\765\ As
discussed above, however, the number of advisers that we estimate will
complete an additional Form ADV amendment will be lower than under
proposed rule 203A-5. We estimate that 700 advisers that will remain
registered with the Commission after the switch will file an other-
than-annual amendment, and 3,200 mid-sized advisers will file a Form
ADV amendment with us before they switch to state registration.\766\ In
addition, of these 3,900 registered advisers, we estimate that 850
advise one or more private funds and will have to complete the private
fund reporting requirements.\767\ We expect this will take 8,373 hours,
and we estimate that the total one-time burden for completing
[[Page 43002]]
the Form ADV amendments to be 49,323 hours.\768\
---------------------------------------------------------------------------
\762\ See supra note 511. The PRA burden for filing Form ADV-W
is part of the PRA burden submitted for Form ADV-W. See infra
section VI.E. The Implementing Proposing Release erroneously
included Form ADV-W both in the PRA burden for proposed rule 203A-5
and for Form ADV-W. See sections V.C. and V.E. of the Implementing
Proposing Release.
\763\ We anticipate that the hour burden for the refiling of
Form ADV for purposes of new rule 203A-5 will be the same as an
adviser's annual amendment filing, which has an approved burden of 6
hours. See supra section VI.B.2.a.iii.
\764\ See supra sectionsVI.B.1.a.
\765\ See Implementing Proposing Release, supra note 7, at nn.
403, 444.
\766\ See supra note 511.
\767\ Based on IARD data as of April 7, 2011, 839 advisers out
of the estimated 3,700 current SEC-registered advisers that advise
private funds do not have a December fiscal year end or are expected
to switch to state registration. We have rounded this number to 850
for purposes of this analysis.
\768\ See supra notes 520-522, 528-532. ((6 hours (annual
amendment) + 4.5 hours (new items)) x 3,900) + ((442 advisers x 3
funds x 1 burden hour per fund) + (365 x 10 funds x 1 burden hour
per fund) + (43 advisers x 79 funds x 1 burden hour per fund)) =
44,100 (burden hours for Form ADV filing excluding private fund
reporting + 8,373 (burden hours for private fund reporting) = 49,323
total burden hours for Form ADV filing.
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D. Form ADV-NR
We are making 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.\769\
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 adopting reflect that exempt
reporting advisers will be filing reports on the IARD, and that they
will 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.
---------------------------------------------------------------------------
\769\ See amended Form ADV-NR; Form ADV: General Instruction 16.
---------------------------------------------------------------------------
In the Implementing Proposing Release, we estimated that
approximately 9,150\770\ investment advisers would be registered with
the Commission after the Dodd-Frank Act amendments to the Advisers Act
take effect and that approximately 2,000\771\ 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.\772\ Accordingly, we estimated that the annual
aggregate information collection burden for Form ADV-NR would be 19
hours, an increase of one hour over the currently approved burden.\773\
We did not receive comments on these estimates. Based on updated IARD
data, we now estimate that approximately 9,750 \774\ investment
advisers will be registered with the Commission and continue to
estimate that approximately 2,000 \775\ exempt reporting advisers will
file reports with the Commission, and that these advisers will file
Form ADV-NR at an annual rate of 0.17 percent,\776\ for a total of
approximately 20 filings annually.\777\ We continue to estimate that
ADV-NR requires an average of one hour to complete. 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 will be 20 hours, an increase of two hours over the currently
approved burden of 18 hours.\778\
---------------------------------------------------------------------------
\770\ See Implementing Proposing Release, supra note 7, at
section V.D.
\771\ See id.
\772\ See id.
\773\ See id.
\774\ See supra note 655 and accompanying text.
\775\ See supra note 734 and accompanying text.
\776\ See Implementing Proposing Release, supra note 7, at
n.450.
\777\ 0.17% (rate of filing) x (9,750 estimated registered
investment advisers + 2,000 estimated exempt reporting advisers) =
approximately 20 Form ADV-NR filings.
\778\ 20 ADV-NR filings x 1 hour per filing = 20 hours. 20
hours-18 hours = 2 hours.
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E. Rule 203-2 and Form ADV-W
We are amending rule 203A-2(b), the exemption from the prohibition
on registration for certain pension consultants. The amendments will
increase the minimum value of plan assets which an adviser must consult
from $50 to $200 million annually.\779\ An investment adviser will 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 register with the
Commission. Those pension consultants providing consulting services to
plans of less than $200 million will 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.
---------------------------------------------------------------------------
\779\ See amended rule 203A-2(a)(1).
---------------------------------------------------------------------------
The amendments to the rule that we are adopting today do not differ
from our proposed amendments. Commenters supported our proposal and did
not discuss the proposal's collection of information estimates.\780\ In
the Implementing Proposing Release, we estimated that approximately 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, and approximately 4,100 advisers also would have
to withdraw their Commission registration as a result of the Dodd-Frank
Act.\781\ We have lowered our estimate of advisers withdrawing from
Commission registration to 3,200 based on more current IARD data,\782\
but we continue to estimate that 50 of the current advisers relying on
this exemption from the prohibition on registration will no longer be
eligible to rely on the exemption as adopted.\783\
---------------------------------------------------------------------------
\780\ NRS Letter; Pickard Letter.
\781\ See Implementing Proposing Release, supra note 7, at n.453
and accompanying and following text.
\782\ See supra note 510.
\783\ Based on IARD data as of April 7, 2011, there are 322
advisers relying on the pension consultant exemption from
registration, and we estimate that approximately 15 percent will no
longer be eligible to rely on the exemption as adopted. This
estimate is based on our understanding that a typical pension
consultant will have plan assets far in excess of the 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, will 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 amendment to rule 203A-2(b).\784\ In
addition, as noted above, we estimate that approximately 3,200 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.\785\ Thus, we estimate that the amendment to rule 203A-2(b)
associated with filing Form ADV-W will generate a burden of
approximately
[[Page 43003]]
813 additional hours \786\ in addition to the approved burden of 500
hours for a total of 1,313 hours.
---------------------------------------------------------------------------
\784\ See supra note 549 (discussing the fact that advisers
filing Form ADV-W due to our amendment to rule 203A-2(b) will likely
file partial withdrawals).
\785\ See supra note 533.
\786\ (3,200 + 50) responses on Form ADV-W x 0.25 hours = 812.5
hours.
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F. Form ADV-H
Rule 204-4(e) provides a temporary hardship exemption for an exempt
reporting adviser having unanticipated technical difficulties that
prevent submission of a filing to the IARD system.\787\ 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).\788\ Like rule 203-3(a), rule 204-4(e) requires 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 the IARD no later than seven business
days after the filing was due.\789\ Because we are adopting rule 204-4,
respondents to the collection of information on Form ADV-H will now
include exempt reporting advisers, in addition to registered advisers.
The collection of information on Form ADV-H is mandatory for registered
advisers and exempt reporting advisers relying on a temporary hardship
exemption. The information collected on Form ADV-H is not kept
confidential.
---------------------------------------------------------------------------
\787\ New rule 204-4(e).
\788\ Rule 203-3(a); 17 CFR 279.3 (Form ADV-H).
\789\ New rule 204-4(e).
---------------------------------------------------------------------------
In the Implementing Proposing Release, we estimated that exempt
reporting advisers would file approximately two responses to Form ADV-H
annually.\790\ We also estimated that Form ADV-H would impose the same
average burden per response on exempt reporting advisers as it imposes
on registered advisers--one hour. Thus, we estimated that rule 204-4
would result in an increase of two hours in the total hour burden
associated with Form ADV-H.\791\ We did not receive comments on our
estimates. We continue to estimate that exempt reporting advisers will
file approximately two responses to Form ADV-H annually, with each
response requiring an average of one hour, for an estimated annual
burden of two hours.\792\ 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 11,500 to 9,750.\793\
Given the reduction in registered advisers, we estimate that Form ADV-H
will receive 10 annual responses from registered advisers.\794\ We
continue to estimate that Form ADV-H will require an average of one
hour to complete, and thus estimate that the total annual burden for
registered advisers to be 10 hours.\795\ Thus, the total burden
associated with Form ADV-H will increase one hour to 12 hours.\796\
---------------------------------------------------------------------------
\790\ See Implementing Proposing Release, supra note 7, at
section V.F.
\791\ See id.
\792\ 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
then-estimated 11,850 advisers registered with the Commission, meant
that approximately 1 response is filed per 1,000 advisers (11,850
registered advisers/11 responses = approximately 1 response per
1,000 registered advisers). We estimate that approximately 2,000
exempt reporting advisers will file reports on Form ADV in
accordance with rule 204-4. Thus, we estimate two responses to Form
ADV-H in accordance with rule 204-4 (2,000 exempt reporting advisers
x 1 response per 1,000 advisers = 2 responses).
\793\ See supra note 655.
\794\ 9,750 registered advisers x 1 response per 1,000 advisers
= 9.75 responses.
\795\ 10 responses x 1 hour = 10 hours.
\796\ The current approved burden is 11 hours. Our new estimate
is 10 hours for registered advisers + 2 hours for exempt reporting
advisers = 12 hours.
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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.\797\ 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.\798\ The collection of information is mandatory.
---------------------------------------------------------------------------
\797\ Rule 204-2.
\798\ See section 210(b) of the Advisers Act.
---------------------------------------------------------------------------
We are amending 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 after the Dodd-Frank Act eliminates the ``private
adviser'' exemption on July 21, 2011.\799\ Upon registration, these
advisers will become subject to the recordkeeping requirements of the
Act, including the requirement to keep certain records relating to
performance.\800\ The amendment clarifies that these advisers are not
obligated to keep certain performance-related records for any period
when they were not registered with the Commission; however, to the
extent that these advisers preserved these performance-related records
even though they were not required to keep them, they must continue to
preserve them.\801\ 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 amendment to the grandfathering provision will reduce our
current approved average annual hourly burden per adviser under rule
204-2.
---------------------------------------------------------------------------
\799\ See amended rule 204-2(e)(3)(ii); section II.D.2.b. In
addition, we are amending 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. This
amendment is technical and will not increase or decrease the
collection burden on advisers. We are also rescinding rule 204-2(l)
because that section was vacated by a Federal appeals court in
Goldstein.
\800\ See amended rule 204-2(a)(16).
\801\ See amended 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 your
registration, provided 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)).
---------------------------------------------------------------------------
Although we do not anticipate that our amendments to rule 204-2
will 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.\802\ The
current approved burden for rule 204-2 is based on an estimate of
11,658 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 2,115,376 hours. We estimated in the Implementing Proposing
Release that the Dodd-Frank Act will reduce the number of registered
advisers to 9,150.\803\ We did not receive comments on these estimates.
However, based on updated IARD data, we now estimate that the Dodd-
Frank Act will reduce the number of registered advisers to 9,750.\804\
Thus, we estimate that the total burden under amended rule 204-
[[Page 43004]]
2 will be 1,769,138 hours,\805\ a reduction of 346,238 hours.\806\
---------------------------------------------------------------------------
\802\ 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.
\803\ See Implementing Proposing Release, supra note 7, at n.377
and accompanying text.
\804\ See supra note 655 and accompanying text.
\805\ 9,750 registered advisers x 181.45 hours = approximately
1,769,138.
\806\ 2,115,376 hours-1,769,138 hours = 346,238 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
$34,965,063, or an average of approximately $3,000 per adviser.\807\
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
$29,250,000,\808\ a reduction of $5,715,063.\809\
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\807\ $34,965,063/11,658 advisers = approximately $3,000.
\808\ 9,750 x $3,000 = $29,250,000.
\809\ $34,965,063-$29,250,000 = $5,715,063.
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VII. Final Regulatory Flexibility Analysis
The Commission has prepared the following Final Regulatory
Flexibility Analysis (``FRFA''), in accordance with section 4(a) of the
Regulatory Flexibility Act, regarding the rules and rule amendments we
are adopting today to give effect to the Dodd-Frank Act's amendments to
the Advisers Act.\810\ It relates to new rules 203A-5 and 204-4,
amendments to rules 0-7, 203-1, 203A-1, 203A-2, 203A-3, 203A-4, 204-1,
204-2, 206(4)-5, 222-1, 222-2, and amendments to Form ADV, Form ADV-NR
and Form ADV-H under the Advisers Act.\811\ We prepared an Initial
Regulatory Flexibility Analysis (``IRFA'') in conjunction with the
Implementing Proposing Release in November 2010.\812\
---------------------------------------------------------------------------
\810\ 5 U.S.C. 604(a).
\811\ We note that the FRFA analysis associated with the
requirement that an accountant's report be filed electronically was
included in our adoption of substantive amendments to Form ADV-E.
Today, we are making only a technical amendment to Form ADV-E to
conform to that prior rulemaking. See 2009 Custody Release, supra
note 310, at section VI.
\812\ See Implementing Proposing Release, supra note 7, at
section VI.
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A. Need for and Objectives of the New Rules and Rule Amendments
The 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 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 funds, we are requiring advisers to those
funds to provide us with additional information about the operation of
those funds, which will permit us to better oversee those advisers by
focusing our examination and enforcement resources on those advisers to
private funds that appear to present greater compliance risks. We also
are requiring 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.
Specifically, the new rules and rule amendments 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 Advisers Act; and (iii) provide for reporting by
advisers to certain types of private funds that are exempt from
registration.\813\ 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. Rule 203-1(e) is intended to
provide an orderly transition to registration for advisers that
previously relied on the ``private adviser'' exemption in section
203(b)(3) of the Advisers Act. New rule 204-4 and amendments to rule
204-1 are intended to require exempt reporting advisers to submit, and
to update periodically, reports to us by completing several items on
Form ADV. The 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.\814\ The amendments to Form
ADV will 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 amendments to Form ADV also will provide
additional information on the operations of registered investment
advisers. The amendments to Forms ADV-NR and ADV-H will revise the
forms for use by exempt reporting advisers. Additionally, we are
amending the Advisers Act pay to play rule, rule 206(4)-5, to make it
apply both to exempt reporting advisers and foreign private advisers,
thereby preventing the unintended narrowing of the application of the
rule resulting from the repeal of the ``private adviser''
exemption.\815\ Furthermore, we are amending the rule to add the new
``municipal advisor'' category of registrant created by the Dodd-Frank
Act to the categories of registered entities--referred to as
``regulated persons''--excepted from the rule's prohibition on advisers
paying third parties to solicit government entities.\816\
---------------------------------------------------------------------------
\813\ See supra section I.
\814\ See supra section II.D.2.b. As discussed above, we are
also rescinding rule 204-2(l), which was vacated by the Federal
appeals court in Goldstein.
\815\ See amended rule 206(4)-5; supra section II.D.1.
\816\ See id.
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B. Significant Issues Raised by Public Comment
In the Implementing Proposing Release, we requested comment on the
IRFA. In particular, we sought comment on the number of small entities,
particularly small advisers, to which the new rules and rule amendments
would apply and the effect on those entities, including whether the
effects would be economically significant. None of the comment letters
we received specifically addressed the IRFA. A couple of commenters
made specific comments about the proposed rule and rule amendments'
impact on smaller advisers, generally. In response to a question in the
Implementing Proposing Release, one commenter stated that a shortened
deadline, from 90 to 60 days, for filing an annual update to Form ADV
would be particularly burdensome on small advisers because they have
limited resources.\817\ As discussed above, in light of this and
similar concerns raised by other commenters, we are not adopting a
requirement to accelerate the annual updating amendment deadline.\818\
Another commenter asserted that we should retain the rule 203A-4 safe
harbor for state-registered advisers that have a reasonable belief that
they are prohibited from registration with the Commission as there has
been, and continues to be, confusion among small advisers in
calculating assets under management.\819\ We have not retained the safe
harbor, which, as we explain above, was designed for smaller advisory
businesses (with assets under management of less than $30 million)
[[Page 43005]]
that may not employ the same tools or otherwise have a need to
calculate assets as precisely as advisers with greater assets under
management.\820\ Moreover, such a safe harbor would no longer apply to
small advisers as it would be used, if at all, by advisers managing
close to the new $100 million threshold for SEC registration and not
the $30 million threshold that existed prior to the Dodd-Frank
amendments to the Advisers Act.
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\817\ Pickard Letter.
\818\ See supra section II.C.7.
\819\ NRS Letter.
\820\ See supra section II.A.6.
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C. Small Entities Subject to Rules and Rule Amendments
In developing these new rules and rule amendments, we have
considered their potential impact on small entities to which they will
apply. The rules and rule amendments will 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.\821\
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\821\ Rule 0-7(a) [17 CFR 275.0-7(a)].
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Our rule and form amendments will 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.\822\ We estimate that as of April 7, 2011,
approximately 570 advisers that were small advisers were registered
with the Commission.\823\ Because these advisers are registered, they
will be subject to new rule 203A-5 and amendments to rules 0-7, 203-1,
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
two small advisers will become subject to these rules.\824\ Further, as
a result of the amendments to rule 203A-2, we estimate that 15
additional multi-state small advisers will register with us and be
subject to these rules,\825\ and 18 pension consultants that are small
advisers will be required to withdraw from registration with us and
will no longer be subject to these rules.\826\ We estimate that four
exempt reporting advisers that are small advisers will be subject to
rule 204-4, and the 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.\827\ We also estimate that
four exempt reporting advisers that are small advisers will be subject
to the amendments to rule 206(4)-5. Finally, all investment advisers,
whether they are small advisers or not, will be subject to the
technical amendments to rules 222-1 and 222-2. The small advisers
subject to these amendments include approximately four exempt reporting
advisers and approximately 14,600 state-registered advisers.\828\
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\822\ See supra section II.A.7.a.
\823\ Based on IARD data as of April 7, 2011, 572 advisers
registered with the Commission were small advisers. We have rounded
this number to 570 for purposes of this analysis.
\824\ We believe that the only small advisers 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 April 7, 2011, we
estimate that 28 SEC-registered small advisers are required to be
registered with us because they have a principal office and place of
business in Wyoming, which is 0.2% of all SEC-registered advisers
(28/11,500 SEC-registered advisers = approximately 0.2%). 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 Wyoming-based small advisers. As a result, we estimate that
approximately two small advisers to private funds will register with
the Commission (750 private fund advisers x 0.2% = approximately
two).
\825\ See supra note 555.
\826\ Based on IARD data as of April 7, 2011, 118 of the
advisers that would be considered small advisers rely on the pension
consultant exemption from registration. We estimate that
approximately 15%, or 18, of these advisers would no longer be
eligible to rely on the exemption as amended. This ratio is
consistent with our estimate for the PRA burden. See supra section
VI.E. and note 783.
\827\ The only small adviser exempt reporting advisers that
would be subject to the rule and amendments would be exempt
reporting advisers that maintain their principal office and place of
business in Wyoming. 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. See NSMIA Adopting Release, supra note 17, 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)]. 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 new
rule 204-4; supra section II.B.1. 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
rule 204-4 and the 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 four exempt reporting advisers that are small advisers
would be subject to rule 204-4 and the amendments to rule 204-1,
Form ADV, and Form ADV-H (2,000 exempt reporting advisers x 0.2% =
four small Wyoming-based exempt reporting advisers).
\828\ Based on IARD data as of January 1, 2011, we estimate that
there were approximately 14,600 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 14,600 state-registered
advisers are small advisers. Therefore, 14,600 small advisers
(registered with the states as of January 1, 2011) + 18 small
advisers (registering with the states due to the amendment to the
pension consultant exemption in rule 203A-2(b))-2 small advisers
(registering with the Commission due to elimination of the private
adviser exemption in section 203(b)(3))-15 small advisers (de-
registering with the states and registering with the Commission due
to the amendment to the multi-state adviser exemption in rule 203A-
2(e)) = approximately 14,600 state-registered advisers that are
small advisers.
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements
The rules and rule amendments we are adopting today impose certain
reporting, recordkeeping, and compliance requirements on advisers,
including small advisers. The rules and amendments require all of the
small advisers registered with us to file an amended Form ADV, require
some to file Form ADV-W, and require some to file reports as exempt
reporting advisers. The amendments also cause the advisers 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.\829\
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\829\ Supra sections I. through II. describe these requirements
in more detail.
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Transition to State Registration
Rule 203A-5 imposes costs on all investment advisers, including
small advisers, by requiring each investment adviser registered with us
on January 1, 2012 to file an amendment to its Form ADV no later than
March 30, 2012, and withdraw from Commission registration by June 28,
2012, if no longer eligible.\830\
[[Page 43006]]
We estimate that all of the 570 small advisers currently registered
with the Commission will file Form ADV, but none will withdraw
registration because the Dodd-Frank Act does not change the eligibility
requirements for small advisers registered with us since they already
rely on one or more of the exemptions from the prohibition on
registration.\831\
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\830\ New rule 203A-5(b)-(c). See supra section II.A.1.
\831\ See section 410 of the Dodd-Frank Act; rule 203A-2.
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Switching Between State and Commission Registration
The amendments to rule 203A-1 eliminate the $5 million buffer in
current rule 203A-1(a), which permits an adviser to register with the
Commission if the adviser has between $25 million and $30 million of
assets under management, and replaces it with a similar buffer for mid-
sized advisers with assets under management of close to $100
million.\832\ By definition, a small adviser under the Advisers Act has
less than $25 million in assets under management; as such, these
amendments should have no impact on small advisers.\833\
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\832\ See amended rule 203A-1; supra section II.A.4.
\833\ See rule 0-7(a)(1).
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Exemptions From the Prohibition on Registration With the Commission
The amendments we are adopting to two of the three exemptions from
the prohibition on registration in rule 203A-2 will cause small
advisers to be subject to new reporting, recordkeeping, and other
compliance requirements.\834\ The amendment to the exemption from the
prohibition on registration available to pension consultants in rule
203A-2(b) will increase the minimum value of plan assets on which an
adviser must consult from $50 million to $200 million.\835\ We estimate
that this may cause approximately 18 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.\836\ These
advisers will likely need to register with one or more states, and
comply with the states' recordkeeping and other regulatory
requirements. These additional costs will have a negative impact on
competition for these advisers compared to pension consultants with
more than $200 million of plan assets that will remain registered with
the Commission.
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\834\ See amended rule 203A-2; supra section II.A.5. The
elimination of the exemption from the prohibition on Commission
registration for NRSROs in rule 203A-2(a) will not affect small
advisers because, based on IARD data as of April 7, 2011, none of
the advisers registered with us relies on the exemption.
\835\ We also are renumbering the rule as rule 203A-2(a). See
amended rule 203A-2(a); supra section II.A.5.b.
\836\ See supra note 826 and accompanying text.
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The amendment to the multi-state adviser exemption in rule 203A-
2(e) will permit all investment advisers who are required to register
as an investment adviser with 15 or more states to register with the
Commission, rather than 30 states, as currently required.\837\ An
adviser relying on this exemption will continue to report certain
information on Form ADV \838\ 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 will promote 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 19 small advisers that rely on the exemption
currently,\839\ approximately 15 will begin relying on the exemption,
as amended.\840\ Advisers newly relying on the amended exemption will
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. 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.\841\
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\837\ We also are renumbering the rule as rule 203A-2(d). See
amended rule 203A-2(d); supra section II.A.5.c.
\838\ Advisers will 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 amended rule 203A-2(d)(2).
\839\ Based on IARD data as of April 7, 2011, 19 advisers
checked Item 12 of Part 1A of Form ADV to indicate that they are
small advisers and checked Item 2.A.(9) to indicate their basis for
SEC registration under the multi-state rule.
\840\ See supra note 555.
\841\ See supra section II.A.5.c., note 543 and accompanying
text.
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Elimination of Safe Harbor
Eliminating rule 203A-4, which has provided a safe harbor from
Commission registration for an investment adviser that is registered
with state securities authorities 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, will not create
new requirements for small advisers.\842\ These advisers will not have
at least $30 million of assets under management, and advisers have not,
in our experience, relied on this safe harbor.
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\842\ Rule 203A-4. See supra section II.A.6.
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Mid-Sized Advisers
Providing in instructions to Form ADV an explanation 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 will not create new reporting
requirements for small advisers.\843\ The mid-sized adviser
requirements will only apply to advisers with assets under management
between $25 million and $100 million and therefore will not apply to
small advisers.
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\843\ See amended Form ADV: Instructions for Part 1A, instr.
2.b.; supra section II.A.7.
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Exempt Reporting Advisers
Rule 204-4 and the amendments to rules 204-1, Form ADV, and Form
ADV-H require exempt reporting advisers to file reports with the
Commission electronically on Form ADV and impose reporting requirements
on an estimated four small advisers.\844\ As discussed above, we
estimate that completing and filing Form ADV will cost $2,032 for each
exempt reporting adviser.\845\ In addition, small exempt reporting
advisers would be required to pay an estimated filing fee of $225
annually,\846\ for a total of $900 for the estimated four small exempt
reporting advisers.\847\ Finally, under rule 204-4 exempt reporting
advisers that seek a temporary hardship exemption from electronic
filing must complete and file Form ADV-H.\848\ To the extent any of the
four small exempt reporting advisers file Form ADV-H, we have estimated
that it would require one burden hour at a total cost of $189.\849\
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\844\ See supra section II.B. and note 827.
\845\ See supra note 579 and accompanying text. $4,064,000/2,000
= $2,032.
\846\ See supra notes 567-568 and accompanying text (discussing
the potential filing fee).
\847\ $225 x 4 small exempt reporting advisers = $900.
\848\ New rule 204-4(e).
\849\ See supra note 596 and accompanying text.
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Amendments to Form ADV
The amendments to Form ADV that we are adopting today will require
registered advisers to report information
[[Page 43007]]
that is different from, or in addition to, what is currently required.
Approximately 570 currently registered small advisers, and two small
advisers currently relying on the private adviser exemption that we
expect will register with us, will be subject to these
requirements.\850\ We expect these 570 advisers will spend, on average,
4.5 hours to respond to the new and amended questions on Form ADV,
other than the private fund reporting requirements.\851\ We expect the
aggregate cost associated with this process will be $651,511.\852\ The
two anticipated newly registering advisers will spend, in the
aggregate, about 101 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,\853\ for a total cost of
$25,655.\854\ In addition, of these approximately 572 registered
advisers, we estimate that 50 advise one or more private funds and will
have to complete the private fund reporting requirements we are
adopting today.\855\ We expect this will take 150 hours,\856\ in the
aggregate, for a total cost of $38,100.\857\ The total estimated labor
costs associated with our Form ADV amendments that we expect will be
borne by small advisers, therefore, are $715,266. Additionally, we
estimate that one of the newly registering advisers will use outside
legal services to assist them in preparing their Part 2 brochure, for a
total non-labor cost of $3,200.\858\
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\850\ See supra notes 823 and 824 and accompanying text.
\851\ See supra text preceding note 679. 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 to Form ADV increase neither the burden associated with
these items on Form ADV, nor the external costs associated with
certain Part 2 requirements.
\852\ 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
$235 and $273 per hour, respectively. 570 advisers x 4.5 hours =
2,565 hours. (1,282.5 hours x $235 = $301,388) + (1,282.5 hours x
$273 = $350,123) = $651,511.
\853\ 2 advisers x (40.74 hours per adviser to complete entire
form (except private fund reporting requirements)) + (1 annual
updating amendment x 6.0 hours) + (1 interim updating amendment per
year x 0.5 hours) + (1 hour on new brochure supplements) + (1 hour
on interim amendments to brochure supplements) + (1.3 hours
delivering codes of ethics to clients)) = 101 hours. See supra notes
679, 709, 710 and accompanying text.
\854\ (50.5 hours x $235 = $11,868) + (50.5 hours x $273 =
$13,787) = $25,655. 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
618.
\855\ Based on IARD data as of April 7, 2011. Form ADV currently
asks 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. We
note the decrease in the estimated number of small advisers to
private funds in the Implementing Proposing Release is primarily
attributable to an increase in these advisers' assets under
management, rendering them no longer ``small'' for purposes of FRFA.
See Implementing Proposing Release, supra note 7 at n.516 and
accompanying text.
\856\ We expect these advisers are likely to advise 3 funds
each. See text accompanying note 698. We estimated above that
private fund reporting would take an adviser approximately 1 hour
per fund to complete. 50 advisers x 3 hours = 150 hours.
\857\ (75 hours x $235 = $17,625) + (75 hours x $273 = $20,475)
= $38,100. 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 522.
\858\ 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 notes 668 and
669 and accompanying text.
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Amendments To Pay To Play Rule
Our amendment to the pay to play rule to make it apply to exempt
reporting advisers and foreign private advisers will not create new
reporting, recordkeeping, or other compliance requirements for these
advisers.\859\ Rather, we are adopting this amendment to assure that
the rule continues to apply to these advisers and to prevent the
unintended narrowing of the rule.\860\ Our amendment to the pay to play
rule to add registered municipal advisors to the definition of
``regulated persons'' (i.e., those excepted from the rule's ban on
third-party solicitation) may create new recordkeeping and compliance
requirements on investment advisers that are small advisers subject to
the rule to the extent that they have to verify and document that
persons that they hire to solicit government entities are indeed
registered municipal advisors, if these solicitors do not otherwise
meet the ``regulated person'' definition.\861\
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\859\ See supra section II.D.1 (discussing this amendment).
\860\ See id.
\861\ See id.
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Other Amendments
Our amendments to rule 204-2's grandfathering provision are meant
to assure 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) will not face a retroactively imposed
recordkeeping requirement.\862\ We are also making a technical
amendment to rule 204-2(e)(3)(ii) to a cross-reference to the new
definition of a private fund in section 202(a)(29) of the Advisers
Act.\863\ These amendments will not create reporting, recordkeeping,
and other compliance requirements for small advisers independent of the
reporting, recordkeeping, and other compliance requirements imposed by
current rule 204-2.\864\
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\862\ See supra section II.D.2.b.
\863\ See id.
\864\ 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 advisers
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 amendments to rule 204-2.
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We do not believe that our technical amendments to rules 0-7 and
222-1 will impose reporting, recordkeeping, and other compliance
requirements on small advisers. Our amendment to rule 203-1 will not
impose reporting, recordkeeping, and other compliance requirements on
small advisers. Rather, it delays reporting, recordkeeping, and other
compliance requirements on such advisers to the extent that they
currently rely on the ``private adviser'' exemption in section
203(b)(3).\865\ Because our amendments to rule 222-2 will require
advisers to count clients from whom they do not receive compensation
for purposes of the national de minimis standard, some small advisers
may be required to register with one or more states, and comply with
the states' recordkeeping and other regulatory requirements.\866\
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\865\ See supra section III.B.2.
\866\ See supra section II.D.2.e (discussing the amendments to
rule 222-2).
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E. Agency Action To Minimize Effect on Small Entities
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 advisers. In
considering whether to adopt the new rules and 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 advisers; (ii)
[[Page 43008]]
the clarification, consolidation, or simplification of compliance and
reporting requirements under the rules for such small advisers; (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 advisers.
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 advisers 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 adopted 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 advisers under the new rules and
amendments unless expressly required to do so by Congress.
Regarding the second alternative, rule 203A-5 will 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 will 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 amendments to rule 203A-1 eliminate the $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,\867\ 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. The buffer for advisers with close to
$100 million of assets under management will prevent advisers from
frequently having to switch to and from Commission registration due to
market fluctuations and will eliminate the additional associated costs
they would therefore incur.\868\ Amending the multi-state adviser
exemption in rule 203A-2(e) also will 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.\869\ This amendment also will 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, requiring the
use of an existing form, Form ADV, and an existing filing system, the
IARD, for reporting and registration purposes will clarify and simplify
the processes of registering and/or reporting for small advisers
because: (i) All of the information collection requirements for both
registration and reporting will be consolidated in a single form; (ii)
a small exempt reporting adviser will 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 will be able to register
simply by filing an amendment to its current Form ADV to apply for
registration.\870\
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\867\ See supra note 426 and accompanying text.
\868\ See supra note 427 and accompanying text.
\869\ See amended rule 203A-2(d); supra section V.A.1. 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 are amending 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.
\870\ See supra section II.C.
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Regarding the third alternative, we do not consider using
performance rather than design standards to be consistent with
Congress's mandate in the Dodd-Frank Act.
VIII. Effects on Competition, Efficiency and Capital Formation
The Commission is adopting certain new rules and amending others
pursuant to its authority under sections 204(a) and 206A of the
Advisers Act,\871\ and sections 23(a) and 28(e)(2) of the Exchange
Act.\872\ 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.'' \873\ Section 202(c) of the Advisers Act
requires that whenever the Commission is engaged in rulemaking and is
required, pursuant to the Advisers Act, to consider or determine
whether an action is necessary or appropriate in the public interest,
the Commission must also consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation.\874\ Section 3(f) of the Exchange Act imposes the
same requirements on the Commission's Exchange Act rulemakings.\875\
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.\876\
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\871\ 15 U.S.C. 80b-4(a), 80b-6A.
\872\ 15 U.S.C. 78w(a) and 78bb(e)(2).
\873\ 15 U.S.C. 80b-4(a) and 78bb(e)(2).
\874\ 15 U.S.C. 80b-2(c).
\875\ 15 U.S.C. 78c(f).
\876\ 15 U.S.C. 78w(a)(2).
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The Commission is adopting rule 204-4 and amending rules 203-1,
204-1, and 204-2 and Forms ADV, ADV-NR, and ADV-H.\877\ The new rule
and rule amendments are designed to give effect to provisions of Title
IV of the Dodd-Frank Act.\878\ We are adopting new rule 204-4 to
require exempt reporting advisers to file reports with the Commission
electronically on Form ADV.\879\ We are adopting amendments to Form ADV
to improve our risk-assessment capabilities and so that it can serve
the dual purpose of an SEC reporting form for exempt reporting advisers
and, as it is used today, a registration form for both state and SEC-
registered firms.\880\ In addition to requiring that exempt reporting
advisers use Form ADV, rule 204-4 will require these advisers to submit
reports through
[[Page 43009]]
the IARD and to pay a filing fee.\881\ We are also amending 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.\882\ Finally, we are amending rule 203-1
to allow an adviser that was relying on, and was permitted to rely on,
the ``private adviser'' exemption in section 203(b)(3) on July 20,
2011, to delay registering with the Commission until March 30,
2012.\883\
---------------------------------------------------------------------------
\877\ In contrast, we are adopting 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(a)(2), 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 new rule and rule amendments
on competition, efficiency, and capital formation, see supra
sections V., VI., and VII. We note that our analysis of the effects
on competition, efficiency, and capital formation associated with
the requirement that an accountant's report be filed electronically
was included in our adoption of substantive amendments to that form.
Today, we are making only a technical amendment to Form ADV-E to
conform to that prior rulemaking. See 2009 Custody Release, supra
note 310 at section VII.
\878\ For a discussion of the overall objectives of our rules
and rule amendments, see supra section I.
\879\ New rule 204-4. See supra section II.B.1.
\880\ See supra sections II.B. and II.C.
\881\ New rule 204-4(b). New rule 204-4(e) also allows 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 adopting technical amendments to Form
ADV-H for this purpose.
\882\ See amended rule 204-1; supra section II.B.3.
\883\ See amended rule 203-1(e); supra section III.B.2.
---------------------------------------------------------------------------
In the Implementing Proposing Release, we solicited comment on
whether the proposed rule and rule amendments would, if adopted,
promote efficiency, competition, and capital formation. We further
encouraged commenters to provide empirical data to support their views.
We did not receive any empirical data in this regard concerning the
proposed amendments. We received some comments, addressing competition
and efficiency generally, which are addressed below.
A. Exempt Reporting Adviser Reporting Requirements
The Dodd-Frank Act provides for the Commission to 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 adopting rule 204-4 to require these advisers to
complete a subset of items contained in Form ADV and to file through
the IARD, and in amending rule 204-1 to impose periodic updating
requirements of those filings, will impose costs on exempt reporting
advisers.\884\ However, as we asserted in the Implementing Proposing
Release, our choices also will 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. Commenters widely agreed with us,\885\ with one
stating that, in its view, there is ``no reason to create a new form or
filing system when the existing ones have been designed for use by
advisers and are suitable for that purpose.'' \886\ In addition,
because an exempt reporting adviser 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 reporting instrument.\887\ Several
commenters agreed and also expressed the view that use of Form ADV and
the IARD for exempt reporting advisers would be efficient, because the
system is familiar to many advisers.\888\ Similarly, commenters agreed
with our expectation that 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.\889\ Finally, certain items in Form ADV Part 1
are also linked to Form BD, which would create efficiencies if the
exempt reporting adviser were to apply for broker-dealer registration.
---------------------------------------------------------------------------
\884\ For a discussion of the costs of the reporting obligations
we are applying to exempt reporting advisers, see section V.B.2.
\885\ Two commenters urged that we create a separate reporting
system. Merkl Implementing Letter; Seward Letter. See also Shearman
Letter (making arguments regarding the potential for investor
confusion, but not advocating use of a different form or reporting
system). However, as we stated above, the expense and delay of
developing a system with adequate functionality, which neither
commenter addressed, argues against these commenters'
recommendations for a new form and electronic filing system. See
supra section II.B.1.
\886\ ABA Committees Letter. See also AFL-CIO Letter; NRS
Letter; Better Markets Letter; NASAA Letter; ABA Committees Letter.
We anticipate that the IARD's ability to pre-populate prior
responses and allow drop-down boxes for common responses will also
save time for advisers.
\887\ See supra note 170 and accompanying text.
\888\ See Better Markets Letter; NRS Letter; NASAA Letter.
Responding to our request for comment regarding the possible use of
EDGAR in place of the IARD, one commenter argued that ``[s]uch an
approach would be confusing and burdensome for any adviser that
transitions between [exempt reporting adviser] and Commission-
registered status.'' ABA Committees Letter.
\889\ See ABA Committees Letter; Better Markets Letter; NRS
Letter; NASAA Letter. Form ADV, as amended, permits 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. See amended Form ADV: General Instruction 15
(providing procedural guidance to advisers that no longer meet the
definition of exempt reporting adviser).
---------------------------------------------------------------------------
Using Form ADV and the IARD also will 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. Indeed, commenters indicated that an investor
would be better able to perform due diligence if the information was
made available to the public,\890\ and could make an informed decision
regarding the integrity of a prospective adviser if he or she were able
to review the disciplinary history of the exempt reporting adviser and
its employees.\891\ As we asserted in the Implementing Proposing
Release, public access to this information, which may previously have
been undisclosed, may promote competition to the extent that it will
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 enhancing
allocative efficiency of client assets among investment advisers.\892\
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. Greater
competition among advisers may, in turn, benefit clients. Access to the
information we are requiring 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 assets available for
investment and enhancing the allocation of capital generally.
---------------------------------------------------------------------------
\890\ Merkl Implementing Letter.
\891\ CII Letter.
\892\ See Implementing Proposing Release, supra note 7, at
section VII.A.
---------------------------------------------------------------------------
Several commenters, however, stated that public availability of the
information we proposed to be reported would impose costs on advisers
(and in some cases their supervised persons or owners) including the
potential loss of business to competitors, as the information was not
typically made available to others previously and may not be required
of unregistered competitors.\893\ Some commenters
[[Page 43010]]
expressed concerns that some of the information we proposed to require
also could include proprietary or competitively sensitive information
regarding private funds.\894\ We have responded to some of these
concerns by declining to adopt certain questions that commenters
suggested could require particularly proprietary or competitively
sensitive information, such as certain data about beneficial
owners.\895\ Nonetheless, as discussed above in greater detail, based
on section 210 of the Act, which presumes reports submitted to us by
advisers will be publicly available, together with the Freedom of
Information Act, which generally supports disclosure of such documents,
we decline to deny the public access to all of this information at this
time.\896\
---------------------------------------------------------------------------
\893\ See BCLBE Letter; NRS Letter; Seward Letter (claiming that
the reporting may be valuable to the Commission, but making the
information publicly available would provide little benefit to
investors, and asserting that the benefits were insufficient to
justify the costs).
\894\ See, e.g., MFA Letter; NVCA Letter; O'Melveny Letter.
Another commenter, however, refuted these competitive concerns,
stating that none of the items that exempt reporting advisers would
complete would require the disclosure of proprietary or
competitively sensitive information. Merkl Implementing Letter.
\895\ See supra notes 245-247 and accompanying text.
\896\ See supra section II.B.3.
---------------------------------------------------------------------------
Finally, to the extent that the information we collect and the
filing method by which we collect it impose 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. As we acknowledged in the Implementing Proposing
Release, this may result in inefficiencies in the market for advisory
services and hinder capital formation.\897\
---------------------------------------------------------------------------
\897\ See Implementing Proposing Release, supra note 7, at
section VII.A.
---------------------------------------------------------------------------
B. Risk-Assessment Amendments to Form ADV
The amendments to Form ADV we are adopting today are designed to
improve advisers' disclosure of their business practices (particularly
those relating to advising private funds), non-advisory activities,
financial industry affiliations, and conflicts of interest. Private
fund reporting, in particular, will benefit private fund investors and
other market participants and will provide us and other policy makers
with better data. Better data will 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 industry. Private fund reporting will 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
in total balance sheet assets will enable us to identify the advisers
that are covered by section 956 of the Dodd-Frank Act, which addresses
certain incentive-based compensation arrangements.
As acknowledged above with respect to exempt reporting advisers,
there may also be a competitive impact among registered investment
advisers as a result of the collection of the additional information on
Form ADV in connection with the amendments we are adopting today. We
raised several examples of competitive impacts in the Implementing
Proposing Release.\898\ 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.\899\ We are
adopting a modified version of this item as it was proposed, which we
expect will alleviate commenters' concerns about the costs and burdens
of the proposed item,\900\ but which we do not expect will alter this
competitive impact. Another example we noted in the Implementing
Proposing Release includes the information concerning private funds
that registered and exempt reporting advisers are required to submit on
Form ADV, which could assist private fund investors in assessing
investment choices or screening funds based on certain parameters, such
as the identification of certain fund service providers or gatekeepers.
Amendments we are adopting to Form ADV will not prevent this
information from being used by other financial service providers (such
as banks or broker-dealers) that do not provide similar information
publicly.
---------------------------------------------------------------------------
\898\ See id. at section VII.B.
\899\ See supra section II.C.2. (discussing Item 5.D.(2)).
\900\ See id. See IAA General Letter.
---------------------------------------------------------------------------
We continue to believe that increased competition among investment
advisers (both exempt reporting and registered) and other financial
service providers will result in capital being allocated more
efficiently, benefiting clients and certain advisers. Commenters did
not address the above examples or provide empirical data about the
competitive effects of the proposal.
Finally, as noted above and in the Implementing Proposing Release,
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.\901\ This also may enhance capital formation by making more
assets available for investment and enhancing the allocation of capital
generally. On the other hand, if the rule amendments we are adopting
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.
---------------------------------------------------------------------------
\901\ See Implementing Proposing Release, supra note 7, at
section VII.B.
---------------------------------------------------------------------------
C. Other Amendments
Finally, we are amending rule 203-1 to allow an adviser that was
relying on, and was permitted to rely on, the ``private adviser''
exemption in section 203(b)(3) on July 20, 2011, to delay registering
with the Commission until March 30, 2012. We believe that this
temporary extension of the registration deadline will assure an orderly
transition to registration and thus will promote efficiency. We believe
that this temporary extension will have minimal, if any, effects on
competition or capital formation.
We are also amending 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.\902\ Finally, we are amending Forms ADV-NR and Form ADV-H to
provide for their use by exempt reporting advisers. The amendments to
rule 204-2, Form ADV-NR, and Form ADV-H are technical in nature. We do
not anticipate that they will have any bearing on efficiency,
competition, or capital formation.
---------------------------------------------------------------------------
\902\ See supra section II.D.2.b.
---------------------------------------------------------------------------
IX. Statutory Authority
The Commission is removing rules 202(a)(11)-1, 203(b)(3)-1, and
203(b)(3)-2 under the Investment Advisers Act of 1940 pursuant to the
authority set forth in section 211(a) of the Investment Advisers Act of
1940 [15 U.S.C. 80b-11(a)], adopting new rule 203A-5 and amendments to
rules 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 Advisers Act
[15 U.S.C. 80b-3A(c) and 80b-11(a)]; amendments to rule 203A-1 under
the Advisers Act pursuant to the authority set forth in
[[Page 43011]]
sections 203A(a)(2)(B)(ii) (as amended by section 410 of the Dodd-Frank
Act), 203A(c), and 211(a) of the Advisers Act [15 U.S.C. 80b-
3A(a)(2)(B)(ii), 80b-3A(c), and 80b-11(a)]; amendments to rule 203-1
under the Advisers Act pursuant to the authority set forth in section
206A of the Advisers Act [15 U.S.C. 80b-6A]; new rule 204-4 and
amendments to rules 204-1 and 204-2 under the Advisers Act 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 under the
Advisers Act 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 under the Advisers Act
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 Exchange Act [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 [15 U.S.C. 78a-37(a)], and sections
203(c)(1), 204, and 211(a) of the Advisers Act [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
Exchange Act [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 [15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, and
211(a) of the Advisers Act [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)]; 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)]; and Form ADV-E pursuant to authority set forth in
sections 204, 206(4), and 211(a) of the Advisers Act [15 U.S.C. 80b-4,
80b-6(4), and 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 amended as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The authority citation for Part 275 is amended by revising the
general authority and by adding authority for sections 275.203A-3,
275.203A-5, 275.204-1 and 275.204-4 in numerical order 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-3 is also issued under 15 U.S.C. 80b-3a.
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.
* * * * *
Sec. 275.0-7 [Amended]
0
2. 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).''
Sec. 275.202(a)(11)-1 [Removed]
0
3. Section 275.202(a)(11)-1 is removed.
0
4. Section 275.203-1 is amended by adding paragraph (e) to read as
follows:
Sec. 275.203-1 Application for investment adviser registration.
* * * * *
(e) ``Private adviser'' transition rule. If you are exempt from
registration with the Commission as an investment adviser under, and
are not registered in reliance on, section 203(b)(3) of the Act (15
U.S.C. 80b-3(b)(3)) on July 20, 2011, you are exempt from registration
with the Commission as an investment adviser until March 30, 2012,
provided that you:
(1) During the course of the preceding twelve months, have had
fewer than fifteen clients; and
(2) Neither hold yourself out generally to the public as an
investment adviser nor act as an investment adviser to any investment
company registered under the Investment Company Act of 1940 (15 U.S.C.
80a), or a company which has elected to be a business development
company pursuant to section 54 of that Act (15 U.S.C. 80a-54) and has
not withdrawn its election.
Sec. 275.203(b)(3)-1 [Removed]
0
5. Section 275.203(b)(3)-1 is removed.
Sec. 275.203(b)(3)-2 [Removed]
0
6. Section 275.203(b)(3)-2 is removed.
0
7. Section 275.203A-1 is revised to read as follows:
Sec. 275.203A-1 Eligibility for SEC registration; Switching to or
from SEC registration.
(a) Eligibility for SEC registration of mid-sized investment
advisers--If you are an investment adviser described in section
203A(a)(2)(B) of the Act (15 U.S.C. 80b-3a(a)(2)(B)):
(1) Threshold for SEC registration and registration buffer. You
may, but are not required to register with the Commission if you have
assets under management of at least $100,000,000 but less than
$110,000,000, and you need not withdraw your registration unless you
have less than $90,000,000 of assets under management.
(2) Exceptions. This paragraph (a) does not apply if:
(i) You are an investment adviser to an investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a) or
to a company which has elected to be a business development company
pursuant to section 54 of the Investment Company Act of 1940 (15 U.S.C.
80a-54), and has not withdrawn the election; or
(ii) You are eligible for an exemption described in Sec. 275.203A-
2 of this chapter.
(b) Switching to or from SEC registration--
(1) 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)).
(2) 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.
[[Page 43012]]
0
8. Section 275.203A-2 is amended by:
0
a. Removing paragraph (a);
0
b. Redesignating paragraphs (b) through (f) as paragraphs (a) through
(e);
0
c. Revising newly designated paragraph (a)(1);
0
d. Revising the reference to ``paragraph (b) of this section'' in the
introductory text of newly designated paragraph (a)(2) to read
``paragraph (a) of this section'';
0
e. Revising newly designated paragraph (c)(1);
0
f. Revising newly designated paragraph (d)(1);
0
g. Further redesignating newly designated paragraphs (d)(2) and (d)(3)
as paragraphs (d)(2)(i) and (d)(2)(ii);
0
h. Adding new introductory text to paragraph (d)(2) and revising newly
designated paragraphs (d)(2)(i) and (d)(2)(ii);
0
i. Further redesignating newly designated paragraph (d)(4) as paragraph
(d)(3);
0
j. 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'';
0
k. Revising the reference to ``paragraph (f)(1)(i) of this section'' in
newly designated paragraphs (e)(1)(ii) and (e)(3) to read ``paragraph
(e)(1)(i) of this section'';
0
l. Revising the reference to ``paragraph (c) of this section'' in newly
designated paragraph (e)(1)(iii) to read ``paragraph (b) of this
section''; and
0
m. 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 is eligible
for SEC registration); and
* * * * *
0
9. 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) * * *
(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.
Sec. 275.203A-4 [Removed and reserved]
0
10. Section 275.203A-4 is removed and reserved.
0
11a. Effective July 21, 2011, Sec. 275.203A-5 is added to read as
follows:
Sec. 275.203A-5 Transition rules.
(a) Temporary exemption from prohibition on Commission registration
for mid-sized investment advisers. Until January 1, 2012, the
prohibition of section 203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2))
does not apply to an investment adviser registered with the Commission
on July 21, 2011.
(b) [Reserved]
0
11b. Effective September 19, 2011, Sec. 275.203A-5 is amended by
adding paragraphs (b) and (c) to read as follows:
Sec. 275.203A-5 Transition rules.
* * * * *
(b) SEC-registered advisers--Form ADV filing. Every investment
adviser registered with the Commission on January 1, 2012 shall file an
amendment to Form ADV (17 CFR 279.1) no later than March 30, 2012 and
shall determine its assets under management based on the current market
value of the assets as determined within 90 days prior to the date of
filing the Form ADV.
(c) Mid-sized investment advisers--withdrawing from Commission
registration.
(1) If an investment adviser registered with the Commission on
January 1, 2012 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
June 28, 2012. 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.
(2) 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
[[Page 43013]]
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.
0
12. Section 275.204-1 is amended by revising the heading, paragraph
(b), the Note to paragraphs (a) and (b), and paragraph (c), to read as
follows:
Sec. 275.204-1 Amendments to Form ADV.
* * * * *
(b) Electronic filing of amendments.
(1) Subject to paragraph (c) of this section, 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 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.
* * * * *
0
13. Section 275.204-2 is amended by:
0
a. Removing paragraph (l);
0
b. In paragraph (a)(14)(ii), revising the reference to ``assets under
management'' to read ``regulatory assets under management''; and
0
c. 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 your registration,
provided 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.
* * * * *
0
14. 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, 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 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.
0
15. Section 275.206(4)-5 is amended by:
0
a. In paragraph (f)(2)(i), removing the term ``individual'' and adding
in its place the term ``person''; and
0
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 section 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
[[Page 43014]]
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 person; 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 person means:
(i) An investment adviser registered with the Commission that has
not, and whose covered associates have not, within two years of
soliciting a government entity:
(A) Made a contribution to an official of that government entity,
other than as described in paragraph (b)(1) of this section; and
(B) Coordinated or solicited any person or political action
committee to make any contribution or payment described in paragraphs
(a)(2)(ii)(A) and (B) of this section;
(ii) A ``broker,'' as defined in section 3(a)(4) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(4)) or a ``dealer,'' as defined
in section 3(a)(5) of that Act (15 U.S.C. 78c(a)(5)), that is
registered with the Commission, and is a member of a national
securities association registered under 15A of that Act (15 U.S.C. 78o-
3), provided that:
(A) The rules of the association prohibit members from engaging in
distribution or solicitation activities if certain political
contributions have been made; and
(B) The Commission, by order, finds that such rules impose
substantially equivalent or more stringent restrictions on broker-
dealers than this section imposes on investment advisers and that such
rules are consistent with the objectives of this section; and
(iii) A ``municipal advisor'' registered with the Commission under
section 15B of the Exchange Act and subject to rules of the Municipal
Securities Rulemaking Board, provided that:
(A) Such rules prohibit municipal advisors from engaging in
distribution or solicitation activities if certain political
contributions have been made; and
(B) The Commission, by order, finds that such rules impose
substantially equivalent or more stringent restrictions on municipal
advisors than this section imposes on investment advisers and that such
rules are consistent with the objectives of this section.
* * * * *
Sec. 275.222-1 [Amended]
0
16. 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).
0
17. 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.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
18. The authority citation for Part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b.
Sec. 279.1 [Amended]
0
19. Form ADV [referenced in Sec. 279.1] is amended by:
0
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;
0
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;
0
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;
0
d. In the form, revising Part 1A. The revised version of Form ADV, Part
1A is attached as Appendix D;
0
e. In the form, revising the reference to ``proceeding'' in Item 3.D.
of Part 2B to read ``hearing or formal adjudication'';
0
f. In the form, revising the reference to ``assets under management''
in the Note to Item 4.E of Part 2A to read ``regulatory assets under
management''; and
0
g. 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]
0
20. 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.
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]
0
21. 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.
Sec. 279.8 [Amended]
0
22. Form ADV-E [referenced in Sec. 279.4] is amended by revising the
form. The revised version of Form ADV-E is attached as Appendix H.
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Note: The text of Form ADV-E does not and the amendments will
not appear in the Code of Federal Regulations.
Dated: June 22, 2011.
By the Commission.
Elizabeth M. Murphy,
Secretary.
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[FR Doc. 2011-16318 Filed 7-18-11; 8:45 am]
BILLING CODE 8011-01-C