Securities and Exchange Commission (the “Commission”).
Proposed rules.
The Commission is publishing for comment rule amendments under the Investment Advisers Act of 1940 that would exempt certain investment advisers that provide advisory services through the Internet from the prohibition on Commission registration set out in section 203A of the Act. The effect of the amendments would be to permit these advisers to register with the Commission instead of with state securities authorities. The amendments are designed to alleviate the burden of multiple state regulation on advisers whose business is unconnected with any particular state and for whom multiple state regulation would be a hardship.
Comments must be received on or before June 6, 2002.
Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. Comments also may be submitted electronically at the following E-mail address:
Marilyn Barker, Senior Counsel, or Jennifer L. Sawin, Assistant Director, at (202) 942–0719 or
The Commission is requesting public comment on proposed amendments to rule 203A–2 (17 CFR 275.203A–2) and to Part 1A of Form ADV (17 CFR 279.1), both under the Investment Advisers Act of 1940 (15 U.S.C. 80b) (“Advisers Act” or “Act”).
The National Securities Markets Improvement Act of 1996 (“NSMIA”) amended the Advisers Act to divide the responsibility for regulating investment advisers between the Commission and the state securities authorities.
The “$25 million assets under management” test was designed by Congress to distinguish investment advisers with a national presence from those that are essentially local businesses.
We recently have been asked, by advisers that provide their services through interactive websites and by their counsel, whether we might use our exemptive authority to permit these advisers to register with us.
Most Internet Investment Advisers are not eligible to register with us. They do not have assets under management or advise a registered investment company, and thus do not meet the statutory thresholds for registration with us.
Our multi-state adviser exemption permits an adviser that does not meet the statutory thresholds to register with us if, among other things, it would otherwise have to register with the securities authorities of at least 30 states.
As discussed above, Congress gave us authority to permit investment advisers to register with us when the prohibition would be unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes of section 203A.
Proposed rule 203A–2(f) would exempt an adviser from the prohibition on Commission registration if the adviser conducts substantially all of its advisory business through an interactive website on the Internet.
We have drafted the proposed rule to make it unavailable to advisers that merely have websites as marketing tools or that use Internet vehicles such as E-mail, chat rooms, bulletin boards and webcasts or other electronic media to communicate with clients.
We request comment on the terms of the proposed rule:
• Does the proposed rule differentiate adequately between advisers that merely use the Internet to market their business and those that conduct substantially all of their advisory business through the Internet?
• Will the test for “substantially all” appropriately limit the use of the rule, or are there alternative tests that we should consider?
• The rule would require that 90% of the adviser's clients obtain their investment advice exclusively through the interactive website. Is 90% of clients the appropriate percentage? If not, what higher or lower percentage should we consider?
• Should we require that these clients obtain all of their advice from the adviser through the interactive website? Alternatively, should we consider permitting an adviser to use the rule even if these clients obtain less than all of their advice through the website? If so, what proportion should we require? How would the adviser measure that proportion? What burden would this measurement place on the adviser?
• We estimate that as many as 20 advisers may currently be eligible for the exemption provided by the proposed rule amendments. Is this estimate reasonable?
• We believe that demand for Internet Investment Advisers' services may grow in the next several years, perhaps as part of the growing demand for advice to pension plan participants. Is this expectation reasonable? How many new Internet Investment Advisers are likely to form to meet any increases in demand?
• Are there other types of investment advisers “ without assets under management but operating in many states “ that face similar burdens? How many of these advisers are there? In how many states do they typically register? Should we also consider exempting them from section 203A?
Any interested persons wishing to submit written comments on the proposed rule amendments that are the
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, the Commission also is requesting information regarding the potential impact of the proposed rule amendments on the economy on an annual basis. Commenters should provide empirical data to support their views.
The Commission is sensitive to the costs and benefits imposed by its rules. Proposed rule 203A–2(f) under the Advisers Act would permit certain investment advisers that provide advisory services through interactive Internet websites to register with the Commission rather than with the state securities authorities. These investment advisers cannot currently register with the Commission because they do not meet the Act's statutory thresholds, that is, they do not have $25 million or more of assets under management and do not advise registered investment companies.
Congress gave us authority to permit advisers to register with us even though they do not meet the statutory threshold if the prohibition would be unfair, a burden on interstate commerce, or otherwise inconsistent with NSMIA's regulatory division between the states and the Commission. We have used this authority to adopt exemptive rules to permit Commission registration of advisers that did not meet the statutory thresholds in section 203A. The rule amendment we are proposing today is designed to alleviate the substantial burden of multiple state registration and regulation for Internet Investment Advisers by permitting these advisers to register with the Commission.
Since most Internet Investment Advisers do not currently register with us, we have limited data on the number of investment advisers that would qualify at this time for the proposed exemption. Based on news articles, however, and for purposes of the Paperwork Reduction Act, we have estimated that perhaps as many as 20 firms would currently be eligible for the new exemption.
• Comment is requested on our estimate of the number of investment advisers likely to register with the Commission under the proposed rule.
• Commenters are requested to provide views and empirical data relating to the number of these advisers.
The proposal would benefit Internet Investment Advisers by relieving them of the costs they would otherwise incur if they were required to comply with the registration and other regulatory requirements of 49 states. As discussed earlier, Internet Investment Advisers, as a practical matter, would have to register in all states and then wait until their registration obligations are triggered in at least 30 states before becoming eligible for Commission registration under our multi-state exemption in rule 203A–2(e).
The benefits of the proposed rule would also include the savings to the affected advisers from the cost of examinations by multiple states' regulators, as well as the savings to state securities authorities that would no longer examine these firms.
Proposed rule 203A–2(f) would impose certain costs on advisers relying on the exemption. The Commission estimates that the total cost to each Internet Investment Adviser to comply with the recordkeeping provision of the proposed rule would be approximately $138.80,
We have not included the benefits or costs associated with filing Form ADV,
• The Commission requests comment on the potential costs and benefits identified in this release, as well as any other costs or benefits that may result from the proposal.
• We encourage commenters to identify, discuss, analyze, and supply relevant data regarding these or additional costs and benefits.
Proposed rule 203A–2(f) would exempt, from the prohibition against Commission registration, certain investment advisers that provide advisory services through the Internet. The proposed rule includes a recordkeeping provision, and therefore contains a new “collection of information” requirement within the meaning of the Paperwork Reduction Act of 1995.
• We request comment whether the estimate of our recordkeeping burden is reasonable.
The Commission is submitting the collection of information to the Office of Management and Budget (“OMB”) in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of information is “Exemption for Certain Investment Advisers Operating Through the Internet” under the Advisers Act. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The collection of information is mandatory, and responses are not kept confidential. The likely respondents to this information collection would be investment advisers that meet the conditions of the proposed rule and register with us.
In addition, the proposal would amend Form ADV to add a new category of advisers eligible for Commission registration. The proposed rule therefore would increase the number of advisers that file Form ADV and annual amendments to Form ADV with the Commission. The title for this existing collection of information is “Form ADV” under the Advisers Act. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The form contains currently approved collection of information numbers under OMB control number 3235–0049 (expires June 30, 2003), and the Commission is submitting the amendments to this collection of information to the Office of Management and Budget (“OMB”) in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The collection of information is found at 17 CFR 275.203–1, 275.204–1, and 279.1. This collection of information also is mandatory. Responses are not kept confidential. The likely new respondents to this information collection would be the investment advisers that meet the conditions of the proposed rule and register with us.
As new respondents,
• We request comment whether these estimates are reasonable.
Any information received by the Commission related to the proposed rule amendments would not be kept confidential. Pursuant to 44 U.S.C.
• Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility;
• Evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information;
• Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and
• Determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Room 3208, Washington, DC 20503, and also should send a copy to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609 with reference to File No. S7–10–02. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, so a comment to OMB is best assured of having its full effect if OMB receives the comment within 30 days after publication of this release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7–10–02, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street, NW, Washington, DC 20549.
The Commission has prepared the following Initial Regulatory Flexibility Analysis (“IRFA”) regarding proposed rule 203A–2(f) in accordance with section 3(a) of the Regulatory Flexibility Act.
Section 203A(a) of the Investment Advisers Act of 1940 generally prohibits an investment adviser from registering with the Commission unless the adviser either has at least $25 million of assets under management or is an adviser to a registered investment company. Internet Investment Advisers do not meet the statutory thresholds for registration with us and do not qualify to use our existing exemptive rules. Section 203A(c) of the Advisers Act gives us authority to permit investment advisers to register with us when the prohibition of section 203A(a) would be unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes of section 203A.
The objective of the proposed amendments is to alleviate the burden of multiple state regulation on investment advisers that conduct substantially all of their advisory business through interactive websites. Proposed rule 203A–2(f) would achieve this objective by providing these advisers with an exemption from the prohibition on Commission registration. We are proposing this rule pursuant to our authority under section 203A(c) of the Act.
Under Commission rules, for the purposes of the Advisers Act and the Regulatory Flexibility Act, an investment adviser generally is considered 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 $5 million or more on the last day of its most recent fiscal year.
• Comment is requested on the number of Internet Investment Advisers that are likely to be small entities.
• Commenters are requested to provide views and empirical data relating to the number of these advisers that would be considered small entities.
The proposed rule would impose certain new recordkeeping requirements on Internet Investment Advisers. The proposed rule would not impose any other new or additional reporting or compliance requirements on these advisers, and would significantly reduce certain compliance burdens for these advisers by eliminating the need for these advisers to comply with multiple state regulations. As discussed earlier, most or all of these advisers would likely be small advisers. Under the proposed rule, Internet Investment Advisers would be required to maintain in an easily accessible place a record demonstrating that substantially all of their advisory business has been conducted through an interactive website. The Commission believes that the recordkeeping requirement contained in the proposed rule would not impose a significant burden on Internet Investment Advisers, including small advisers.
The Commission believes that the proposed amendment to Item 2 of Part 1A of Form ADV would have no measurable effect on Internet Investment Advisers, including small advisers. A new box would be added to
The Commission believes that there are no rules that duplicate, overlap, or conflict with the proposed rule.
The Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities, including (i) establishing different compliance or reporting requirements or timetables that take into account the resources available to small advisers; (ii) clarifying, consolidating, or simplifying compliance and reporting requirements under the proposed rule for small advisers; (iii) using performance rather than design standards; and (iv) exempting small advisers from coverage of all or part of the proposed rule.
Regarding the first alternative, the Commission has considered establishing different compliance or reporting requirements for small advisers. Establishing different compliance or reporting requirements would be inconsistent with our mandate to provide a system of public disclosure of investment adviser information. An Internet Investment Adviser that is a small entity, however, by the nature of its business, would likely spend fewer resources in completing Form ADV and amendments, and pay lower filing fees, than a larger adviser.
Regarding the second alternative, the Commission has attempted to clarify and simplify compliance and reporting requirements under the proposed rule for all advisers, including small advisers. It does not appear that the proposed rule can be formatted differently for small advisers and still achieve its stated objective of providing relief from multiple state regulation. The proposal has been designed particularly to benefit Internet Investment Advisers, which are, we believe, generally small entities.
With respect to the third alternative, the proposed rule would permit advisers to use performance rather than design standards to meet certain requirements under the Act. The proposal, for example, does not specify the means by which an adviser must maintain its records to satisfy the recordkeeping requirements of the proposed rule.
Regarding the fourth alternative, the Commission has considered exempting small advisers from the proposed rule. Such an exemption would be inconsistent with the intended purpose of the proposal, which is to provide regulatory relief from multiple state regulatory requirements. Small advisers are the primary intended beneficiaries of this rulemaking relief.
The Commission has considered the above alternatives in the context of the proposed rule, and, after taking into account the resources available to Internet Investment Advisers that are small entities and the potential burden the proposal could place on these advisers, has concluded that the alternatives would not accomplish the stated objectives of the proposal.
We encourage written comments on matters discussed in this IRFA.
• In particular, how many small entities would be affected by the proposed rule?
• What burdens would the proposed rule impose on small advisers?
• Commenters are asked to describe the nature of any impact and provide empirical data supporting the extent of the impact.
We are proposing rule 203A–2(f) pursuant to our authority set forth in section 203A(c) of the Investment Advisers Act of 1940.
Investment advisers, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulation is proposed to be amended as follows:
1. The authority citation for part 275 continues to read in part as follows:
15 U.S.C. 80b–2(a)(11)(F), 80b–2(a)(17), 80b–3A, 80b–4, 80b–6(4), 80b–6a, 80b–11, unless otherwise noted.
2. Section 275.203A–2 is amended by adding paragraph (f) to read as follows:
(f)
(i) Conducts substantially all of its advisory business through an interactive website on the Internet; and
(ii) Maintains in an easily accessible place, for a period of not less than five years from the filing of a Form ADV that includes a representation that the adviser is eligible to register with the Commission under paragraph (f)(1)(i) of this section, a record demonstrating that substantially all of its advisory business has been conducted through an interactive website.
(2) For purposes of this section:
(i)
(ii)
3. The authority citation for part 279 continues to read as follows:
The Investment Advisers Act of 1940, 15 U.S.C. 80b–1,
4. Form ADV (Referenced in § 279.1), Part 1A, Item 2 is amended by revising the introductory text of paragraph A, paragraph A.(10) and A.(11), and by adding paragraph A.(12) to read as follows:
The text of Form ADV does not and the amendment will not appear in the Code of Federal Regulations.
Form ADV
Part 1A
Item 2 SEC Registration
A. To register (or remain registered) with the SEC, you must check at least one of the Items 2.A(1) through 2.A(11), below. If you are submitting an annual updating amendment to your registration and you are no longer eligible to register with the SEC, check Item 2.A(12). You:
□ (10) are an Internet investment adviser relying on rule 203A–2(f);
□ (11) have received an SEC order exempting you from the prohibition against registration with the SEC.
If you checked this box, complete Section 2A(11) of Schedule D.
□ (12) are no longer eligible to register with the SEC.
5. Form ADV (Referenced in § 279.1), Schedule D is amended by revising the heading “Section 2.A(10)” to read “Section 2.A(11)”.
By the Commission.