Final Rule: Rules Implementing Amendments to the Investment Advisers Act of 1940

156 Pages·2011·5.01 MB·English

42950 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations
SECURITIES AND EXCHANGE SUPPLEMENTARY INFORMATION: The 3. Other Business Activities and Financial
COMMISSION Commission is adopting rules 203A–5 Industry Affiliations: Items 6 and 7
and 204–4 [17 CFR 275.203A–5 and 4. Participation in Client Transactions:

17 CFR Parts 275 and 279 275.204–4] under the Investment Item 8

5. Custody: Item 9
Advisers Act of 1940 [15 U.S.C. 80b]
[Release No. IA–3221; File No. S7–36–10] 6. Reporting $1 Billion in Assets: Item 1.O.
(‘‘Advisers Act’’ or ‘‘Act’’),1
7. Other Amendments to Form ADV
RIN 3235–AK82 amendments to rules 0–7, 203–1, 203A– D. Other Amendments
1, 203A–2, 203A–3, 204–1, 204–2, 1. Amendments to ‘‘Pay to Play’’ Rule
Rules Implementing Amendments to
206(4)–5, 222–1, and 222–2 [17 CFR 2. Technical and Conforming Amendments
the Investment Advisers Act of 1940
275.0–7, 275.203–1, 275.203A–1, a. Rules 203(b)(3)–1 and 203(b)(3)–2
AGENCY: Securities and Exchange
275.203A–2, 275.203A–3, 275.204–1, b. Rule 204–2
Commission.
275.204–2, 275.206(4)–5, 275. 222–1, c. Rule 0–7
d. Rule 222–1
ACTION: Final rule.
and 275.222–2] under the Advisers Act, e. Rule 222–2
and amendments to Form ADV, Form
f. Rule 202(a)(11)–1
SUMMARY: The Securities and Exchange ADV–E, Form ADV–H, and Form ADV–
III. Effective and Compliance Dates
Commission is adopting new rules and NR [17 CFR 279.1, 279.3, and 279.4] A. Effective Dates
rule amendments under the Investment under the Advisers Act. The B. Compliance Dates
Advisers Act of 1940 to implement Commission is also rescinding rules 1. Transition to State Registration and

provisions of the Dodd-Frank Wall 202(a)(11)–1, 203(b)(3)–1, 203(b)(3)–2, Form ADV

Street Reform and Consumer Protection and 203A–4 [17 CFR 275.202(a)(11)–1, 2. Advisers Previously Exempt Under

Act. These rules and rule amendments 275.203(b)(3)–1, 275.203(b)(3)–2, and Section 203(b)(3)

are designed to give effect to provisions 275.203A–4] under the Advisers Act. 3. Exempt Reporting Advisers
4. Other Amendments
of Title IV of the Dodd-Frank Act that,
Table of Contents IV. Certain Administrative Law Matters
among other things, increase the
V. Cost-Benefit Analysis
statutory threshold for registration by I. Background A. Benefits
investment advisers with the II. Discussion B. Costs
Commission, require advisers to hedge A. Eligibility for Registration With the
VI. Paperwork Reduction Act Analysis
funds and other private funds to register Commission: Section 410
A. Rule 203A–2(d)
with the Commission, and require 1. Transition to State Registration B. Form ADV
reporting by certain investment advisers 2. Amendments to Form ADV C. Rule 203A–5
that are exempt from registration. In 3. Assets Under Management D. Form ADV–NR
4. Switching Between State and
E. Rule 203–2 and Form ADV–W
addition, we are adopting rule Commission Registration
F. Form ADV–H
amendments, including amendments to 5. Exemptions From the Prohibition on G. Rule 204–2
the Commission’s pay to play rule, that Registration With the Commission VII. Final Regulatory Flexibility Analysis
address a number of other changes made a. Nationally Recognized Statistical Rating A. Need for and Objectives of the New

by the Dodd-Frank Act. Organizations Rules and Rule Amendments

DATES: Effective dates: The effective b. Pension Consultants B. Significant Issues Raised by Public

date of 17 CFR 275.204–4 and c. Multi-State Advisers Comment

6. Elimination of Safe Harbor C. Small Entities Subject to Rules and Rule
275.203A–5(b) and (c), amendments to 7. Mid-Sized Advisers Amendments
17 CFR 275.0–7, 275.203A–1, a. Required To Be Registered D. Projected Reporting, Recordkeeping and
275.203A–2, 275.203A–3, 275.204–1, b. Subject to Examination Other Compliance Requirements
275.204–2, 275.206(4)–5, 275.222–1, B. Exempt Reporting Advisers: Sections E. Agency Action to Minimize Effect on
and 275.222–2, and amendments to 407 and 408 Small Entities
Forms ADV, ADV–E, ADV–H, and 1. Reporting Required VIII. Effects on Competition, Efficiency and
ADV–NR (referenced in 17 CFR part 2. Information in Reports Capital Formation
279) is September 19, 2011. The 3. Public Availability of Reports IX. Statutory Authority
effective date of 17 CFR 275.203A–5(a) 4. Updating Requirements Text of Rule and Form Amendments
5. Final Reports Appendix A: Form ADV: General
and the amendment to 17 CFR 275.203– C. Form ADV Instructions
1 is July 21, 2011. 17 CFR 1. Private Fund Reporting: Item 7.B. Appendix B: Form ADV: Instructions for Part
275.202(a)(11)–1, 275.203(b)(3)–1, 2. Advisory Business Information:
1A
275.203(b)(3)–2, and 275.203A–4 are Employees, Clients and Advisory
Appendix C: Form ADV: Glossary of Terms
removed effective September 19, 2011. Activities: Item 5
Appendix D: Form ADV, Part 1A
Compliance Date: See section III of Appendix E: Form ADV Execution Pages
this Release. 1 Unless otherwise noted, when we refer to the Appendix F: Form ADV–H
FOR FURTHER INFORMATION CONTACT: Awde vairsee rrse fAercrti,n ogr taon 1y5 p Uar.Sag.Cra. p8h0 bo fo tfh the eA Udnviisteedrs Act, Appendix G: Form ADV–NR
Appendix H: Form ADV–E
David P. Bartels, Attorney-Adviser, States Code, at which the Advisers Act is codified,
Michael J. Spratt, Attorney-Adviser, and when we refer to rule 0–7, rule 202(a)(11)–1, I. Background
Jennifer R. Porter, Senior Counsel, 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, On July 21, 2010, President Obama
Devin F. Sullivan, Senior Counsel,
rule 203A–5, rule 204–1, rule 204–2, rule 204–4, signed into law the Dodd-Frank Wall
Melissa A. Roverts, Branch Chief, rule 206(4)–5, rule 222–1, or rule 222–2, or any
Street Reform and Consumer Protection
Matthew N. Goldin, Branch Chief, or paragraph of these rules, we are referring to 17 CFR
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RO Management, U.S. Securities and 2, 17 CFR 275.204–4, 17 CFR 275.206(4)–5, 17 CFR
N1P Exchange Commission, 100 F Street, 275.222–1, or 17 CFR 275.222–2, respectively, of 2 Dodd-Frank Wall Street Reform and Consumer
V the Code of Federal Regulations (‘‘CFR’’), in which Protection Act, Public Law 111–203, 124 Stat. 1376
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Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations 42951
most of the amendments to the Advisers in Title IV of the Dodd-Frank Act will supported our approach to facilitate
Act. These amendments include be effective on July 21, 2011.6 mid-size advisers’ transition from
provisions that reallocate primary On November 19, 2010, we proposed Commission to state registration, and
responsibility for oversight of new rules and amendments to existing our amendments to Form ADV,
investment advisers by delegating rules and forms to give effect to these including those requiring disclosure of
generally to the states responsibility provisions.7 Specifically, we proposed a additional information about private
over certain mid-sized advisers—i.e., new rule and amendments to our rules funds. Many, however, urged us to take
those that have between $25 million and and forms to facilitate mid-size advisers’ a different approach to, among other
$100 million of assets under transition from Commission to state things, our proposed amendments to the
management.3 These provisions will registration.8 We also proposed a new pay to play rule. We are adopting the
require a significant number of advisers rule and rule amendments to require proposed rules and rule amendments
currently registered with the certain advisers to private funds that are with several modifications to address
Commission to withdraw their exempt from registration under the commenters’ concerns. We address
registrations with the Commission and Advisers Act to submit reports to us.9 these modifications and comments in
to switch to registration with one or We proposed rule amendments, detail below.
more state securities authorities. In including amendments to the
II. Discussion
addition, Title IV repeals the ‘‘private Commission’s ‘‘pay to play’’ rule,10 to
adviser exemption’’ contained in section address a number of other changes to A. Eligibility for Registration With the
203(b)(3) of the Advisers Act on which the Advisers Act made by the Dodd- Commission: Section 410
many advisers, including those to many Frank Act.11 Also, in light of our
Section 203A of the Advisers Act,
hedge funds, private equity funds, and increased responsibility for oversight of
enacted in 1996 as part of the National
venture capital funds, rely in order to private funds, we proposed to require
Securities Markets Improvement Act
avoid registration under the Act.4 In advisers to those funds to provide us
(‘‘NSMIA’’), generally prohibits an
eliminating this provision, Congress with additional information about the
investment adviser regulated by the
created, or directed us to adopt other, in operation of those funds.12 Finally, we state in which it maintains its principal
some ways narrower, exemptions for proposed additional changes to Form office and place of business from
advisers to certain types of private ADV that would enhance our oversight registering with the Commission unless
funds—e.g., venture capital funds— of advisers and also would enable us to it has at least $25 million of assets
which provide that the Commission identify advisers that are subject to the under management,15 and preempts
shall require such advisers to submit Dodd-Frank Act’s requirements certain state laws regulating advisers
such reports ‘‘as the Commission concerning certain incentive-based that are registered with the
determines necessary or appropriate in compensation arrangements.13 Commission.16 This provision makes
the public interest.’’ 5 These provisions We received more than 70 comment
the states the primary regulators of
letters on our proposals, most of which
smaller advisers and the Commission
3 See section 410 of the Dodd-Frank Act; Advisers were from advisers, trade or the primary regulator of larger
Act section 203A. See also National Securities professional organizations, and law
advisers.17
Markets Improvement Act of 1996, Public Law 104–
290, 110 Stat. 3416, § 303 (1996) (‘‘NSMIA’’) firms.14 Commenters generally Section 410 of the Dodd-Frank Act
(allocating to states certain responsibility for small creates a new category of ‘‘mid-sized
investment advisers with less than $25 million in 6 See section 419 of the Dodd-Frank Act. For
assets under management). purposes of this Release, unless indicated
Web site at: http://www.sec.gov/comments/s7-37-
4 See section 403 of the Dodd-Frank Act. Section otherwise, when we refer to the effective date of the
10/s73710.shtml.
203(b)(3) currently exempts from registration any Dodd-Frank Act, we are referring to the effective
investment adviser who during the course of the date of Title IV, which is July 21, 2011. 15 Advisers Act section 203A(a)(1). The
preceding twelve months, has had fewer than 7 See Rules Implementing Amendments to the prohibition does not apply if the investment adviser
fifteen clients, and who neither holds himself out Investment Advisers Act of 1940, Investment is an adviser to an investment company registered
generally to the public as an investment adviser nor Advisers Act Release No. 3110 (Nov. 19, 2010) [75 under the Investment Company Act, or if the
acts as an investment adviser to any investment FR 77052 (Dec. 10, 2010)] (‘‘Implementing adviser is eligible for one of six exemptions the
company registered under the Investment Company Proposing Release’’). Commission has adopted. See id.; rule 203A–2;
Act of 1940 (15 U.S.C. 80a–1) (‘‘Investment 8 See id. at section II.A. infra section II.A.5.
Company Act’’), or a company which has elected 16 An investment adviser must register with the
9 See id. at section II.B. Throughout this Release,
to be a business development company pursuant to Commission unless it is prohibited from registering
we refer to advisers exempt from registration under
section 54 of the Investment Company Act (15 under section 203A of the Advisers Act or is
sections 203(l) and 203(m) of the Advisers Act as
U.S.C. 80a–54). Section 403 of the Dodd-Frank Act exempt from registration under section 203.
‘‘exempt reporting advisers.’’
eliminates this ‘‘private adviser’’ exemption from Advisers Act section 203(a). Investment advisers
section 203(b)(3) and replaces it with a new 10 Rule 206(4)–5. that are prohibited from registering with the
exemption for ‘‘foreign private advisers.’’ We are 11 See Implementing Proposing Release, supra Commission are subject to regulation by the states,
also adopting today a rule to clarify the definition note 7, at section II.D. but the antifraud provisions of the Advisers Act
of a ‘‘foreign private adviser’’ in a separate release. 12 See sections 403, 407 and 408 of the Dodd- continue to apply to them. See Advisers Act
Exemptions for Advisers to Venture Capital Funds, Frank Act; Implementing Proposing Release, supra sections 203A(b), 206. For SEC-registered
Private Fund Advisers With Less Than $150 Million note 7, at section II.C. investment advisers, state laws requiring
in Assets Under Management, and Foreign Private 13 See Implementing Proposing Release, supra registration, licensing, and qualification are
Advisers, Investment Advisers Act Release No. 3222 note 7, at section II.C; section 956 of the Dodd- preempted, but states may investigate and bring
(‘‘Exemptions Adopting Release’’). Frank Act. enforcement actions alleging fraud or deceit, require
5 See section 407 of the Dodd-Frank Act (‘‘The 14 Comment letters submitted in File No. S7–36– notice filings of documents filed with the
Commission shall require such advisers to * * * 10 are available on the Commission’s Web site at: Commission, and require investment advisers to
provide to the Commission such annual or other http://www.sec.gov/comments/s7-36-10/ pay state notice filing fees. See Advisers Act section
reports as the Commission determines necessary or s73610.shtml. We also considered those comments 203A(b); NSMIA, supra note 3, at sections 307(a)
appropriate in the public interest or for the submitted in File No. S7–37–10 (Exemptions for and (b). Section 410 of the Dodd-Frank Act did not
ES2 protection of investors’’). See also section 408 of the Advisers to Venture Capital Funds, Private Fund amend sections 203A(a)(1) or 203(a) of the Advisers
UL Dodd-Frank Act. Section 407 of the Dodd-Frank Advisers with Less Than $150 Million in Assets Act.
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N1P 203(m) to the Advisers Act, exempts advisers solely Proposing Release’’)) that addressed the rules and Release No. 1633, section I (May 15, 1997) [62 FR
V to private funds with assets under management in amendments adopted in this Release. Those 28112 (May 22, 1997)] (‘‘NSMIA Adopting
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42952 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations
advisers’’ and shifts primary As a consequence of section 410 of • Existing Registrants. Under the rule,
responsibility for their regulatory the Dodd-Frank Act, we estimate that each adviser registered with us on
oversight to the states by prohibiting approximately 3,200 SEC-registered January 1, 2012 must file an amendment
from Commission registration an advisers will be required to withdraw to its Form ADV no later than March 30,
investment adviser that is required to be their registrations and register with one 2012.24 These amendments will respond
registered as an investment adviser in or more state securities authorities.22 to new items in Form ADV (discussed
the state in which it maintains its We are working closely with the state below) and will identify mid-sized
principal office and place of business securities authorities to provide an advisers no longer eligible to remain
and that has assets under management orderly transition of investment adviser registered with the Commission.25 Mid-
between $25 million and $100 registrants to state regulation. In sized advisers that are no longer eligible
million.18 Unlike a small adviser, a mid- addition, we are adopting rules and rule for Commission registration must
sized adviser must register with the amendments, discussed below, that withdraw their registrations with us
Commission: (i) if the adviser is not provide us with a means of identifying after filing their Form ADV amendments
required to be registered as an advisers that must transition to state by filing Form ADV–W 26 no later than
investment adviser with the securities regulation, that clarify the application of June 28, 2012.27 Mid-sized advisers
commissioner (or any agency or office new statutory provisions, and that registered with the Commission as of
performing like functions) of the state in modify certain exemptions from the July 21, 2011 must remain registered
which it maintains its principal office prohibition on Commission registration with the Commission (unless an
and place of business; or (ii) if registered that we previously adopted under exemption from Commission
with that state, the adviser would not be section 203A of the Act. registration is available) until January 1,
saudbvjiescetr tboy e txhaamt sinecautirointi eass an investment 1. Transition to State Registration 20•1 2N.2e8w Applicants. Until July 21,
commissioner.19 Section 203A(c) of the We are adopting new rule 203A–5 to 2011, when the amendments to section
Advisers Act, which was not amended provide for an orderly transition to state 203A(a)(2) take effect, advisers applying
registration for mid-sized advisers that for registration with the Commission
by the Dodd-Frank Act, permits the
will no longer be eligible to register with that qualify as mid-sized advisers under
Commission to exempt small and mid-
the Commission.23 section 203A(a)(2) of the Act 29 may
sized advisers from the prohibitions on
register with either the Commission or
Commission registration,20 and we have
Form ADV; (v) certain multi-state investment the appropriate state securities
adopted six exemptions for small
advisers; and (vi) certain Internet advisers). authority.30 Thereafter, all such advisers
advisers pursuant to this authority.21
22 According to data from the Investment Adviser
Registration Depository (‘‘IARD’’) as of April 7,
18 See section 410 of the Dodd-Frank Act (adding 2011, 3,531 SEC-registered advisers either: (i) Had See amended Form ADV: General Instructions
new section 203A(a)(2) of the Advisers Act). This assets under management between $25 million and (special one-time instruction for Dodd-Frank
amendment increases the threshold above which all $90 million and did not indicate on Form ADV Part transition filing for SEC-registered advisers).
investment advisers must register with the 1A that they are relying on an exemption from the 24 New rule 203A–5(b). In this filing, advisers will
Commission from $25 million to $100 million. See prohibition on Commission registration; or (ii) were report the current market value of their assets under
S. Rep. No. 111–176, at 76 (2010) (‘‘Senate permitted to register with us because they rely on management determined within 90 days of the
Committee Report’’). We are further increasing this the registration of an SEC-registered affiliate that filing.
threshold to $110 million, pursuant to authority has assets under management between $25 million 25 See infra sections II.A.2. and II.C. Advisers will
granted to us by Congress. See section 410 of the and $90 million and are not relying on an be required to update all of the items in Form ADV,
Dodd-Frank Act; infra section II.A.4. exemption from registration. We estimate that 350 and this filing will serve as the annual updating
19 See section 410 of the Dodd-Frank Act. A mid- of these advisers will not switch to state registration amendment for most advisers. See infra note 48 and
sized adviser also is required to register with the because their principal office and place of business accompanying text.
Commission if it is an adviser to a registered is located in Minnesota, New York, or Wyoming, 26 17 CFR 279.2 (‘‘Form ADV–W’’).
investment company or business development which did not advise our staff that advisers 27 New rule 203A–5(c)(1).
registered with them are subject to examination. See
company under the Investment Company Act; 28 New rule 203A–5(a). We are using the authority
infra note 152 (according to IARD data as of April
therefore, mid-sized advisers to registered provided to us in section 203A(c) of the Act to
7, 2011, there were 63 mid-sized advisers in
investment companies and business development require mid-sized advisers to remain registered with
Minnesota, 286 in New York, and 1 in Wyoming).
companies are not permitted to withdraw their the Commission until the programming of the IARD
As a result, we estimate that approximately 3,200
Commission registrations. Compare section 410 of is completed. See infra notes 35–41 and
advisers will switch to state registration. 3,531 SEC-
the Dodd-Frank Act with Advisers Act section registered advisers¥350 advisers not switching to accompanying text. For a discussion of section
203A(a)(1). Additionally, a mid-sized adviser may 203A(c) of the Act, see supra note 20. We believe
state registration = 3,181 advisers. In the
register with the Commission if the adviser is that the failure to provide a transition period during
Implementing Proposing Release, we estimated that
required to register in 15 or more states. See section the beginning of 2012 would be unfair, a burden on
approximately 4,100 SEC-registered advisers would
410 of the Dodd-Frank Act. For a discussion of interstate commerce, or otherwise inconsistent with
be required to withdraw their registrations and
advisers required to register in multiple states, see the purposes of section 203A of the Act. We are also
register with one or more state securities
infra section II.A.5.c. adopting, as proposed, a provision that will permit
authorities, based on IARD data as of September 1,
20 For the Commission to permit the registration 2010. See Implementing Proposing Release, supra us to postpone the effectiveness of, and impose
of small and mid-sized advisers with the note 7, at n.15. We have lowered our estimate by additional terms and conditions on, an adviser’s
Commission, application of the prohibition from 900 advisers to account for the advisers that have withdrawal from SEC registration if we institute
registration must be ‘‘unfair, a burden on interstate between $90 million and $100 million of assets certain proceedings before the adviser files Form
commerce, or otherwise inconsistent with the under management that may remain registered with ADV–W. New rule 203A–5(c)(2). This limitation on
purposes’’ of section 203A. Advisers Act section us as a result of the amendments we are adopting withdrawal of an adviser’s registration is similar to
203A(c). The Commission’s exercise of this to rule 203A–1, the advisers that have withdrawn the one we adopted to implement NSMIA in 1997.
authority not only would permit registration with their registrations with us since that time, and as See NSMIA Adopting Release, supra note 17.
the Commission, but also would result in the discussed above, the advisers that will not switch 29 For a discussion of section 203A(a)(2) of the
preemption of state law with respect to the advisers registration because they have a principal office and Act, see supra notes 18–19 and accompanying text.
that register with us as a result of an exemption. See place of business in Minnesota, New York or As discussed above, the Dodd-Frank Act
Advisers Act sections 203(a), 203A(b), and 203A(c). Wyoming. See section II.A.4. for a discussion of amendments to this section will be effective on July
ES2 21 See rule 203A–2 (permitting the following adopted rule 203A–1. Based on IARD data as of 21, 2011. See supra note 6 and accompanying text.
UL types of advisers to register with the Commission: April 7, 2011, 244 advisers had assets under 30 We noted in the Implementing Proposing
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N1P an adviser registered with the Commission; (iv) us and 114 advisers initially registered with us. adviser is not registered with us, so long as the
V investment advisers expecting to be eligible for 23 As proposed, we are also amending the adviser reports on its Form ADV that it has between
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Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations 42953
are prohibited from registering with the transition period would be affected by day period 39 provided to SEC-registered
Commission and must register with the our ability to re-program the IARD, advisers that must switch to state
state securities authorities.31 We also through which advisers file their registration.40 We are persuaded by
note that advisers that have assets under amendments to Form ADV.35 these commenters, and, as described
management of $100 million or more We have worked closely with the above, we are requiring mid-sized
will continue to register with the Financial Industry Regulatory Authority advisers registered with us on July 21,
Commission (unless an exemption from (‘‘FINRA’’), our IARD contractor, to 2011 to remain registered until they
registration with the Commission make the needed modifications, but it switch to state registration after January
otherwise is available).32 has informed us that the programming 1, 2012.41 As noted above, rule 203A–
We have made several changes to will not be completed by the July 21,
5 provides until March 30, 2012 for each
these transition provisions in response 2011 effective date of the Dodd-Frank
adviser already registered with the
to comments we received.33 The Act. We understand that beginning in
Commission to determine whether it is
proposed rule would have provided November, the IARD will be updated to
eligible for Commission registration and
mid-sized advisers with a 90-day reflect the revisions to Form ADV that
to file an amended Form ADV,42 and
transitional process with two ‘‘grace we are adopting today. We noted in the
provides an additional 90 days (i.e., by
periods,’’ the first providing until Implementing Proposing Release that if
June 28, 2012) for an adviser no longer
August 20, 2011 for an adviser to the IARD is unable to accept filings of
eligible for Commission registration to
determine whether it is eligible for revised Form ADV on July 21, 2011, we
register with the states and withdraw its
Commission registration and to file an might consider delaying the transition
registration with us.43 After the end of
amended Form ADV, and the second process until the system could accept
providing until October 19, 2011 for an electronic filing of the revised form.36
adviser to register in the states and Commenters, including the North 39 Our current rule provides an SEC-registered
adviser that has to switch to state registration a
withdraw its registration with us.34 We American Securities Administrators
period of 180 days after its fiscal year end to file
noted in the Implementing Proposing Association, Inc. (‘‘NASAA’’), agreed an annual amendment to Form ADV and to
Release, however, that timing of the with our assessment and supported withdraw its SEC registration after reporting to us
delaying the transition if the IARD that it is no longer eligible to remain registered with
management, is registered as an investment adviser could not accept the revised Form ADV us. See rule 203A–1(b)(2); cf. rule 204–1(a)
(requiring an adviser to file an annual amendment
in the state in which it maintains its principal office instead of adopting alternative
90 days after its fiscal year end).
and place of business, and has a reasonable belief requirements, such as requiring interim 40 Altruist Letter; Dezellem Letter; FSI Letter;
that it is required to be registered with, and is
paper filings.37 Many also urged us to Klein Letter; NYSBA Committee Letter; Schnase
subject to examination as an investment adviser by,
that state. See Implementing Proposing Release, provide additional time for mid-sized Letter; Seward Letter; Shearman Letter. See also
supra note 7, at section II.A.1. In order to account advisers to complete the switch to state ABA Committees Letter (recommending December
foofr t hthee D Joudlyd 2-F1r,a 2n0k1 A1 cetf faencdti vthe ed laotne goefr s tercatniosinti 4o1n0 registration,38 and recommended that 3st1a tdee raedgliisntrea);t iNonR Sp rLoectetesrs )(.r Oecnoem cmomenmdeinngte rro sltlaintegd
period that we are adopting (ending on June 28, the Commission match the current 180- that based on its almost three decades of
2012 instead of October 19, 2011, as proposed), experience, it ‘‘most strongly supports a defined
beginning on July 21, 2011, these advisers will no 35 See Implementing Proposing Release, supra and longer’’ transition period. NRS Letter. Another
longer be able to choose to register with us; instead, note 7, at section II.A.1. stated that ‘‘some states may be unable to process
they will be prohibited from registering with us and 36 See id. such filings in a timely and efficient manner.’’ ABA
must instead register with the states. See infra note Committees Letter. Several commenters echoed
31. We believe that allowing these advisers to 37 Comment letter of the North American concerns about timely state processing of
register with the Commission before January 1, 2012 Securities Administrators Association, Inc. (Feb. 10, applications, noting, in particular, additional
only to require them to withdraw their registrations 2011) (‘‘NASAA Letter’’) (‘‘the benefits of electronic registration and compliance requirements in many
by June 28, 2012 would be burdensome, and filing, including easy public access to the states and expected delays to approve state
permitting them to choose whether to register with documents, are significant and would outweigh any registrations given the increase in filings as a result
disadvantages imposed by a delay in filing
us until the summer of 2012 would be inconsistent of the Dodd-Frank Act. See Altruist Letter (noting
deadlines.’’); comment letter of Bill Dezellem, CFA,
with the purposes of Advisers Act section that it took 122 days for a state to approve its
Tieton Capital Management (Jan. 4, 2011)
203A(a)(2), as amended by section 410 of the Dodd- application). See also CMC Letter; Dezellem Letter;
(‘‘Dezellem Letter’’); comment letter of the National
Frank Act. See supra note 3 and accompanying text. Klein Letter; NRS Letter; NYSBA Committee Letter;
Regulatory Services (Jan. 24, 2011) (‘‘NRS Letter’’);
31 Once registered, an adviser must remain comment letter of the New York State Bar Schnase Letter; Seward Letter. To address potential
registered with the Commission (unless an Association, Business Law Section, Securities timing issues, NASAA noted that it is
exemption is available) until January 1, 2012, when Regulation Committee (Apr. 1, 2011) (‘‘NYSBA recommending to advisers to file with the states as
it may transition to state registration as described Committee Letter’’). soon as possible and to the states to conditionally
above. Until January 1, 2012, we are exempting approve the registrations until the re-filing of Form
from section 203A(a)(2) only those mid-sized 38 Comment letter of the American Bar ADV is completed. NASAA Letter.
Association, Section of Business Law, Committee
advisers already registered with us on July 21, 2011 41 See supra note 28 and accompanying text.
on Federal Regulation of Securities, Committee on
that have at least $25 million in assets under State Regulation of Securities, and the Committee 42 New rule 203A–5(a) and (b). This deadline
management because the IARD will not be able to on Private Equity and Venture Capital (Jan. 31, coincides with the deadline for most advisers’
accept the revised Form ADV by July 21, 2011 and 2011) (‘‘ABA Committees Letter’’); comment letter required annual updating amendment (90 days from
it is our understanding that mid-sized advisers will of Altruist Financial Advisors LLC (Dec. 12, 2010) December 31, 2011), eliminating the requirement
need additional time to switch to state registration. (‘‘Altruist Letter’’); comment letter of Capital that they file an additional amendment to their
See new rule 203A–5(a); supra note 28 and Markets Compliance, LLC (Feb. 8, 2011) (‘‘CMC Form ADV. See rule 204–1(a); infra note 48.
accompanying text. As a result, on or after July 21, Letter’’); Dezellem Letter; comment letter of R.H. Postponing the beginning of the transition process
2011, state-registered advisers and newly- Dinel Investment Counsel, Inc. (Jan. 20, 2011) until January, instead of November or December,
registering advisers will be subject to the section (‘‘Dinel Letter’’); comment letter of Financial also will ensure that the refiling of Form ADV does
203A(a)(2) prohibition from Commission Services Institute (Jan. 24, 2011) (‘‘FSI Letter’’); not interfere with the November state registration
registration. comment letter of Amy Klein (Nov. 30, 2010) and license renewal process and annual system
32 See Advisers Act section 203A(a)(2), as (‘‘Klein Letter’’); NRS Letter; NYSBA Committee outages for the IARD scheduled in December.
amended by the Dodd-Frank Act. See also Advisers Letter; comment letter of Sadis & Goldberg LLP (Jan. 43 New rule 203A–5(c)(1). The rule 203A–5
Act section 203. For a discussion of the threshold 21, 2011) (‘‘Sadis Letter’’); comment letter of L.A. transition period is the same 180-day transition
ES2 requiring larger advisers to register with the Schnase (Dec. 23, 2010) (‘‘Schnase Letter’’); period for advisers that fall below the $25 million
UL Commission, see infra section II.A.4. comment letter of Seward & Kissel LLP (Jan. 31, threshold and have to switch to state registration.
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D with Im3p3l Seemee pnrtoinpgo sPerdo pruoslein 2g0 R3Ael–e5as(ae),– s(ubp);r a note 7, at 2S0h1e1ar) m(‘‘aSne w& aSrtde rLlienttge Lr’L’)P; c(oJamnm. 2e4n,t 2 l0e1tt1e)r of Sreeqeu riureled 2to0 3wAi–th1d(bra)(w2) .f rOomth erre gaidsvtriasteirosn t hbaetc wauislle bteh ey
RO section II.A.1. (‘‘Shearman Letter’’). Only one commenter are no longer eligible for Commission registration
N1P 34 See proposed rule 203A–5(a)–(b); supported the proposed 90-day grace period. will include, for example, pension consultants with
V Implementing Proposing Release, supra note 7, at Comment letter of Pickard and Djinis LLP (Jan. 21, plan assets of $50 million to $200 million. See infra
T
TP section II.A.1. 2011) (‘‘Pickard Letter’’). section II.A.5.b.
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42954 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations
this period, we expect to cancel the by several commenters,49 we are assets under management, which we
registration of advisers no longer providing additional flexibility for an discuss below.54
eligible to register with us that fail to adviser to choose the date by which it To implement the new prohibition on
file an amendment or withdraw their must calculate its assets under registration for mid-sized advisers, we
registrations in accordance with the management reported on Form ADV by are amending Item 2.A. to reflect the
rule.44 The revised process that we are requiring the calculation within 90 days new statutory threshold for registration.
adopting today allows the Commission of the transition filing, rather than 30 Item 2.A. requires each adviser
and state regulators to manage the days.50 This is the same amount of time registered with us (and each applicant
transition of mid-sized advisers in an that advisers are afforded to report for registration) to identify whether it is
orderly manner.45 assets under management after the end eligible to register with the Commission
We are requiring that all advisers because it: (i) Is a large adviser that has
of their fiscal year on Form ADV
registered with us on January 1, 2012— $100 million or more of regulatory
today.51
regardless of size—file amendments to assets under management (or $90
Form ADV no later than March 30, 2. Amendments to Form ADV million or more if an adviser is filing its
2012. Some commenters argued that most recent annual updating
advisers unaffected by the statutory We are adopting several amendments amendment and is already registered
changes effected by the Dodd-Frank Act to Item 2.A. of Part 1A of Form ADV to with us); 55 (ii) is a mid-sized adviser
should not have to complete and file all reflect the new threshold for registration that does not meet the criteria for state
of Form ADV.46 We believe such a filing and the revisions we are making to registration or is not subject to
is necessary for each adviser to confirm related rules in response to the examination; 56 (iii) has its principal
its current eligibility for Commission enactment of the Dodd-Frank Act.52 office and place of business in Wyoming
registration in light of the multiple Item 2 requires each investment adviser (which does not regulate advisers) or
statutory changes (as well as changes to applying for registration to indicate its outside the United States; 57 (iv) meets
the rules that we are adopting today) basis for registration with the the requirements for one or more of the
that could affect whether the adviser Commission and to report annually revised exemptive rules under section
may register with the Commission.47 whether it is eligible to remain 203A discussed below; 58 (v) is an
These commenters’ concerns also registered. We are adopting the adviser (or subadviser) to a registered
should be allayed by the new March 30, revisions to Item 2.A. substantially as investment company; 59 (vi) is an
2012 deadline for filing Form ADV that proposed,53 except that we have revised adviser to a business development
will coincide with most advisers’ the instructions and Item 2.A.(1) to company and has at least $25 million of
required annual updating amendment, reflect our adoption of a ‘‘buffer’’ for regulatory assets under management; 60
eliminating the requirement that they advisers with close to $100 million in or (vii) received an order permitting the
file an additional amendment to their adviser to register with the
Form ADV.48 Finally, as recommended Commission.61
on Part 1A of Form ADV (not just the items required
Each adviser must check at least one
to be updated in a typical other-than-annual
44 See Advisers Act section 203(h). As provided amendment). of these items, or indicate that the
in the Advisers Act, an adviser would be given 49 Altruist Letter (quarter end); comment letter of adviser is no longer eligible to remain
appropriate notice and opportunity for hearing to Dechert LLP (Jan. 24, 2011) (‘‘Dechert General registered with the Commission.62 The
show why its registration should not be cancelled. Letter’’) (rolling 12-month average); Dezellem Letter
IARD will prevent an applicant from
Advisers Act section 211(c). (fiscal year end); Dinel Letter (rolling three-year
45 See also supra notes 24–28 and accompanying average); NYSBA Committee Letter (quarter end); registering with us, and an adviser from
text. Seward Letter (quarter end); Shearman Letter remaining registered, unless it
46 Comment letter of the Investment Company (quarter end). Several commenters argued, for
Institute (Jan. 24, 2011) (‘‘ICI Letter’’) example, that providing for the use of end of quarter 54 See amended Form ADV: Instructions for Part
(recommending exempting advisers that do not rely numbers precludes an administrate burden for 1A, instr. 2.a. For a discussion of the buffer, see
on assets under management to register with the many advisers that value assets on a quarterly basis infra section II.A.4.
SAEsCso);c icaotmiomn e(Jnatn l.e 2tt4e,r 2 o0f1 t1h)e ( ‘M‘ManFaAg eLde tFteurn’’d) s btoe ccaaulcsuel mateo sfte easd.v Aisletrrus iasltr eLaedttye rv; aNluYeS aBsAse Ctso qmumarittetreley are5 5r Aevmiseinndg eFdo rFmor AmD AVD tVo ,u Psaer tt h1eA t,e Irtmem ‘‘ r2e.gAu.l(a1t)o. rWy e
(recommending exempting private fund advisers Letter; Seward Letter; Shearman Letter. assets under management’’ instead of ‘‘assets under
that file an initial Form ADV by July 7); NYSBA 50 New rule 203A–5(b). management.’’ For a discussion of regulatory assets
Committee Letter (recommending exempting 51 Form ADV: Instructions for Part 1A, instr. under management, see infra section II.A.3.
advisers who will continue to be eligible for 5.b.(4).
56 Amended Form ADV, Part 1A, Item 2.A.(2). For
Commission registration and advisers relying on the 52 We are adopting conforming amendments to a discussion of the criteria for state registration and
section 203(b)(3) exemption that we proposed Item 2.A. and the related items in Schedule D to
examination for mid-sized advisers, see infra
would have to register with the Commission by July reflect revisions to rule 203A–2, which provides
section II.A.7.
21, 2011); Shearman Letter (recommending a more exemptions from the prohibition on registration
limited filing of Form ADV to determine eligibility). with the Commission. See amended Form ADV 57 Amended Form ADV, Part 1A, Items 2.A.(3),
2.A.(4).
But most commenters supported the proposal. See Items 2.A.(7), (10) and Section 2.A.(10) of amended
CMC Letter; FSI Letter; NASAA Letter; NRS Letter; Schedule D; infra sections II.A.4., II.A.5., II.A.7. 58 Amended Form ADV, Part 1A, Items 2.A.(7)–
Pickard Letter. Additionally, we are making conforming changes to 2.A.(11). For a discussion of the exemptive rules,
47 In addition, we believe that requiring advisers the instructions for Form ADV. See amended Form see infra section II.A.5.
to complete all of the items will provide the ADV: Instructions for Part 1A, instr. 2. We also are 59 Amended Form ADV, Part 1A, Item 2.A.(5).
Commission and the state regulatory authorities revising the terms used in the rules and Form ADV 60 Amended Form ADV, Part 1A, Item 2.A.(6).
with essential information about the advisers that to refer to the securities authorities in each state 61 Amended Form ADV, Part 1A, Item 2.A.(12).
are transitioning to state registration and the with a single defined term, ‘‘state securities We are also deleting the item for NRSROs to register
advisers that are remaining registered with the authority.’’ Compare amended rules 203A–1, 203A– as investment advisers. For a discussion of
Commission. See infra sections II.A.2., II.C. 2(c) and (d), 203A–3(e); amended Form ADV: NRSROs, see infra section II.A.5.a.
48 As of April 7, 2011, 10,636 of SEC-registered Glossary with rules 203A–1(b)(1), 203A–2(e)(1), 62 Amended Form ADV, Part 1A, Item 2.A.(13).
ES2 advisers (approximately 92%) had a fiscal year 203A–4; Form ADV: Glossary. See also section 410 One commenter asked that we clarify whether
UL ending on December 31. These advisers will comply of the Dodd-Frank Act (amended section 203A(a)(2) advisers must check every box in Item 2.A. that
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D with wbyi tshu rbumlei t2ti0n3gA th–5ei(rb )a’ns nFuoarml a mADenVd fmilienngt .r SeqEuCi-rement oauf tthhoe rAitdy vaiss e‘‘rtsh Ae cset cduersictireibs ecso am smtaitses isoenceurr i(toier sa ny tihnestyr uacreti oelnisg itbol eth teo icthemec kin. dSicchantea steh aLte attne ra.d Tvhisee r
RO registered advisers not required to file an annual agency or office performing like functions)’’). must check ‘‘at least one’’ of the items, but does not
N1P updating amendment between January 1, 2012 and 53 One commenter expressed the view that the require all bases for registration be identified.
V March 30, 2012 will file an other-than-annual item was ‘‘sufficiently and clearly written.’’ NRS Amended Form ADV: Instructions for Part 1A,
T
TP amendment, but they will complete all of the items Letter. instr. 2.
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Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations 42955
represents on Form ADV that it meets at requirement and to distinguish it from Eliminating an adviser’s ability to
least one of the specific eligibility the assets under management disclosure exclude all or some of these assets will
criteria set forth in the Advisers Act or that advisory clients receive in Part 2 of prevent advisers from excluding these
our rules. Form ADV.67 assets from their regulatory assets under
Many commenters expressed general management in order to remain below
3. Assets Under Management
support for providing a uniform method the new asset threshold for registration
In most cases, the amount of assets an of calculating assets under management and to avoid reporting systemic risk
adviser has under management will in order to maintain consistency for information.71 This approach will also
determine whether the adviser must registration and risk assessment lead to more consistent reporting of
register with the Commission or one or purposes.68 Others, however, disagreed assets under management among
more states. Section 203A(a)(2) of the with or sought changes to one or more advisers.
Act defines ‘‘assets under management’’ of the revisions we are making to the A number of commenters disagreed
as the ‘‘securities portfolios’’ with instructions, which we discuss below. with the proposed changes.72 Some
respect to which an adviser provides We are adopting the amendments as argued that advisers should not be
‘‘continuous and regular supervisory or proposed. required to include proprietary assets
management services.’’ 63 Instructions to Under the revised instructions, and assets managed without receiving
Form ADV provide advisers with advisers must include in their compensation in the calculation because
guidance in applying this provision, and regulatory assets under management
such a requirement would be
until now have permitted advisers to securities portfolios for which they
inconsistent with the statutory
exclude certain types of assets that provide continuous and regular
definition of ‘‘investment adviser.’’ 73
otherwise would have to be included.64 supervisory or management services,
Although a person is not an ‘‘investment
We are adopting revisions to the regardless of whether these assets are
adviser’’ for purposes of the Advisers
instructions to Part 1A of Form ADV to family or proprietary assets, assets
Act unless it receives compensation for
implement a uniform method for managed without receiving
providing advice to others, once a
advisers to calculate assets under compensation, or assets of foreign
person meets that definition (by
management that will be used under the clients.69 We proposed to require
receiving compensation from any client
Act for regulatory purposes in addition advisers to include these assets in light
to which it provides advice), the person
to assessing whether an adviser is of the new uses of the term ‘‘assets
is an adviser, and the Act applies to the
eligible to register with the under management’’ in the Advisers Act
relationship between the adviser and
Commission.65 As discussed in more and the new regulatory requirements
any of its clients (whether or not the
detail below, the amendments improve related to systemic risk that we
adviser receives compensation from
consistency by eliminating choices the anticipated would be triggered by
them).74 Moreover, the management of
instructions had provided advisers that registration with the Commission.70
‘‘proprietary’’ assets or assets for which
have enabled some of them to opt in or
the adviser may not be compensated,
out of federal or state regulation (by 67 See amended Form ADV: Instructions for Part
when combined with other client assets,
including or excluding a class of assets). 1A, instr. 5.b.; Amendments to Form ADV,
We are also amending rule 203A–3 to Investment Advisers Act Release No. 3060 (July 28, may suggest that the adviser’s activities
2010) [75 FR 49234 (Aug. 12, 2010)] (‘‘Part 2 are of national concern or have
continue to require that the calculation
Release’’). One commenter supported the change of implications regarding the reporting for
of ‘‘assets under management’’ for terminology. See Schnase Letter (supporting the
the assessment of systemic risk.75 We
purposes of section 203A of the Act be idea of distinguishing ‘‘regulatory assets under
the calculation of the securities management’’ from ‘‘assets under management’’). are therefore adopting the amendment
portfolios with respect to which an 68 See, e.g., comment letter of the American to the instruction, as proposed.76
Federation of Labor and Congress of Industrial
investment adviser provides continuous Organizations (Jan. 24, 2011) (‘‘AFL–CIO Letter’’)
and regular supervisory or management (‘‘an adviser’s calculation of its assets under 71 See Implementing Proposing Release, supra
note 7, at nn.44–45 and accompanying text;
services, as reported on the investment management is central to the determination of
Reporting by Investment Advisers to Private Funds
whether that adviser is required to register with the
adviser’s Form ADV.66 Finally, we are and Certain Commodity Pool Operators and
SEC and be subject to its oversight * * *. The
altering the terminology we use in Part uniform, comprehensive methodology proposed by Commodity Trading Advisors on Form PF,
1A of Form ADV to refer to an adviser’s the SEC will ensure its ability to oversee advisers Investment Advisers Act Release No. IA–3145 (Jan.
26, 2011) [76 FR 8,068 (Feb. 11, 2011)] (‘‘Systemic
‘‘regulatory assets under management’’ to funds that may pose a systemic threat.’’);
Risk Reporting Release’’) (proposing systemic risk
comment letter of Americans for Financial Reform
in order to acknowledge the reporting).
(Jan. 24, 2011) (‘‘AFR Letter’’) (‘‘Because
‘‘regulatory’’ purposes of this reporting calculations of the amount of assets under 72 See AIMA Letter; Dechert General Letter; MFA
management by each adviser are key to the Letter; Pickard Letter; Seward Letter; NYSBA
63 Advisers Act section 203A(a)(2). The Dodd- determination of whether or not they are required Committee Letter.
Frank Act renumbered current paragraph 203A(a)(2) to register, the comprehensive and uniform 73 See Dechert General Letter; MFA Letter;
as 203A(a)(3), but did not amend this definition. definition of these terms in the proposed rule is Seward Letter; NYSBA Committee Letter. See also
See section 410 of the Dodd-Frank Act. particularly important.’’). See also comment letter Pickard Letter. Under Section 202(a)(11) of the
64 See Form ADV: Instructions for Part 1A, instr. of the Alternative Investment Management Advisers Act, the definition of ‘‘investment
5.b. These assets include proprietary assets, assets Association (Jan. 24, 2011) (‘‘AIMA Letter’’); adviser’’ includes, among others, ‘‘any person who,
an adviser manages without receiving Dechert General Letter; comment letter of the for compensation, engages in the business of
compensation, and assets of foreign clients. Investment Adviser Association (by Valerie M. advising others * * * as to the value of securities
65 See amended Form ADV: Instructions for Part Baruch) (Jan. 24, 2011) (‘‘IAA General Letter’’); NRS or as to the advisability of investing in, purchasing,
1A, instr. 5.b. See also sections 402(a) and 408 of Letter; comment letter of O’Melveny & Myers LLP or selling securities * * *.’’
the Dodd-Frank Act (adding section 202(a)(30) of (on behalf of the China Venture Capital and Private 74 See section 202(a)(11); Form ADV: Instructions
the Act, which defines a foreign private adviser as Equity Association) (Jan. 25, 2011) (‘‘O’Melveny for Part 1A, Glossary of Terms, Client.
having ‘‘assets under management’’ attributable to Letter’’); Schnase Letter; NYSBA Committee Letter; 75 See supra note 70.
ES2 U.S. clients and private fund investors of less than Dezellem Letter. 76 One commenter objected to the inclusion of
UL $25 million, and section 203(m) of the Act, which 69 See amended Form ADV: Instructions for Part assets of foreign clients because it would require
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D with dfoirr eacdtvs itsheer sC soomlemlyi stsoi opnri vtoa tper fouvniddes fwoirt han a sesxeetms ption 1A7,0 iSnesetr s. u5p.br.a( 1n)o. te 65. Section 404 of the Dodd- dbaosme etsot irce gaidsvteirs ewrsi tthh atht eo nCloym hmavises aio fno.r eCiognm cmlieenntt
RO under management in the United States of less than Frank Act gives the Commission authority to letter of Katten Muchin Rosenman LLP (on behalf
VN1P $n1o5te0 4m, ailtl isoenc)t;i oEnx eIIm.Bp. tions Adopting Release, supra iCmopmomsei sosnio inn vreepstomrteinngt aadnvdi sreercso rrdegkiesetepriendg with the oHfo AwPeGve Ar,s as edt oMmaensatigce madevnits eUr Sd eInacli.n) g(J aenxc. l2u1s,i v2e0l1y1 ).
T
TP 66 See amended rule 203A–3(d). requirements for systemic risk assessment purposes. Continued
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42956 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations
The revised instructions to Form ADV use gross (rather than net) assets for Proposing Release, advisers to some
also clarify that an adviser must regulatory purposes, the instruction private funds (such as private equity
calculate its regulatory assets under would not preclude an adviser from funds) typically make investments
management on a gross basis, that is, holding itself out to its clients as following capital calls on the funds’
without deduction of ‘‘any outstanding managing a net amount of assets as may investors.87 One commenter agreed with
indebtedness or other accrued but be its custom in, for example, its client this approach generally,88 while another
unpaid liabilities.’’ 77 Several brochure. We are therefore adopting the disagreed, asserting that the uncalled
commenters argued that advisers should instruction, as proposed.83 capital commitments remain under the
determine the amount of regulatory We are also revising the Form ADV management of the fund investor.89 As
assets under management on a net, instructions, as proposed, to provide we noted in the Implementing
rather than gross, basis.78 They asserted guidance regarding how an adviser that Proposing Release, in the early years of
that the use of net assets would better advises private funds determines the a private fund’s life, its adviser typically
reflect the clients’ assets at risk that an amount of assets it has under earns fees based on the total amount of
adviser manages,79 and that use of gross management. We have designed our capital commitments, which we
assets would confuse advisory clients.80 new instructions both to provide presume reflects compensation for
However, nothing in the current advisers with greater certainty in their efforts expended on behalf of the fund
instructions suggests that liabilities calculation of regulatory assets under in preparation for the investments.90 We
should be deducted from the calculation management (which they would also are adopting the instruction, as
of an adviser’s assets under use as a basis to determine their proposed.
management. Indeed, since 1997, the eligibility for certain exemptions that
Third, advisers must use the market
instructions have stated that an adviser we are adopting today in the
value of private fund assets, or the fair
should not deduct securities purchased Exemptions Adopting Release) and to
value of private fund assets where
on margin when calculating its assets prevent advisers from understating
market value is unavailable.91 This
under management.81 Whether a client those assets to avoid registration.
has borrowed to purchase a portion of First, an adviser must include in its requirement is designed to make
assets managed does not seem to us a calculation of regulatory assets under advisers value private fund assets on a
relevant consideration in determining management the value of any private more meaningful and consistent basis
the amount of assets an adviser has to fund over which it exercises continuous for regulatory purposes under the Act
manage and the scope and national and regular supervisory or management and it, therefore, should result in a more
significance of an adviser’s business. services, regardless of the nature of the coherent application of the Act’s
Moreover, we are concerned that the use assets held by the fund.84 A sub-adviser regulatory requirements and assessment
of net assets could permit advisers that to a private fund would include in its of risk. This instruction would prevent,
utilize investment strategies with highly regulatory assets under management for example, an adviser electing to value
leveraged positions to avoid registration only that portion of the value of the its assets based on their cost, which
with the Commission even though the portfolio for which it provides could be significantly lower than the
activities of such advisers may have continuous and regular supervisory or value of the assets based on their fair
national significance. The use of a net management services. Advisers that value, thus permitting the adviser to
assets test also could allow advisers to have discretionary authority over fund avoid registration with or reporting to
large and highly leveraged funds to assets, or a portion of fund assets, and the Commission. It is designed to
avoid systemic risk reporting under our that provide ongoing supervisory or prevent inconsistent application of the
proposed systemic risk reporting management services over those assets Advisers Act to advisers managing the
rules.82 In addition, there need not be would exercise continuous and regular same amount of assets.
any investor confusion because supervisory or management services.85 We received a number of comments
although an adviser will be required to Second, an adviser must include the regarding the use of fair value, which
amount of any uncalled capital represents a change from the current
with foreign clients must register with the commitments made to a private fund instruction that permits an adviser to
Commission if it uses any U.S. jurisdictional means managed by the adviser.86 As we calculate the value of its assets under
in connection with its advisory business. See
explained in the Implementing management based on whatever method
section 203 of the Advisers Act (requiring
registration of any investment adviser that uses the the adviser uses to report its assets to
United States mails or any other means or 83 Some commenters asked that we clarify how clients or to calculate fees for
instrumentality of interstate commerce in the calculation on a gross basis would apply with
connection with its business as an investment respect to, among others, mutual funds, short
adviser unless the adviser qualifies for an positions, and leverage. See IAA General Letter; 87 Implementing Proposing Release, supra note 7,
exemption from registration or is prohibited from MFA Letter. We expect that advisers will continue at n.53 and accompanying text.
registering with the Commission). to calculate their gross assets as they do today, even 88 See AIMA Letter (supporting including
77 See amended Form ADV: Instructions for Part if they currently only calculate gross assets as an uncalled capital commitments, provided that the
1A, instr. 5.b.(2). Accordingly, an adviser cannot intermediate step to compute their net assets. In the adviser has full contractual rights to call that capital
deduct accrued fees, expenses, or the amount of any case of pooled investment vehicles with a balance and would be given responsibility for management
borrowing. Prior to today’s amendments, the sheet, for instance, an adviser could include in the of those assets).
instructions directed advisers not to ‘‘deduct calculation the total assets of the entity as reported 89 See Merkl Exemptions Letter.
securities purchased on margin.’’ on the balance sheet. 90 Implementing Proposing Release, supra note 7,
78 See, e.g., Dechert General Letter; comment 84 See amended Form ADV: Instructions for Part at n.54 and accompanying text.
letter of Georg Merkl (Jan. 25, 2011) (‘‘Merkl 1A, instr. 5.b.(1). One commenter specifically 91 See amended Form ADV: Instructions for Part
Exemptions Letter’’); MFA Letter; Seward Letter; addressed this matter, supporting our approach. See 1A, instr. 5.b.(4). This valuation requirement is
Shearman Letter. See also NYSBA Committee IAA General Letter. described in terms similar to the definition of
ES2 Letter. 85 See amended Form ADV: Instructions for Part ‘‘value’’ in the Investment Company Act, which
UL 79 See Merkl Exemptions Letter; MFA Letter. 1A, instr. 5.b.(3). looks to market value when quotations are readily
D with R 8801 SSeeee DFoercmhe ArtD GVe:n Ienrsatlr uLcettitoern;s M foFrA P aLrett 1teAr., instr. 1A8,6 iSnesetr a. m5.ebn.(d1e).d A F ocarmpi tAalD cVo:m Inmsittrmucetniot niss afo r Part aInvvaeilsatbmlee natn Cdo, mif pnaont,y t hAecnt stoe cftaiiorn v 2al(ua)e(.4 S1e) e(1 5 U.S.C.
RO 5.b.(2). (‘‘Do not deduct securities purchased on contractual obligation of an investor to acquire an 80a–2(a)(41)). Other standards also may be
N1P margin.’’). interest in, or provide the total commitment amount expressed as requiring that a determination of fair
V 82 See Systemic Risk Reporting Release, supra over time to, a private fund, when called by the value be based on market quotations where they are
T
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Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations 42957
investment advisory services.92 One valuation standard.99 While these other from similarly situated advisers.
commenter, for example, supported standards may not provide the quality of Accordingly, we are adopting the
requiring the use of fair value, noting information in financial reporting (for requirement as proposed.
that it would help achieve more example, of private fund returns), we
We also requested comment in the
consistent asset calculations and expect these calculations will provide
Implementing Proposing Release on
reporting across the investment advisory sufficient consistency for the purposes
whether we should require advisers to
industry, and that it would enable better that regulatory assets under
report their assets under management
application of our staff’s risk assessment management serve in our rules (such as
more frequently than annually. All
program.93 Other commenters, applying annual thresholds to
commenters who responded to our
including the Managed Funds determine the registration status of an
request asked that we continue to
Association, however, objected to the adviser).100
require annual reporting, arguing that
use of fair value, asserting that the The alternatives that commenters
more frequent reporting would require
requirement would cause those advisers recommended (e.g., cost basis or any
additional calculations only for
that did not use fair value standards to method required by the private fund’s
purposes of Form ADV disclosure, thus
incur additional costs, particularly if the governing documents other than fair
placing an unnecessary burden on
assets are illiquid and therefore difficult value) would not meet our objective of
advisers.102 As commenters
to fair value.94 having more meaningful and
In the Implementing Proposing comparable valuation of private fund recommended, we are not changing the
Release, we noted that we understood assets, and could result in a significant frequency of the reporting requirement.
that many private funds already value understatement of appreciated assets.101
4. Switching Between State and
assets in accordance with U.S. generally Moreover, these alternative approaches
Commission Registration
accepted accounting principles could permit advisers to circumvent the
(‘‘GAAP’’) or other international Advisers Act’s registration Rule 203A–1 is designed to prevent
accounting standards that require the requirements. Permitting the use of any an adviser from having to switch
use of fair value, citing letters we had valuation standard set forth in the frequently between state and
received in connection with other governing documents of the private Commission registration as a result of
rulemaking initiatives.95 We are fund other than fair value could changes in the value of its assets under
sensitive to the costs this new effectively yield to the adviser the management or the departure of one or
requirement will impose. We believe, choice of the most favorable standard more clients. We are amending the rule
however, that this approach is for determining its registration to eliminate the current buffer for
warranted in light of the unique obligation as well as the application of advisers that have assets under
regulatory purposes of the calculation other regulatory requirements, and management between $25 million and
under the Advisers Act. We estimated would not provide consistent outcomes $30 million that permits these advisers
these costs in the Implementing to remain regulated by the states, and
Proposing Release,96 and have taken 99 Consistent with this good faith requirement, we we are replacing it with a similar buffer
several steps to mitigate them.97 While would expect that an adviser that calculates fair for mid-sized advisers.103 We are also
many advisers will calculate fair value vacacluoeu ninti nacgc foorrd fainnacne cwiaitlh r eGpAorAtiPn go rp aunroptohseers bwaislils of retaining, as proposed, the requirement
in accordance with GAAP or another also use that same basis for purposes of determining that eligibility for registration be
international accounting standard,98 the fair value of its regulatory assets under determined annually as part of an
other advisers acting consistently and in management. adviser’s annual updating amendment,
good faith may utilize another fair 100 The fair valuation process need not be the allowing an adviser to avoid the need to
result of a particular mandated procedure and the
procedure need not involve the use of a third-party change registration status based on
92 See Form ADV: Instructions for Part 1A, instr. pricing service, appraiser or similar outside expert. fluctuations that occur during the
5.b.(4). An adviser could rely on the procedure for course of the year.104
93 See IAA General Letter. See also ABA calculating fair value that is specified in a private
Committees Letter (addressing the requirement fund’s governing documents. The fund’s governing The amended rule provides a buffer
within the context of the asset calculation for documents may provide, for example, that the for mid-sized advisers with assets under
purposes of the foreign private adviser and the fund’s general partner determines the fair value of
private fund adviser exemptions). the fund’s assets. Advisers are not, however, management close to $100 million to
94 See MFA Letter; Merkl Exemptions Letter; required to fair value real estate assets only in those determine whether and when to switch
O’Melveny Letter; Seward Letter. limited circumstances where real estate assets are between state and Commission
95 See Implementing Proposing Release, supra not required to be fair valued for financial reporting
note 7, at n.56 and accompanying text. purposes under accounting principles that
96 See Implementing Proposing Release, supra otherwise require fair value for assets of private 102 See, e.g., AIMA Letter; NRS Letter; O’Melveny
note 7, at n.369 and accompanying text. funds. For example, in those cases, an adviser may Letter; NYSBA Committee Letter. Under the
97 We recognize that although these steps will instead value the real estate assets as the private Systemic Risk Reporting Release, we proposed to
provide advisers greater flexibility in calculating fund does for financial reporting purposes. We note require large advisers with $1 billion or more in
the value of their private fund assets, they also will that the Financial Accounting Standards Board assets under management attributable to hedge
result in valuations that are not as comparable as (‘‘FASB’’) has a current project related to funds, unregistered money market funds or private
they could be if we specified a fair value standard investment property entities that may require real equity funds to file systemic risk reports quarterly.
(e.g., as specified in GAAP). estate assets subject to that accounting standard to See Systemic Risk Reporting Release, supra note 71.
98 Several commenters asked that we not require be measured by the adviser at fair value. See FASB 103 Amended rule 203A–1(a). Additionally, we
advisers to fair value private fund assets in Project on Investment Properties. We also note that are revising the provision in rule 203A–1 that does
accordance with GAAP for purposes of calculating certain international accounting standards currently not require an adviser to withdraw its Commission
regulatory assets under management because many permit, but do not require, fair valuation of certain registration until its assets under management fall
funds, particularly offshore ones, do not use GAAP real estate assets. See International Accounting below $25 million to reflect the new, $90 million
and such a requirement would be unduly Standard 40, Investment Property. To the extent threshold. See amended rule 203A–1(a)(1).
ES2 burdensome. See, e.g., comment letter of European that an adviser follows GAAP or another accounting 104 Amended rule 203A–1(b)(2) (continuing to
UL Fund and Asset Management Association (Jan. 24, standard that requires or in the future requires real require an adviser filing an annual updating
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D with 2C0o1m1m) (e‘‘nEtF lAetMteAr o Lf eKttaetrt’e’n); MIAuAc hGienn Reroasle Lnemttaenr ;L LP etos ttahtee uasssee otsf tfoai br ev afaluire v maleuaesdu,r tehmise nlitm foitre rde aelx ceestpattieo n aemligeinbdlem foenr tC toom itms iFsosriomn AreDgVis trreaptioornti ntog wthiatht ditr iasw n iotts
RO (on behalf of non-U.S. Advisers) (Jan. 24, 2011) assets would not be available. registration within 180 days of its fiscal year end).
N1P (‘‘Katten Foreign Advisers Letter’’). We did not 101 See Merkl Exemptions Letter; MFA Letter; We are not renumbering this paragraph as
V propose such a requirement, nor are we adopting O’Melveny Letter; Seward Letter; NYSBA proposed. Compare proposed rule 203A–1(a)–(b)
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42958 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations
registration.105 The rule raises the the current buffer’s 20 percent increase decrease the $100 million threshold set
threshold above which a mid-sized in assets under management),111 one by Congress in the Dodd-Frank Act.117
investment adviser must register with that would fall below $100 million,112
5. Exemptions From the Prohibition on
the Commission to $110 million; but, and a buffer that straddled above and
Registration With the Commission
once registered with the Commission, below $100 million.113
an adviser need not withdraw its
We are persuaded by these comments Using the authority provided by
registration until it has less than $90
that a buffer may prevent costs and section 203A(c) of the Advisers Act, we
million of assets under management.106
disruption to advisers that otherwise are adopting, as proposed, amendments
Although commenters did not object
to elimination of the current buffer, may have to switch between federal and to three of the exemptions in rule 203A–
several argued that we need to include state registration frequently because of, 2 from the prohibition on Commission
a new buffer for mid-sized advisers that for example, the volatility of the market registration in section 203A to reflect
have close to $100 million of assets values of the assets they manage. Rule developments since their original
under management.107 Some 203A–1(a), as amended, raises the adoption, including the enactment of
commenters, for example, asserted that threshold above which a mid-sized the Dodd-Frank Act, which we discuss
the current $5 million buffer was investment adviser must register with below.118 Each of the exemptions
effective in preventing frequent the Commission to $110 million.114 (including those we are not amending)
switching of registration attributable to Once registered with the Commission, also applies to mid-sized advisers,
market fluctuations,108 while another an adviser need not withdraw its exempting them from the prohibitions
called the buffer an important element registration until it has less than $90 on registering with the Commission if
of regulatory flexibility.109 Several million of assets under management.115 they meet the requirements of rule
advisers with close to $100 million of The amendment operates to provide a 203A–2.119
assets under management asserted that buffer of 20 percent of the $100 million
a buffer is necessary to prevent them statutory threshold for registration with 117 An adviser must register if its assets under
from switching to and from Commission
the Commission, which is the same management are $110 million or more, which is $10
registration.110 Commenters percentage as the current buffer.116 We million higher than the $100 million statutory
recommended several different buffers, threshold. See Advisers Act section 203A(a)(2), as
believe a 20 percent buffer is
including one for advisers with between amended by the Dodd-Frank Act; amended rule
appropriate because it is large enough to 203A–1(a)(1). See also supra note 108 (citing
$100 million and $120 million (to retain
accommodate market fluctuations or the commenters discussing market fluctuations); Senate
departure of one or more clients, and Committee Report, supra note 18, at 76 (stating that
105 Amended rule 203A–1(a). this amendment increases the threshold above
does not substantially increase or
106 Amended rule 203A–1(a)(1). Mid-sized which all investment advisers must register with
advisers eligible for a rule 203A–2 exemption and the Commission from $25 million to $100 million).
advisers to a registered investment company or 111 Altruist Letter; FSI Letter; NASAA Letter; 118 Using the authority provided in section
business development company under the WJM Letter. See also ICW Letter; Merkl 203A(c) of the Advisers Act, the Commission has
Investment Company Act will not be able to rely Implementing Letter; NYSBA Committee Letter. permitted six types of investment advisers to
on the buffer because they are required to register 112 Dezellem Letter ($80–$100 million); Dinel register with the Commission under rule 203A–2:
with us regardless of whether they have $100 Letter ($80–$100 million); JVL Associates Letter (i) NRSROs; (ii) certain pension consultants; (iii)
million of assets under management. Amended rule
($90–$100 million); NRS Letter ($90–$100 million). certain investment advisers affiliated with an
203A–1(a)(2). In addition, advisers that rely on
amended rule 203A–2(c) to register with the 113 Wealth Coach Letter ($85–$115 million). adviser registered with the Commission; (iv)
Commission because they expect to be eligible for 114 We find that raising the threshold for mid- investment advisers expecting to be eligible for
registration within 120 days cannot rely on the sized advisers to register with the Commission is Commission registration within 120 days of filing
buffer—they must have $100 million of assets under appropriate in accordance with the purposes of the Form ADV; (v) certain multi-state investment
management within 120 days to remain registered Advisers Act. Advisers Act section advisers; and (vi) certain Internet advisers. See
with the Commission. See Form ADV: Instructions 203A(a)(2)(B)(ii), as amended by the Dodd-Frank supra notes 20–21 and accompanying text. We are
for Part 1A, instrs. 2.a., 2.g. See also amended rule Act. also renumbering, and making minor conforming
changes to, rule 203A–2(c), (d) and (f) regarding
203A–1(a)(2)(ii); amended rule 203A–2(c). 115 Amended rule 203A–1(a)(1). We find that not
107 Altruist Letter; Dezellem Letter; Dinel Letter; providing this buffer and requiring advisers with investment advisers affiliated with an SEC-
FSI Letter; comment letter of Intelligent assets under management of between $90 million registered adviser, newly formed advisers expecting
Capitalworks Investment Advisors (Jan. 24, 2011) and $100 million to register with the states would to be eligible for Commission registration within
(‘‘ICW Letter’’); comment letter of JVL Associates, be unfair, a burden on interstate commerce, or 120 days, and Internet advisers, respectively. See
LLC (Jan. 13, 2011) (‘‘JVL Associates Letter’’); otherwise inconsistent with the purposes of section amended rule 203A–2(b), (c), and (e). We are
comment letter of Georg Merkl (Jan. 25, 2011) 203A of the Advisers Act. Advisers Act section requiring advisers to comply with amended rule
(‘‘Merkl Implementing Letter’’); NASAA Letter; NRS 203A(c). Advisers Act section 203A(c) permits the 203A–2 60 days after publication in the Federal
Letter; NYSBA Committee Letter; comment letter of Commission to exempt advisers from the Register. See infra section III.
The Wealth Coach, LLC (by Jeffrey W. McClure) prohibition on Commission registration, including 119 Rule 203A–2 provides that advisers meeting
(Dec. 31, 2010) (‘‘Wealth Coach Letter’’); and small and mid-sized advisers, if the application of the criteria for a category of advisers under the rule
comment letter of WJM Financial, LLC (Jan. 4, 2011) the prohibition from registration would be ‘‘unfair, will not be prohibited from registering with us by
(‘‘WJM Letter’’). To prevent an adviser from a burden on interstate commerce, or otherwise Advisers Act section 203A(a). See rule 203A–2;
switching frequently between state and Commission inconsistent with the purposes’’ of section 203A. NSMIA Adopting Release, supra note 17, at section
registration, we proposed to retain an adviser’s See supra note 20 for a discussion of section II.D. The new prohibition on mid-sized advisers
ability to rely on the reporting on Form ADV of 203A(c). registering with the Commission also is established
assets under management in the annual updating 116 Commenters said the current $5 million under Advisers Act section 203A(a); therefore, mid-
amendment for purposes of determining its buffer, which is 20 percent of the $25 million sized advisers meeting the requirements for a
eligibility to register. See proposed rule 203A–1(b). statutory threshold, effectively limits advisers category of exempt advisers under rule 203A–2 are
108 See, e.g., Altruist Letter; NRS Letter. having to switch registrations due to market eligible to register with us. See section 410 of the
109 NASAA Letter. changes in their assets under management. See, e.g., Dodd-Frank Act; amended rule 203A–2. We asked,
110 ICW Letter (for 3 years, adviser’s assets under Altruist Letter (current $5 million buffer ‘‘was but did not receive comment on, whether we
management have been greater than $100 million by useful in lessening the need to switch back and should limit rule 203A–2’s application to small
ES2 a few million dollars and at various times forth between state and Federal regulation as an advisers; however, one commenter agreed that these
UL throughout the year has been reduced to under $100 IA’s AUM grew or fell’’). See also Advisers Act exemptions should apply to all advisers, including
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RO under management have fluctuated around $100 which is 20 percent of the $100 million statutory matter their assets under management as it
N1P million since 2007). See also Wealth Coach Letter threshold. See Advisers Act section 203A(a)(2), as ‘‘promotes uniformity, clarity and a consistent
V (from October 2008 through March 2009, adviser’s amended by the Dodd-Frank Act; amended rule standard for all.’’). We are leaving rule 203A–2
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Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Rules and Regulations 42959
a. Nationally Recognized Statistical Commission registration and register relying on the rule must withdraw from
Rating Organizations with one or more states.126 registration with the Commission when
We proposed to increase the threshold it is no longer required to be registered
We are eliminating, as proposed, the
to $200 million in light of Congress’s with 15 states.132 We are also
exemption in rule 203A–2(a) from the
determination to increase from $25 rescinding, as proposed, the provision
prohibition on Commission registration
million to $100 million the amount of in the current rule that permits advisers
for nationally recognized statistical
‘‘assets under management’’ that to remain registered until the number of
rating organizations (‘‘NRSROs’’).120
requires all advisers to register with the states in which they must register falls
Since we adopted this exemption,
Commission, and to maintain the same below 25 states, and we are not adopting
Congress amended the Act to exclude
ratio as today of plan assets to the a similar cushion for the 15-state
certain NRSROs from the Act’s
statutory threshold for registration.127 threshold.133
definition of ‘‘investment adviser’’ 121
Commenters supported our proposal.128 Commenters generally agreed with
and provided for a separate regulatory
One agreed that the new $200 million our proposal to align our multi-state
regime for NRSROs under the Securities
threshold would continue to ensure that exemption for small advisers with the
Exchange Act of 1934 (‘‘Exchange
the activities of a pension consultant statutory exemption for mid-sized
Act’’).122 Commenters supported the
registered with the Commission are advisers.134 A few, however,
elimination of this provision.123
significant enough to have an impact on recommended a lower threshold of
b. Pension Consultants national markets.129 We are adopting required state registrations for eligibility
We are amending rule 203A–2(b), the the amendment, as proposed. for the multi-state exemption.135 In light
exemption available to pension c. Multi-State Advisers of Congressional determination to set
consultants, to increase the minimum the threshold at 15 states and our stated
value of plan assets required to rely on We are adopting, as proposed, purpose in amending the rule to align it
the exemption from $50 million to amendments to the multi-state adviser with the Dodd-Frank Act, we have
$200 million.124 As discussed in the exemption to align the rule with the determined not to lower the threshold
Implementing Proposing Release, multi-state exemption that Congress further.136 We also note that the
provided for mid-sized advisers in
pension consultants typically do not
have ‘‘assets under management,’’ but section 410 of the Dodd-Frank Act.130 132 See amended rule 203A–2(d). To rely on this
Amended rule 203A–2(d) permits all exemption, an adviser also must continue to: (i)
we have required these advisers to
investment advisers who are required to Include a representation on Schedule D of Form
register with us because their activities ADV that the investment adviser has concluded that
register as an investment adviser with
have a direct effect on the management it must register as an investment adviser with the
of large amounts of pension plan 15 or more states to register with the required number of states; (ii) undertake to
Commission, rather than 30 states, as withdraw from registration with the Commission if
assets.125 As a result of this amendment,
currently required.131 An adviser the adviser indicates on an annual updating
advisers currently relying on the amendment to Form ADV that it would be required
pension consultant exemption advising by the laws of fewer than 15 states to register as an
plan assets of less than $200 million 126 An adviser currently relying on the investment adviser with the state; and (iii) maintain
exemption, but that advises plan assets of less than a record of the states in which the investment
may be required to withdraw from
$200 million and files an annual updating adviser has determined it would, but for the
amendment to its Form ADV following the exemption, be required to register. Amended rule
120 See rule 203A–2(a). compliance date of the amended rule, will be 203A–2(d)(2)–(3). The adviser may not include in
121 Credit Rating Agency Reform Act of 2006, P.L. required to withdraw from Commission registration the number of states those in which it is not
109–291, 120 Stat. 1327 § 4(b)(3)(B) (2006) (‘‘Credit within 180 days of the adviser’s fiscal year end required to register because of applicable state laws
Rating Agency Reform Act’’). See also Advisers Act (unless the adviser is otherwise eligible for SEC or the national de minimis standard of section
section 202(a)(11)(F) (excluding an NRSRO from the registration). See rule 203A–1(b)(2); supra note 118. 222(d) of the Advisers Act. See Exemption for
definition of investment adviser unless it issues 127 Proposed rule 203A–2(a). Investment Advisers Operating in Multiple States;
recommendations about purchasing, selling, or 128 See NRS Letter; Pickard Letter. Revisions to Rules Implementing Amendments to
holding securities or engages in managing assets 129 NRS Letter. See also NSMIA Adopting the Investment Advisers Act of 1940; Investment
that include securities on behalf of others). Release, supra note 17, at n.60 (the $50 million Advisers with Principal Offices and Places of
122 Credit Rating Agency Reform Act, supra note ‘‘higher threshold is necessary to demonstrate that Business in Colorado or Iowa, Investment Advisers
121, at sections 4(a), 5. a pension consultant’s activities have an effect on Act Release No. 1733, n.17 (July 17, 1998) [63 FR
123 NRS Letter (asserting that the proposal is national markets.’’). The higher asset requirement 39708 (July 24, 1998)].
consistent with the Credit Rating Agency Reform also reflects that a pension consultant has 133 See rule 203A–2(e)(1). Eliminating this buffer
Act, which amended the Advisers Act to exclude substantially less control over client assets than an simplifies the requirements of the exemption. See
NRSROs and to provide for a separate regulatory adviser that has ‘‘assets under management.’’ Id. NRS Letter (‘‘The Dodd-Frank Act has addressed
regime for them under the Exchange Act); Pickard 130 Amended rule 203A–2(d). Form ADV will not the multi-state adviser exemption to simplify the
Letter (asserting that continued availability of the be amended to reflect the changes to the multi-state requirements of this exemption.’’)
NRSRO exemption is causing confusion among adviser exemption until the end of the calendar 134 See NASAA Letter; comment letter of the
advisers). year. See supra section II.A.1. Until that time, both National Education Association Member Benefits
124 Amended rule 203A–2(a). Pension consultants a mid-sized adviser eligible for the statutory multi- Corporation (Jan. 21, 2011) (‘‘NEA Letter’’); NRS
provide services to pension and employee benefit state exemption and a small adviser eligible for the Letter; Pickard Letter; Seward Letter; Shearman
plans and their fiduciaries, including assisting them exemption under amended rule 203A–2(d) because Letter.
to select investment advisers that manage plan it is required to register as an adviser in 15 or more 135 See Seward Letter and Shearman Letter (in
assets. See rule 203A–2(b)(2), (3); NSMIA Adopting states may register or remain registered (as the case each case supporting the 15-state threshold we
Release, supra note 17, at section II.D.2. The may be) with the Commission by checking the proposed, and suggesting the burdens of
exemption does not apply to pension consultants boxes (Item 2.A.(9) and the relevant section of maintaining multiple state registrations can be
that solely provide services to plan participants. See Schedule D) indicating that it is exempt because it significant). See also NEA Letter. One of these
NSMIA Adopting Release, supra note 17, at section is required to register in 30 or more states. See commenters also would support further decreasing
II.D.2. To determine the aggregate value of plan supra note 118. Upon making its next amendments the number of states to five and requiring advisers
assets, a pension consultant may only include the to Form ADV, the adviser should revise its filing to relying on the exemption to have at least $25
portion of the plan’s assets for which the consultant report reliance on the new multi-state adviser million of assets under management. Seward Letter.
ES2 provides investment advice. Rule 203A–2(b)(3). exemption. Another ‘‘would support an even lower threshold.’’
UL 125 See Implementing Proposing Release, supra 131 We note that amended rule 203A–2(d) permits Shearman Letter.
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RO Implementing Amendments to the Investment registrations and not switch to SEC registration. See may register with the Commission if it would be
N1P Advisers Act of 1940, Investment Advisers Act amended rule 203A–2(d)(2) (adviser elects to rely required to register with 15 or more states); H. Rep.
V Release No. 1601, section II.D.2. (Dec. 20, 1996) on the exemption by making the required No. 111–517, at 867 (2010) (‘‘Conference Committee
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TP [61 FR 68480 (Dec. 27, 1996)]. representations on Form ADV). Continued
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