[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]
[Rules and Regulations]
[Pages 42950-43105]
[FR Doc No: 2011-16318]

Vol. 76

Tuesday,

No. 138

July 19, 2011

Part III

Securities and Exchange Commission

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17 CFR Parts 275 and 279

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

Federal Register / Vol. 76 , No. 138 / Tuesday, July 19, 2011 / Rules
and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-3221; File No. S7-36-10]
RIN 3235-AK82

Rules Implementing Amendments to the Investment Advisers Act of
1940

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: Effective dates: The effective date of 17 CFR 275.204-4 and
275.203A-5(b) and (c), amendments to 17 CFR 275.0-7, 275.203A-1,
275.203A-2, 275.203A-3, 275.204-1, 275.204-2, 275.206(4)-5, 275.222-1,
and 275.222-2, and amendments to Forms ADV, ADV-E, ADV-H, and ADV-NR
(referenced in 17 CFR part 279) is September 19, 2011. The effective
date of 17 CFR 275.203A-5(a) and the amendment to 17 CFR 275.203-1 is
July 21, 2011. 17 CFR 275.202(a)(11)-1, 275.203(b)(3)-1, 275.203(b)(3)-
2, and 275.203A-4 are removed effective September 19, 2011.
    Compliance Date: See section III of this Release.

FOR FURTHER INFORMATION CONTACT: David P. Bartels, Attorney-Adviser,
Michael J. Spratt, Attorney-Adviser, Jennifer R. Porter, Senior
Counsel, Devin F. Sullivan, Senior Counsel, Melissa A. Roverts, Branch
Chief, Matthew N. Goldin, Branch Chief, or Daniel S. Kahl, Assistant
Director, at<PHONE_NUMBER> or<EMAIL_ADDRESS>Office of Investment
Adviser Regulation, Division of Investment Management, U.S. Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-8549.

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

I. Background
II. Discussion
    A. Eligibility for Registration With the Commission: Section 410
    1. Transition to State Registration
    2. Amendments to Form ADV
    3. Assets Under Management
    4. Switching Between State and Commission Registration
    5. Exemptions From the Prohibition on Registration With the
Commission
    a. Nationally Recognized Statistical Rating Organizations
    b. Pension Consultants
    c. Multi-State Advisers
    6. Elimination of Safe Harbor
    7. Mid-Sized Advisers
    a. Required To Be Registered
    b. Subject to Examination
    B. Exempt Reporting Advisers: Sections 407 and 408
    1. Reporting Required
    2. Information in Reports
    3. Public Availability of Reports
    4. Updating Requirements
    5. Final Reports
    C. Form ADV
    1. Private Fund Reporting: Item 7.B.
    2. Advisory Business Information: Employees, Clients and
Advisory Activities: Item 5
    3. Other Business Activities and Financial Industry
Affiliations: Items 6 and 7
    4. Participation in Client Transactions: Item 8
    5. Custody: Item 9
    6. Reporting $1 Billion in Assets: Item 1.O.
    7. Other Amendments to Form ADV
    D. Other Amendments
    1. Amendments to ``Pay to Play'' Rule
    2. Technical and Conforming Amendments
    a. Rules 203(b)(3)-1 and 203(b)(3)-2
    b. Rule 204-2
    c. Rule 0-7
    d. Rule 222-1
    e. Rule 222-2
    f. Rule 202(a)(11)-1
III. Effective and Compliance Dates
    A. Effective Dates
    B. Compliance Dates
    1. Transition to State Registration and Form ADV
    2. Advisers Previously Exempt Under Section 203(b)(3)
    3. Exempt Reporting Advisers
    4. Other Amendments
IV. Certain Administrative Law Matters
V. Cost-Benefit Analysis
    A. Benefits
    B. Costs
VI. Paperwork Reduction Act Analysis
    A. Rule 203A-2(d)
    B. Form ADV
    C. Rule 203A-5
    D. Form ADV-NR
    E. Rule 203-2 and Form ADV-W
    F. Form ADV-H
    G. Rule 204-2
VII. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the New Rules and Rule Amendments
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to Rules and Rule Amendments
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    E. Agency Action to Minimize Effect on Small Entities
VIII. Effects on Competition, Efficiency and Capital Formation
IX. Statutory Authority
Text of Rule and Form Amendments
Appendix A: Form ADV: General Instructions
Appendix B: Form ADV: Instructions for Part 1A
Appendix C: Form ADV: Glossary of Terms
Appendix D: Form ADV, Part 1A
Appendix E: Form ADV Execution Pages
Appendix F: Form ADV-H
Appendix G: Form ADV-NR
Appendix H: Form ADV-E

I. Background

    On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'')
which, among other things, amends certain provisions of the Advisers
Act.\2\ Title IV of the Dodd-Frank Act (``Title IV'') includes

most of the amendments to the Advisers Act. These amendments include
provisions that reallocate primary responsibility for oversight of
investment advisers by delegating generally to the states
responsibility over certain mid-sized advisers--i.e., those that have
between $25 million and $100 million of assets under management.\3\
These provisions will require a significant number of advisers
currently registered with the Commission to withdraw their
registrations with the Commission and to switch to registration with
one or more state securities authorities. In addition, Title IV repeals
the ``private adviser exemption'' contained in section 203(b)(3) of the
Advisers Act on which many advisers, including those to many hedge
funds, private equity funds, and venture capital funds, rely in order
to avoid registration under the Act.\4\ In eliminating this provision,
Congress created, or directed us to adopt other, in some ways narrower,
exemptions for advisers to certain types of private funds--e.g.,
venture capital funds--which provide that the Commission shall require
such advisers to submit such reports ``as the Commission determines
necessary or appropriate in the public interest.'' \5\ These provisions
in Title IV of the Dodd-Frank Act will be effective on July 21,
2011.\6\
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    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ See section 410 of the Dodd-Frank Act; Advisers Act section
203A. See also National Securities Markets Improvement Act of 1996,
Public Law 104-290, 110 Stat. 3416, Sec.  303 (1996) (``NSMIA'')
(allocating to states certain responsibility for small investment
advisers with less than $25 million in assets under management).
    \4\ See section 403 of the Dodd-Frank Act. Section 203(b)(3)
currently exempts from registration any investment adviser who
during the course of the preceding twelve months, has had fewer than
fifteen clients, and who neither holds himself out generally to the
public as an investment adviser nor acts as an investment adviser to
any investment company registered under the Investment Company Act
of 1940 (15 U.S.C. 80a-1) (``Investment Company Act''), or a company
which has elected to be a business development company pursuant to
section 54 of the Investment Company Act (15 U.S.C. 80a-54). Section
403 of the Dodd-Frank Act eliminates this ``private adviser''
exemption from section 203(b)(3) and replaces it with a new
exemption for ``foreign private advisers.'' We are also adopting
today a rule to clarify the definition of a ``foreign private
adviser'' in a separate release. Exemptions for Advisers to Venture
Capital Funds, Private Fund Advisers With Less Than $150 Million in
Assets Under Management, and Foreign Private Advisers, Investment
Advisers Act Release No. 3222 (``Exemptions Adopting Release'').
    \5\ See section 407 of the Dodd-Frank Act (``The Commission
shall require such advisers to * * * provide to the Commission such
annual or other reports as the Commission determines necessary or
appropriate in the public interest or for the protection of
investors''). See also section 408 of the Dodd-Frank Act. Section
407 of the Dodd-Frank Act, which adds section 203(l) to the Advisers
Act, exempts advisers solely to one or more venture capital funds.
Section 408, which adds section 203(m) to the Advisers Act, exempts
advisers solely to private funds with assets under management in the
United States of less than $150 million.
    \6\ See section 419 of the Dodd-Frank Act. For purposes of this
Release, unless indicated otherwise, when we refer to the effective
date of the Dodd-Frank Act, we are referring to the effective date
of Title IV, which is July 21, 2011.
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    On November 19, 2010, we proposed new rules and amendments to
existing rules and forms to give effect to these provisions.\7\
Specifically, we proposed a new rule and amendments to our rules and
forms to facilitate mid-size advisers' transition from Commission to
state registration.\8\ We also proposed a new rule and rule amendments
to require certain advisers to private funds that are exempt from
registration under the Advisers Act to submit reports to us.\9\ We
proposed rule amendments, including amendments to the Commission's
``pay to play'' rule,\10\ to address a number of other changes to the
Advisers Act made by the Dodd-Frank Act.\11\ Also, in light of our
increased responsibility for oversight of private funds, we proposed to
require advisers to those funds to provide us with additional
information about the operation of those funds.\12\ Finally, we
proposed additional changes to Form ADV that would enhance our
oversight of advisers and also would enable us to identify advisers
that are subject to the Dodd-Frank Act's requirements concerning
certain incentive-based compensation arrangements.\13\
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    \7\ See Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 3110 (Nov. 19,
2010) [75 FR 77052 (Dec. 10, 2010)] (``Implementing Proposing
Release'').
    \8\ See id. at section II.A.
    \9\ See id. at section II.B. Throughout this Release, we refer
to advisers exempt from registration under sections 203(l) and
203(m) of the Advisers Act as ``exempt reporting advisers.''
    \10\ Rule 206(4)-5.
    \11\ See Implementing Proposing Release, supra note 7, at
section II.D.
    \12\ See sections 403, 407 and 408 of the Dodd-Frank Act;
Implementing Proposing Release, supra note 7, at section II.C.
    \13\ See Implementing Proposing Release, supra note 7, at
section II.C; section 956 of the Dodd-Frank Act.
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    We received more than 70 comment letters on our proposals, most of
which were from advisers, trade or professional organizations, and law
firms.\14\ Commenters generally supported our approach to facilitate
mid-size advisers' transition from Commission to state registration,
and our amendments to Form ADV, including those requiring disclosure of
additional information about private funds. Many, however, urged us to
take a different approach to, among other things, our proposed
amendments to the pay to play rule. We are adopting the proposed rules
and rule amendments with several modifications to address commenters'
concerns. We address these modifications and comments in detail below.
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    \14\ Comment letters submitted in File No. S7-36-10 are
available on the Commission's Web site at: http://www.sec.gov/comments/s7-36-10/s73610.shtml. We also considered those comments
submitted in File No. S7-37-10 (Exemptions for Advisers to Venture
Capital Funds, Private Fund Advisers with Less Than $150 Million in
Assets Under Management, and Foreign Private Advisers, Investment
Advisers Act Release No. 3111 (Nov. 19, 2010) [75 FR 77190 (Dec. 10,
2010)] (``Exemptions Proposing Release'')) that addressed the rules
and amendments adopted in this Release. Those comments are available
at on the Commission's Web site at: http://www.sec.gov/comments/s7-37-10/s73710.shtml.
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II. Discussion

A. Eligibility for Registration With the Commission: Section 410

    Section 203A of the Advisers Act, enacted in 1996 as part of the
National Securities Markets Improvement Act (``NSMIA''), generally
prohibits an investment adviser regulated by the state in which it
maintains its principal office and place of business from registering
with the Commission unless it has at least $25 million of assets under
management,\15\ and preempts certain state laws regulating advisers
that are registered with the Commission.\16\ This provision makes the
states the primary regulators of smaller advisers and the Commission
the primary regulator of larger advisers.\17\
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    \15\ Advisers Act section 203A(a)(1). The prohibition does not
apply if the investment adviser is an adviser to an investment
company registered under the Investment Company Act, or if the
adviser is eligible for one of six exemptions the Commission has
adopted. See id.; rule 203A-2; infra section II.A.5.
    \16\ An investment adviser must register with the Commission
unless it is prohibited from registering under section 203A of the
Advisers Act or is exempt from registration under section 203.
Advisers Act section 203(a). Investment advisers that are prohibited
from registering with the Commission are subject to regulation by
the states, but the antifraud provisions of the Advisers Act
continue to apply to them. See Advisers Act sections 203A(b), 206.
For SEC-registered investment advisers, state laws requiring
registration, licensing, and qualification are preempted, but states
may investigate and bring enforcement actions alleging fraud or
deceit, require notice filings of documents filed with the
Commission, and require investment advisers to pay state notice
filing fees. See Advisers Act section 203A(b); NSMIA, supra note 3,
at sections 307(a) and (b). Section 410 of the Dodd-Frank Act did
not amend sections 203A(a)(1) or 203(a) of the Advisers Act.
    \17\ See S. Rep. No. 104-293, at 4 (1996). See also Rules
Implementing Amendments to the Investment Advisers Act of 1940,
Investment Advisers Act Release No. 1633, section I (May 15, 1997)
[62 FR 28112 (May 22, 1997)] (``NSMIA Adopting Release'').
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    Section 410 of the Dodd-Frank Act creates a new category of ``mid-
sized

advisers'' and shifts primary responsibility for their regulatory
oversight to the states by prohibiting from Commission registration an
investment adviser that is required to be registered as an investment
adviser in the state in which it maintains its principal office and
place of business and that has assets under management between $25
million and $100 million.\18\ Unlike a small adviser, a mid-sized
adviser must register with the Commission: (i) if the adviser is not
required to be registered as an investment adviser with the securities
commissioner (or any agency or office performing like functions) of the
state in which it maintains its principal office and place of business;
or (ii) if registered with that state, the adviser would not be subject
to examination as an investment adviser by that securities
commissioner.\19\ Section 203A(c) of the Advisers Act, which was not
amended by the Dodd-Frank Act, permits the Commission to exempt small
and mid-sized advisers from the prohibitions on Commission
registration,\20\ and we have adopted six exemptions for small advisers
pursuant to this authority.\21\
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    \18\ See section 410 of the Dodd-Frank Act (adding new section
203A(a)(2) of the Advisers Act). This amendment increases the
threshold above which all investment advisers must register with the
Commission from $25 million to $100 million. See S. Rep. No. 111-
176, at 76 (2010) (``Senate Committee Report''). We are further
increasing this threshold to $110 million, pursuant to authority
granted to us by Congress. See section 410 of the Dodd-Frank Act;
infra section II.A.4.
    \19\ See section 410 of the Dodd-Frank Act. A mid-sized adviser
also is required to register with the Commission if it is an adviser
to a registered investment company or business development company
under the Investment Company Act; therefore, mid-sized advisers to
registered investment companies and business development companies
are not permitted to withdraw their Commission registrations.
Compare section 410 of the Dodd-Frank Act with Advisers Act section
203A(a)(1). Additionally, a mid-sized adviser may register with the
Commission if the adviser is required to register in 15 or more
states. See section 410 of the Dodd-Frank Act. For a discussion of
advisers required to register in multiple states, see infra section
II.A.5.c.
    \20\ For the Commission to permit the registration of small and
mid-sized advisers with the Commission, application of the
prohibition from registration must be ``unfair, a burden on
interstate commerce, or otherwise inconsistent with the purposes''
of section 203A. Advisers Act section 203A(c). The Commission's
exercise of this authority not only would permit registration with
the Commission, but also would result in the preemption of state law
with respect to the advisers that register with us as a result of an
exemption. See Advisers Act sections 203(a), 203A(b), and 203A(c).
    \21\ See rule 203A-2 (permitting the following types of advisers
to register with the Commission: (i) Nationally recognized
statistical rating organizations (``NRSROs''); (ii) certain pension
consultants; (iii) investment advisers affiliated with an adviser
registered with the Commission; (iv) investment advisers expecting
to be eligible for Commission registration within 120 days of filing
Form ADV; (v) certain multi-state investment advisers; and (vi)
certain Internet advisers).
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    As a consequence of section 410 of the Dodd-Frank Act, we estimate
that approximately 3,200 SEC-registered advisers will be required to
withdraw their registrations and register with one or more state
securities authorities.\22\ We are working closely with the state
securities authorities to provide an orderly transition of investment
adviser registrants to state regulation. In addition, we are adopting
rules and rule amendments, discussed below, that provide us with a
means of identifying advisers that must transition to state regulation,
that clarify the application of new statutory provisions, and that
modify certain exemptions from the prohibition on Commission
registration that we previously adopted under section 203A of the Act.
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    \22\ According to data from the Investment Adviser Registration
Depository (``IARD'') as of April 7, 2011, 3,531 SEC-registered
advisers either: (i) Had assets under management between $25 million
and $90 million and did not indicate on Form ADV Part 1A that they
are relying on an exemption from the prohibition on Commission
registration; or (ii) were permitted to register with us because
they rely on the registration of an SEC-registered affiliate that
has assets under management between $25 million and $90 million and
are not relying on an exemption from registration. We estimate that
350 of these advisers will not switch to state registration because
their principal office and place of business is located in
Minnesota, New York, or Wyoming, which did not advise our staff that
advisers registered with them are subject to examination. See infra
note 152 (according to IARD data as of April 7, 2011, there were 63
mid-sized advisers in Minnesota, 286 in New York, and 1 in Wyoming).
As a result, we estimate that approximately 3,200 advisers will
switch to state registration. 3,531 SEC-registered advisers-350
advisers not switching to state registration = 3,181 advisers. In
the Implementing Proposing Release, we estimated that approximately
4,100 SEC-registered advisers would be required to withdraw their
registrations and register with one or more state securities
authorities, based on IARD data as of September 1, 2010. See
Implementing Proposing Release, supra note 7, at n.15. We have
lowered our estimate by 900 advisers to account for the advisers
that have between $90 million and $100 million of assets under
management that may remain registered with us as a result of the
amendments we are adopting to rule 203A-1, the advisers that have
withdrawn their registrations with us since that time, and as
discussed above, the advisers that will not switch registration
because they have a principal office and place of business in
Minnesota, New York or Wyoming. See section II.A.4. for a discussion
of adopted rule 203A-1. Based on IARD data as of April 7, 2011, 244
advisers had assets under management of between $90 million and $100
million and, from September 2, 2010 to April 7, 2011, 405 advisers
withdrew their registrations with us and 114 advisers initially
registered with us.
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1. Transition to State Registration
    We are adopting new rule 203A-5 to provide for an orderly
transition to state registration for mid-sized advisers that will no
longer be eligible to register with the Commission.\23\
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    \23\ As proposed, we are also amending the instructions to Form
ADV to explain this process. See amended Form ADV: General
Instructions (special one-time instruction for Dodd-Frank transition
filing for SEC-registered advisers).
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     Existing Registrants. Under the rule, each adviser
registered with us on January 1, 2012 must file an amendment to its
Form ADV no later than March 30, 2012.\24\ These amendments will
respond to new items in Form ADV (discussed below) and will identify
mid-sized advisers no longer eligible to remain registered with the
Commission.\25\ Mid-sized advisers that are no longer eligible for
Commission registration must withdraw their registrations with us after
filing their Form ADV amendments by filing Form ADV-W \26\ no later
than June 28, 2012.\27\ Mid-sized advisers registered with the
Commission as of July 21, 2011 must remain registered with the
Commission (unless an exemption from Commission registration is
available) until January 1, 2012.\28\
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    \24\ New rule 203A-5(b). In this filing, advisers will report
the current market value of their assets under management determined
within 90 days of the filing.
    \25\ See infra sections II.A.2. and II.C. Advisers will be
required to update all of the items in Form ADV, and this filing
will serve as the annual updating amendment for most advisers. See
infra note 48 and accompanying text.
    \26\ 17 CFR 279.2 (``Form ADV-W'').
    \27\ New rule 203A-5(c)(1).
    \28\ New rule 203A-5(a). We are using the authority provided to
us in section 203A(c) of the Act to require mid-sized advisers to
remain registered with the Commission until the programming of the
IARD is completed. See infra notes 35-41 and accompanying text. For
a discussion of section 203A(c) of the Act, see supra note 20. We
believe that the failure to provide a transition period during the
beginning of 2012 would be unfair, a burden on interstate commerce,
or otherwise inconsistent with the purposes of section 203A of the
Act. We are also adopting, as proposed, a provision that will permit
us to postpone the effectiveness of, and impose additional terms and
conditions on, an adviser's withdrawal from SEC registration if we
institute certain proceedings before the adviser files Form ADV-W.
New rule 203A-5(c)(2). This limitation on withdrawal of an adviser's
registration is similar to the one we adopted to implement NSMIA in
1997. See NSMIA Adopting Release, supra note 17.
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     New Applicants. Until July 21, 2011, when the amendments
to section 203A(a)(2) take effect, advisers applying for registration
with the Commission that qualify as mid-sized advisers under section
203A(a)(2) of the Act \29\ may register with either the Commission or
the appropriate state securities authority.\30\ Thereafter, all such
advisers

are prohibited from registering with the Commission and must register
with the state securities authorities.\31\ We also note that advisers
that have assets under management of $100 million or more will continue
to register with the Commission (unless an exemption from registration
with the Commission otherwise is available).\32\
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    \29\ For a discussion of section 203A(a)(2) of the Act, see
supra notes 18-19 and accompanying text. As discussed above, the
Dodd-Frank Act amendments to this section will be effective on July
21, 2011. See supra note 6 and accompanying text.
    \30\ We noted in the Implementing Proposing Release that we
would not object if, on or after January 1, 2011 until the end of
the transition period, any state-registered or newly-registering
adviser is not registered with us, so long as the adviser reports on
its Form ADV that it has between $30 million and $100 million of
assets under management, is registered as an investment adviser in
the state in which it maintains its principal office and place of
business, and has a reasonable belief that it is required to be
registered with, and is subject to examination as an investment
adviser by, that state. See Implementing Proposing Release, supra
note 7, at section II.A.1. In order to account for the July 21, 2011
effective date of section 410 of the Dodd-Frank Act and the longer
transition period that we are adopting (ending on June 28, 2012
instead of October 19, 2011, as proposed), beginning on July 21,
2011, these advisers will no longer be able to choose to register
with us; instead, they will be prohibited from registering with us
and must instead register with the states. See infra note 31. We
believe that allowing these advisers to register with the Commission
before January 1, 2012 only to require them to withdraw their
registrations by June 28, 2012 would be burdensome, and permitting
them to choose whether to register with us until the summer of 2012
would be inconsistent with the purposes of Advisers Act section
203A(a)(2), as amended by section 410 of the Dodd-Frank Act. See
supra note 3 and accompanying text.
    \31\ Once registered, an adviser must remain registered with the
Commission (unless an exemption is available) until January 1, 2012,
when it may transition to state registration as described above.
Until January 1, 2012, we are exempting from section 203A(a)(2) only
those mid-sized advisers already registered with us on July 21, 2011
that have at least $25 million in assets under management because
the IARD will not be able to accept the revised Form ADV by July 21,
2011 and it is our understanding that mid-sized advisers will need
additional time to switch to state registration. See new rule 203A-
5(a); supra note 28 and accompanying text. As a result, on or after
July 21, 2011, state-registered advisers and newly-registering
advisers will be subject to the section 203A(a)(2) prohibition from
Commission registration.
    \32\ See Advisers Act section 203A(a)(2), as amended by the
Dodd-Frank Act. See also Advisers Act section 203. For a discussion
of the threshold requiring larger advisers to register with the
Commission, see infra section II.A.4.
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    We have made several changes to these transition provisions in
response to comments we received.\33\ The proposed rule would have
provided mid-sized advisers with a 90-day transitional process with two
``grace periods,'' the first providing until August 20, 2011 for an
adviser to determine whether it is eligible for Commission registration
and to file an amended Form ADV, and the second providing until October
19, 2011 for an adviser to register in the states and withdraw its
registration with us.\34\ We noted in the Implementing Proposing
Release, however, that timing of the transition period would be
affected by our ability to re-program the IARD, through which advisers
file their amendments to Form ADV.\35\
---------------------------------------------------------------------------

    \33\ See proposed rule 203A-5(a)-(b); Implementing Proposing
Release, supra note 7, at section II.A.1.
    \34\ See proposed rule 203A-5(a)-(b); Implementing Proposing
Release, supra note 7, at section II.A.1.
    \35\ See Implementing Proposing Release, supra note 7, at
section II.A.1.
---------------------------------------------------------------------------

    We have worked closely with the Financial Industry Regulatory
Authority (``FINRA''), our IARD contractor, to make the needed
modifications, but it has informed us that the programming will not be
completed by the July 21, 2011 effective date of the Dodd-Frank Act. We
understand that beginning in November, the IARD will be updated to
reflect the revisions to Form ADV that we are adopting today. We noted
in the Implementing Proposing Release that if the IARD is unable to
accept filings of revised Form ADV on July 21, 2011, we might consider
delaying the transition process until the system could accept
electronic filing of the revised form.\36\
---------------------------------------------------------------------------

    \36\ See id.
---------------------------------------------------------------------------

    Commenters, including the North American Securities Administrators
Association, Inc. (``NASAA''), agreed with our assessment and supported
delaying the transition if the IARD could not accept the revised Form
ADV instead of adopting alternative requirements, such as requiring
interim paper filings.\37\ Many also urged us to provide additional
time for mid-sized advisers to complete the switch to state
registration,\38\ and recommended that the Commission match the current
180-day period \39\ provided to SEC-registered advisers that must
switch to state registration.\40\ We are persuaded by these commenters,
and, as described above, we are requiring mid-sized advisers registered
with us on July 21, 2011 to remain registered until they switch to
state registration after January 1, 2012.\41\ As noted above, rule
203A-5 provides until March 30, 2012 for each adviser already
registered with the Commission to determine whether it is eligible for
Commission registration and to file an amended Form ADV,\42\ and
provides an additional 90 days (i.e., by June 28, 2012) for an adviser
no longer eligible for Commission registration to register with the
states and withdraw its registration with us.\43\ After the end of

this period, we expect to cancel the registration of advisers no longer
eligible to register with us that fail to file an amendment or withdraw
their registrations in accordance with the rule.\44\ The revised
process that we are adopting today allows the Commission and state
regulators to manage the transition of mid-sized advisers in an orderly
manner.\45\
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    \37\ Comment letter of the North American Securities
Administrators Association, Inc. (Feb. 10, 2011) (``NASAA Letter'')
(``the benefits of electronic filing, including easy public access
to the documents, are significant and would outweigh any
disadvantages imposed by a delay in filing deadlines.''); comment
letter of Bill Dezellem, CFA, Tieton Capital Management (Jan. 4,
2011) (``Dezellem Letter''); comment letter of the National
Regulatory Services (Jan. 24, 2011) (``NRS Letter''); comment letter
of the New York State Bar Association, Business Law Section,
Securities Regulation Committee (Apr. 1, 2011) (``NYSBA Committee
Letter'').
    \38\ Comment letter of the American Bar Association, Section of
Business Law, Committee on Federal Regulation of Securities,
Committee on State Regulation of Securities, and the Committee on
Private Equity and Venture Capital (Jan. 31, 2011) (``ABA Committees
Letter''); comment letter of Altruist Financial Advisors LLC (Dec.
12, 2010) (``Altruist Letter''); comment letter of Capital Markets
Compliance, LLC (Feb. 8, 2011) (``CMC Letter''); Dezellem Letter;
comment letter of R.H. Dinel Investment Counsel, Inc. (Jan. 20,
2011) (``Dinel Letter''); comment letter of Financial Services
Institute (Jan. 24, 2011) (``FSI Letter''); comment letter of Amy
Klein (Nov. 30, 2010) (``Klein Letter''); NRS Letter; NYSBA
Committee Letter; comment letter of Sadis & Goldberg LLP (Jan. 21,
2011) (``Sadis Letter''); comment letter of L.A. Schnase (Dec. 23,
2010) (``Schnase Letter''); comment letter of Seward & Kissel LLP
(Jan. 31, 2011) (``Seward Letter''); comment letter of Shearman &
Sterling LLP (Jan. 24, 2011) (``Shearman Letter''). Only one
commenter supported the proposed 90-day grace period. Comment letter
of Pickard and Djinis LLP (Jan. 21, 2011) (``Pickard Letter'').
    \39\ Our current rule provides an SEC-registered adviser that
has to switch to state registration a period of 180 days after its
fiscal year end to file an annual amendment to Form ADV and to
withdraw its SEC registration after reporting to us that it is no
longer eligible to remain registered with us. See rule 203A-1(b)(2);
cf. rule 204-1(a) (requiring an adviser to file an annual amendment
90 days after its fiscal year end).
    \40\ Altruist Letter; Dezellem Letter; FSI Letter; Klein Letter;
NYSBA Committee Letter; Schnase Letter; Seward Letter; Shearman
Letter. See also ABA Committees Letter (recommending December 31
deadline); NRS Letter (recommending rolling state registration
process). One commenter stated that based on its almost three
decades of experience, it ``most strongly supports a defined and
longer'' transition period. NRS Letter. Another stated that ``some
states may be unable to process such filings in a timely and
efficient manner.'' ABA Committees Letter. Several commenters echoed
concerns about timely state processing of applications, noting, in
particular, additional registration and compliance requirements in
many states and expected delays to approve state registrations given
the increase in filings as a result of the Dodd-Frank Act. See
Altruist Letter (noting that it took 122 days for a state to approve
its application). See also CMC Letter; Dezellem Letter; Klein
Letter; NRS Letter; NYSBA Committee Letter; Schnase Letter; Seward
Letter. To address potential timing issues, NASAA noted that it is
recommending to advisers to file with the states as soon as possible
and to the states to conditionally approve the registrations until
the re-filing of Form ADV is completed. NASAA Letter.
    \41\ See supra note 28 and accompanying text.
    \42\ New rule 203A-5(a) and (b). This deadline coincides with
the deadline for most advisers' required annual updating amendment
(90 days from December 31, 2011), eliminating the requirement that
they file an additional amendment to their Form ADV. See rule 204-
1(a); infra note 48. Postponing the beginning of the transition
process until January, instead of November or December, also will
ensure that the refiling of Form ADV does not interfere with the
November state registration and license renewal process and annual
system outages for the IARD scheduled in December.
    \43\ New rule 203A-5(c)(1). The rule 203A-5 transition period is
the same 180-day transition period for advisers that fall below the
$25 million threshold and have to switch to state registration. See
rule 203A-1(b)(2). Other advisers that will be required to withdraw
from registration because they are no longer eligible for Commission
registration will include, for example, pension consultants with
plan assets of $50 million to $200 million. See infra section
II.A.5.b.
    \44\ See Advisers Act section 203(h). As provided in the
Advisers Act, an adviser would be given appropriate notice and
opportunity for hearing to show why its registration should not be
cancelled. Advisers Act section 211(c).
    \45\ See also supra notes 24-28 and accompanying text.
---------------------------------------------------------------------------

    We are requiring that all advisers registered with us on January 1,
2012--regardless of size--file amendments to Form ADV no later than
March 30, 2012. Some commenters argued that advisers unaffected by the
statutory changes effected by the Dodd-Frank Act should not have to
complete and file all of Form ADV.\46\ We believe such a filing is
necessary for each adviser to confirm its current eligibility for
Commission registration in light of the multiple statutory changes (as
well as changes to the rules that we are adopting today) that could
affect whether the adviser may register with the Commission.\47\ These
commenters' concerns also should be allayed by the new March 30, 2012
deadline for filing Form ADV that will coincide with most advisers'
required annual updating amendment, eliminating the requirement that
they file an additional amendment to their Form ADV.\48\ Finally, as
recommended by several commenters,\49\ we are providing additional
flexibility for an adviser to choose the date by which it must
calculate its assets under management reported on Form ADV by requiring
the calculation within 90 days of the transition filing, rather than 30
days.\50\ This is the same amount of time that advisers are afforded to
report assets under management after the end of their fiscal year on
Form ADV today.\51\
---------------------------------------------------------------------------

    \46\ Comment letter of the Investment Company Institute (Jan.
24, 2011) (``ICI Letter'') (recommending exempting advisers that do
not rely on assets under management to register with the SEC);
comment letter of the Managed Funds Association (Jan. 24, 2011)
(``MFA Letter'') (recommending exempting private fund advisers that
file an initial Form ADV by July 7); NYSBA Committee Letter
(recommending exempting advisers who will continue to be eligible
for Commission registration and advisers relying on the section
203(b)(3) exemption that we proposed would have to register with the
Commission by July 21, 2011); Shearman Letter (recommending a more
limited filing of Form ADV to determine eligibility). But most
commenters supported the proposal. See CMC Letter; FSI Letter; NASAA
Letter; NRS Letter; Pickard Letter.
    \47\ In addition, we believe that requiring advisers to complete
all of the items will provide the Commission and the state
regulatory authorities with essential information about the advisers
that are transitioning to state registration and the advisers that
are remaining registered with the Commission. See infra sections
II.A.2., II.C.
    \48\ As of April 7, 2011, 10,636 of SEC-registered advisers
(approximately 92%) had a fiscal year ending on December 31. These
advisers will comply with rule 203A-5(b)'s Form ADV filing
requirement by submitting their annual amendment. SEC-registered
advisers not required to file an annual updating amendment between
January 1, 2012 and March 30, 2012 will file an other-than-annual
amendment, but they will complete all of the items on Part 1A of
Form ADV (not just the items required to be updated in a typical
other-than-annual amendment).
    \49\ Altruist Letter (quarter end); comment letter of Dechert
LLP (Jan. 24, 2011) (``Dechert General Letter'') (rolling 12-month
average); Dezellem Letter (fiscal year end); Dinel Letter (rolling
three-year average); NYSBA Committee Letter (quarter end); Seward
Letter (quarter end); Shearman Letter (quarter end). Several
commenters argued, for example, that providing for the use of end of
quarter numbers precludes an administrate burden for many advisers
that value assets on a quarterly basis because most advisers already
value assets quarterly to calculate fees. Altruist Letter; NYSBA
Committee Letter; Seward Letter; Shearman Letter.
    \50\ New rule 203A-5(b).
    \51\ Form ADV: Instructions for Part 1A, instr. 5.b.(4).
---------------------------------------------------------------------------

2. Amendments to Form ADV
    We are adopting several amendments to Item 2.A. of Part 1A of Form
ADV to reflect the new threshold for registration and the revisions we
are making to related rules in response to the enactment of the Dodd-
Frank Act.\52\ Item 2 requires each investment adviser applying for
registration to indicate its basis for registration with the Commission
and to report annually whether it is eligible to remain registered. We
are adopting the revisions to Item 2.A. substantially as proposed,\53\
except that we have revised the instructions and Item 2.A.(1) to
reflect our adoption of a ``buffer'' for advisers with close to $100
million in assets under management, which we discuss below.\54\
---------------------------------------------------------------------------

    \52\ We are adopting conforming amendments to Item 2.A. and the
related items in Schedule D to reflect revisions to rule 203A-2,
which provides exemptions from the prohibition on registration with
the Commission. See amended Form ADV Items 2.A.(7), (10) and Section
2.A.(10) of amended Schedule D; infra sections II.A.4., II.A.5.,
II.A.7. Additionally, we are making conforming changes to the
instructions for Form ADV. See amended Form ADV: Instructions for
Part 1A, instr. 2. We also are revising the terms used in the rules
and Form ADV to refer to the securities authorities in each state
with a single defined term, ``state securities authority.'' Compare
amended rules 203A-1, 203A-2(c) and (d), 203A-3(e); amended Form
ADV: Glossary with rules 203A-1(b)(1), 203A-2(e)(1), 203A-4; Form
ADV: Glossary. See also section 410 of the Dodd-Frank Act (amended
section 203A(a)(2) of the Advisers Act describes a state securities
authority as ``the securities commissioner (or any agency or office
performing like functions)'').
    \53\ One commenter expressed the view that the item was
``sufficiently and clearly written.'' NRS Letter.
    \54\ See amended Form ADV: Instructions for Part 1A, instr. 2.a.
For a discussion of the buffer, see infra section II.A.4.
---------------------------------------------------------------------------

    To implement the new prohibition on registration for mid-sized
advisers, we are amending Item 2.A. to reflect the new statutory
threshold for registration. Item 2.A. requires each adviser registered
with us (and each applicant for registration) to identify whether it is
eligible to register with the Commission because it: (i) Is a large
adviser that has $100 million or more of regulatory assets under
management (or $90 million or more if an adviser is filing its most
recent annual updating amendment and is already registered with us);
\55\ (ii) is a mid-sized adviser that does not meet the criteria for
state registration or is not subject to examination; \56\ (iii) has its
principal office and place of business in Wyoming (which does not
regulate advisers) or outside the United States; \57\ (iv) meets the
requirements for one or more of the revised exemptive rules under
section 203A discussed below; \58\ (v) is an adviser (or subadviser) to
a registered investment company; \59\ (vi) is an adviser to a business
development company and has at least $25 million of regulatory assets
under management; \60\ or (vii) received an order permitting the
adviser to register with the Commission.\61\
---------------------------------------------------------------------------

    \55\ Amended Form ADV, Part 1A, Item 2.A.(1). We are revising
Form ADV to use the term ``regulatory assets under management''
instead of ``assets under management.'' For a discussion of
regulatory assets under management, see infra section II.A.3.
    \56\ Amended Form ADV, Part 1A, Item 2.A.(2). For a discussion
of the criteria for state registration and examination for mid-sized
advisers, see infra section II.A.7.
    \57\ Amended Form ADV, Part 1A, Items 2.A.(3), 2.A.(4).
    \58\ Amended Form ADV, Part 1A, Items 2.A.(7)-2.A.(11). For a
discussion of the exemptive rules, see infra section II.A.5.
    \59\ Amended Form ADV, Part 1A, Item 2.A.(5).
    \60\ Amended Form ADV, Part 1A, Item 2.A.(6).
    \61\ Amended Form ADV, Part 1A, Item 2.A.(12). We are also
deleting the item for NRSROs to register as investment advisers. For
a discussion of NRSROs, see infra section II.A.5.a.
---------------------------------------------------------------------------

    Each adviser must check at least one of these items, or indicate
that the adviser is no longer eligible to remain registered with the
Commission.\62\ The IARD will prevent an applicant from registering
with us, and an adviser from remaining registered, unless it

represents on Form ADV that it meets at least one of the specific
eligibility criteria set forth in the Advisers Act or our rules.
---------------------------------------------------------------------------

    \62\ Amended Form ADV, Part 1A, Item 2.A.(13). One commenter
asked that we clarify whether advisers must check every box in Item
2.A. that they are eligible to check. Schnase Letter. The
instructions to the item indicate that an adviser must check ``at
least one'' of the items, but does not require all bases for
registration be identified. Amended Form ADV: Instructions for Part
1A, instr. 2.
---------------------------------------------------------------------------

3. Assets Under Management
    In most cases, the amount of assets an adviser has under management
will determine whether the adviser must register with the Commission or
one or more states. Section 203A(a)(2) of the Act defines ``assets
under management'' as the ``securities portfolios'' with respect to
which an adviser provides ``continuous and regular supervisory or
management services.'' \63\ Instructions to Form ADV provide advisers
with guidance in applying this provision, and until now have permitted
advisers to exclude certain types of assets that otherwise would have
to be included.\64\
---------------------------------------------------------------------------

    \63\ Advisers Act section 203A(a)(2). The Dodd-Frank Act
renumbered current paragraph 203A(a)(2) as 203A(a)(3), but did not
amend this definition. See section 410 of the Dodd-Frank Act.
    \64\ See Form ADV: Instructions for Part 1A, instr. 5.b. These
assets include proprietary assets, assets an adviser manages without
receiving compensation, and assets of foreign clients.
---------------------------------------------------------------------------

    We are adopting revisions to the instructions to Part 1A of Form
ADV to implement a uniform method for advisers to calculate assets
under management that will be used under the Act for regulatory
purposes in addition to assessing whether an adviser is eligible to
register with the Commission.\65\ As discussed in more detail below,
the amendments improve consistency by eliminating choices the
instructions had provided advisers that have enabled some of them to
opt in or out of federal or state regulation (by including or excluding
a class of assets). We are also amending rule 203A-3 to continue to
require that the calculation of ``assets under management'' for
purposes of section 203A of the Act be the calculation of the
securities portfolios with respect to which an investment adviser
provides continuous and regular supervisory or management services, as
reported on the investment adviser's Form ADV.\66\ Finally, we are
altering the terminology we use in Part 1A of Form ADV to refer to an
adviser's ``regulatory assets under management'' in order to
acknowledge the ``regulatory'' purposes of this reporting requirement
and to distinguish it from the assets under management disclosure that
advisory clients receive in Part 2 of Form ADV.\67\
---------------------------------------------------------------------------

    \65\ See amended Form ADV: Instructions for Part 1A, instr. 5.b.
See also sections 402(a) and 408 of the Dodd-Frank Act (adding
section 202(a)(30) of the Act, which defines a foreign private
adviser as having ``assets under management'' attributable to U.S.
clients and private fund investors of less than $25 million, and
section 203(m) of the Act, which directs the Commission to provide
for an exemption for advisers solely to private funds with assets
under management in the United States of less than $150 million);
Exemptions Adopting Release, supra note 4, at section II.B.
    \66\ See amended rule 203A-3(d).
    \67\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.; Amendments to Form ADV, Investment Advisers Act Release No.
3060 (July 28, 2010) [75 FR 49234 (Aug. 12, 2010)] (``Part 2
Release''). One commenter supported the change of terminology. See
Schnase Letter (supporting the idea of distinguishing ``regulatory
assets under management'' from ``assets under management'').
---------------------------------------------------------------------------

    Many commenters expressed general support for providing a uniform
method of calculating assets under management in order to maintain
consistency for registration and risk assessment purposes.\68\ Others,
however, disagreed with or sought changes to one or more of the
revisions we are making to the instructions, which we discuss below. We
are adopting the amendments as proposed.
---------------------------------------------------------------------------

    \68\ See, e.g., comment letter of the American Federation of
Labor and Congress of Industrial Organizations (Jan. 24, 2011)
(``AFL-CIO Letter'') (``an adviser's calculation of its assets under
management is central to the determination of whether that adviser
is required to register with the SEC and be subject to its oversight
* * *. The uniform, comprehensive methodology proposed by the SEC
will ensure its ability to oversee advisers to funds that may pose a
systemic threat.''); comment letter of Americans for Financial
Reform (Jan. 24, 2011) (``AFR Letter'') (``Because calculations of
the amount of assets under management by each adviser are key to the
determination of whether or not they are required to register, the
comprehensive and uniform definition of these terms in the proposed
rule is particularly important.''). See also comment letter of the
Alternative Investment Management Association (Jan. 24, 2011)
(``AIMA Letter''); Dechert General Letter; comment letter of the
Investment Adviser Association (by Valerie M. Baruch) (Jan. 24,
2011) (``IAA General Letter''); NRS Letter; comment letter of
O'Melveny & Myers LLP (on behalf of the China Venture Capital and
Private Equity Association) (Jan. 25, 2011) (``O'Melveny Letter'');
Schnase Letter; NYSBA Committee Letter; Dezellem Letter.
---------------------------------------------------------------------------

    Under the revised instructions, advisers must include in their
regulatory assets under management securities portfolios for which they
provide continuous and regular supervisory or management services,
regardless of whether these assets are family or proprietary assets,
assets managed without receiving compensation, or assets of foreign
clients.\69\ We proposed to require advisers to include these assets in
light of the new uses of the term ``assets under management'' in the
Advisers Act and the new regulatory requirements related to systemic
risk that we anticipated would be triggered by registration with the
Commission.\70\ Eliminating an adviser's ability to exclude all or some
of these assets will prevent advisers from excluding these assets from
their regulatory assets under management in order to remain below the
new asset threshold for registration and to avoid reporting systemic
risk information.\71\ This approach will also lead to more consistent
reporting of assets under management among advisers.
---------------------------------------------------------------------------

    \69\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(1).
    \70\ See supra note 65. Section 404 of the Dodd-Frank Act gives
the Commission authority to impose on investment advisers registered
with the Commission reporting and recordkeeping requirements for
systemic risk assessment purposes.
    \71\ See Implementing Proposing Release, supra note 7, at nn.44-
45 and accompanying text; Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool Operators and Commodity
Trading Advisors on Form PF, Investment Advisers Act Release No. IA-
3145 (Jan. 26, 2011) [76 FR 8,068 (Feb. 11, 2011)] (``Systemic Risk
Reporting Release'') (proposing systemic risk reporting).
---------------------------------------------------------------------------

    A number of commenters disagreed with the proposed changes.\72\
Some argued that advisers should not be required to include proprietary
assets and assets managed without receiving compensation in the
calculation because such a requirement would be inconsistent with the
statutory definition of ``investment adviser.'' \73\ Although a person
is not an ``investment adviser'' for purposes of the Advisers Act
unless it receives compensation for providing advice to others, once a
person meets that definition (by receiving compensation from any client
to which it provides advice), the person is an adviser, and the Act
applies to the relationship between the adviser and any of its clients
(whether or not the adviser receives compensation from them).\74\
Moreover, the management of ``proprietary'' assets or assets for which
the adviser may not be compensated, when combined with other client
assets, may suggest that the adviser's activities are of national
concern or have implications regarding the reporting for the assessment
of systemic risk.\75\ We are therefore adopting the amendment to the
instruction, as proposed.\76\
---------------------------------------------------------------------------

    \72\ See AIMA Letter; Dechert General Letter; MFA Letter;
Pickard Letter; Seward Letter; NYSBA Committee Letter.
    \73\ See Dechert General Letter; MFA Letter; Seward Letter;
NYSBA Committee Letter. See also Pickard Letter. Under Section
202(a)(11) of the Advisers Act, the definition of ``investment
adviser'' includes, among others, ``any person who, for
compensation, engages in the business of advising others * * * as to
the value of securities or as to the advisability of investing in,
purchasing, or selling securities * * *.''
    \74\ See section 202(a)(11); Form ADV: Instructions for Part 1A,
Glossary of Terms, Client.
    \75\ See supra note 70.
    \76\ One commenter objected to the inclusion of assets of
foreign clients because it would require domestic advisers that only
have a foreign client base to register with the Commission. Comment
letter of Katten Muchin Rosenman LLP (on behalf of APG Asset
Management US Inc.) (Jan. 21, 2011). However, a domestic adviser
dealing exclusively with foreign clients must register with the
Commission if it uses any U.S. jurisdictional means in connection
with its advisory business. See section 203 of the Advisers Act
(requiring registration of any investment adviser that uses the
United States mails or any other means or instrumentality of
interstate commerce in connection with its business as an investment
adviser unless the adviser qualifies for an exemption from
registration or is prohibited from registering with the Commission).

---------------------------------------------------------------------------

    The revised instructions to Form ADV also clarify that an adviser
must calculate its regulatory assets under management on a gross basis,
that is, without deduction of ``any outstanding indebtedness or other
accrued but unpaid liabilities.'' \77\ Several commenters argued that
advisers should determine the amount of regulatory assets under
management on a net, rather than gross, basis.\78\ They asserted that
the use of net assets would better reflect the clients' assets at risk
that an adviser manages,\79\ and that use of gross assets would confuse
advisory clients.\80\ However, nothing in the current instructions
suggests that liabilities should be deducted from the calculation of an
adviser's assets under management. Indeed, since 1997, the instructions
have stated that an adviser should not deduct securities purchased on
margin when calculating its assets under management.\81\ Whether a
client has borrowed to purchase a portion of assets managed does not
seem to us a relevant consideration in determining the amount of assets
an adviser has to manage and the scope and national significance of an
adviser's business. Moreover, we are concerned that the use of net
assets could permit advisers that utilize investment strategies with
highly leveraged positions to avoid registration with the Commission
even though the activities of such advisers may have national
significance. The use of a net assets test also could allow advisers to
large and highly leveraged funds to avoid systemic risk reporting under
our proposed systemic risk reporting rules.\82\ In addition, there need
not be any investor confusion because although an adviser will be
required to use gross (rather than net) assets for regulatory purposes,
the instruction would not preclude an adviser from holding itself out
to its clients as managing a net amount of assets as may be its custom
in, for example, its client brochure. We are therefore adopting the
instruction, as proposed.\83\
---------------------------------------------------------------------------

    \77\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(2). Accordingly, an adviser cannot deduct accrued fees,
expenses, or the amount of any borrowing. Prior to today's
amendments, the instructions directed advisers not to ``deduct
securities purchased on margin.''
    \78\ See, e.g., Dechert General Letter; comment letter of Georg
Merkl (Jan. 25, 2011) (``Merkl Exemptions Letter''); MFA Letter;
Seward Letter; Shearman Letter. See also NYSBA Committee Letter.
    \79\ See Merkl Exemptions Letter; MFA Letter.
    \80\ See Dechert General Letter; MFA Letter.
    \81\ See Form ADV: Instructions for Part 1A, instr. 5.b.(2).
(``Do not deduct securities purchased on margin.'').
    \82\ See Systemic Risk Reporting Release, supra note 71.
    \83\ Some commenters asked that we clarify how the calculation
on a gross basis would apply with respect to, among others, mutual
funds, short positions, and leverage. See IAA General Letter; MFA
Letter. We expect that advisers will continue to calculate their
gross assets as they do today, even if they currently only calculate
gross assets as an intermediate step to compute their net assets. In
the case of pooled investment vehicles with a balance sheet, for
instance, an adviser could include in the calculation the total
assets of the entity as reported on the balance sheet.
---------------------------------------------------------------------------

    We are also revising the Form ADV instructions, as proposed, to
provide guidance regarding how an adviser that advises private funds
determines the amount of assets it has under management. We have
designed our new instructions both to provide advisers with greater
certainty in their calculation of regulatory assets under management
(which they would also use as a basis to determine their eligibility
for certain exemptions that we are adopting today in the Exemptions
Adopting Release) and to prevent advisers from understating those
assets to avoid registration.
    First, an adviser must include in its calculation of regulatory
assets under management the value of any private fund over which it
exercises continuous and regular supervisory or management services,
regardless of the nature of the assets held by the fund.\84\ A sub-
adviser to a private fund would include in its regulatory assets under
management only that portion of the value of the portfolio for which it
provides continuous and regular supervisory or management services.
Advisers that have discretionary authority over fund assets, or a
portion of fund assets, and that provide ongoing supervisory or
management services over those assets would exercise continuous and
regular supervisory or management services.\85\
---------------------------------------------------------------------------

    \84\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(1). One commenter specifically addressed this matter,
supporting our approach. See IAA General Letter.
    \85\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(3).
---------------------------------------------------------------------------

    Second, an adviser must include the amount of any uncalled capital
commitments made to a private fund managed by the adviser.\86\ As we
explained in the Implementing Proposing Release, advisers to some
private funds (such as private equity funds) typically make investments
following capital calls on the funds' investors.\87\ One commenter
agreed with this approach generally,\88\ while another disagreed,
asserting that the uncalled capital commitments remain under the
management of the fund investor.\89\ As we noted in the Implementing
Proposing Release, in the early years of a private fund's life, its
adviser typically earns fees based on the total amount of capital
commitments, which we presume reflects compensation for efforts
expended on behalf of the fund in preparation for the investments.\90\
We are adopting the instruction, as proposed.
---------------------------------------------------------------------------

    \86\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(1). A capital commitment is a contractual obligation of an
investor to acquire an interest in, or provide the total commitment
amount over time to, a private fund, when called by the fund.
    \87\ Implementing Proposing Release, supra note 7, at n.53 and
accompanying text.
    \88\ See AIMA Letter (supporting including uncalled capital
commitments, provided that the adviser has full contractual rights
to call that capital and would be given responsibility for
management of those assets).
    \89\ See Merkl Exemptions Letter.
    \90\ Implementing Proposing Release, supra note 7, at n.54 and
accompanying text.
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    Third, advisers must use the market value of private fund assets,
or the fair value of private fund assets where market value is
unavailable.\91\ This requirement is designed to make advisers value
private fund assets on a more meaningful and consistent basis for
regulatory purposes under the Act and it, therefore, should result in a
more coherent application of the Act's regulatory requirements and
assessment of risk. This instruction would prevent, for example, an
adviser electing to value its assets based on their cost, which could
be significantly lower than the value of the assets based on their fair
value, thus permitting the adviser to avoid registration with or
reporting to the Commission. It is designed to prevent inconsistent
application of the Advisers Act to advisers managing the same amount of
assets.
---------------------------------------------------------------------------

    \91\ See amended Form ADV: Instructions for Part 1A, instr.
5.b.(4). This valuation requirement is described in terms similar to
the definition of ``value'' in the Investment Company Act, which
looks to market value when quotations are readily available and, if
not, then to fair value. See Investment Company Act section 2(a)(41)
(15 U.S.C. 80a-2(a)(41)). Other standards also may be expressed as
requiring that a determination of fair value be based on market
quotations where they are readily available.
---------------------------------------------------------------------------

    We received a number of comments regarding the use of fair value,
which represents a change from the current instruction that permits an
adviser to calculate the value of its assets under management based on
whatever method the adviser uses to report its assets to clients or to
calculate fees for

investment advisory services.\92\ One commenter, for example, supported
requiring the use of fair value, noting that it would help achieve more
consistent asset calculations and reporting across the investment
advisory industry, and that it would enable better application of our
staff's risk assessment program.\93\ Other commenters, including the
Managed Funds Association, however, objected to the use of fair value,
asserting that the requirement would cause those advisers that did not
use fair value standards to incur additional costs, particularly if the
assets are illiquid and therefore difficult to fair value.\94\
---------------------------------------------------------------------------

    \92\ See Form ADV: Instructions for Part 1A, instr. 5.b.(4).
    \93\ See IAA General Letter. See also ABA Committees Letter
(addressing the requirement within the context of the asset
calculation for purposes of the foreign private adviser and the
private fund adviser exemptions).
    \94\ See MFA Letter; Merkl Exemptions Letter; O'Melveny Letter;
Seward Letter.
---------------------------------------------------------------------------

    In the Implementing Proposing Release, we noted that we understood
that many private funds already value assets in accordance with U.S.
generally accepted accounting principles (``GAAP'') or other
international accounting standards that require the use of fair value,
citing letters we had received in connection with other rulemaking
initiatives.\95\ We are sensitive to the costs this new requirement
will impose. We believe, however, that this approach is warranted in
light of the unique regulatory purposes of the calculation under the
Advisers Act. We estimated these costs in the Implementing Proposing
Release,\96\ and have taken several steps to mitigate them.\97\ While
many advisers will calculate fair value in accordance with GAAP or
another international accounting standard,\98\ other advisers acting
consistently and in good faith may utilize another fair valuation
standard.\99\ While these other standards may not provide the quality
of information in financial reporting (for example, of private fund
returns), we expect these calculations will provide sufficient
consistency for the purposes that regulatory assets under management
serve in our rules (such as applying annual thresholds to determine the
registration status of an adviser).\100\
---------------------------------------------------------------------------

    \95\ See Implementing Proposing Release, supra note 7, at n.56
and accompanying text.
    \96\ See Implementing Proposing Release, supra note 7, at n.369
and accompanying text.
    \97\ We recognize that although these steps will provide
advisers greater flexibility in calculating the value of their
private fund assets, they also will result in valuations that are
not as comparable as they could be if we specified a fair value
standard (e.g., as specified in GAAP).
    \98\ Several commenters asked that we not require advisers to
fair value private fund assets in accordance with GAAP for purposes
of calculating regulatory assets under management because many
funds, particularly offshore ones, do not use GAAP and such a
requirement would be unduly burdensome. See, e.g., comment letter of
European Fund and Asset Management Association (Jan. 24, 2011)
(``EFAMA Letter''); IAA General Letter; Comment letter of Katten
Muchin Rosenman LLP (on behalf of non-U.S. Advisers) (Jan. 24, 2011)
(``Katten Foreign Advisers Letter''). We did not propose such a
requirement, nor are we adopting one.
    \99\ Consistent with this good faith requirement, we would
expect that an adviser that calculates fair value in accordance with
GAAP or another basis of accounting for financial reporting purposes
will also use that same basis for purposes of determining the fair
value of its regulatory assets under management.
    \100\ The fair valuation process need not be the result of a
particular mandated procedure and the procedure need not involve the
use of a third-party pricing service, appraiser or similar outside
expert. An adviser could rely on the procedure for calculating fair
value that is specified in a private fund's governing documents. The
fund's governing documents may provide, for example, that the fund's
general partner determines the fair value of the fund's assets.
Advisers are not, however, required to fair value real estate assets
only in those limited circumstances where real estate assets are not
required to be fair valued for financial reporting purposes under
accounting principles that otherwise require fair value for assets
of private funds. For example, in those cases, an adviser may
instead value the real estate assets as the private fund does for
financial reporting purposes. We note that the Financial Accounting
Standards Board (``FASB'') has a current project related to
investment property entities that may require real estate assets
subject to that accounting standard to be measured by the adviser at
fair value. See FASB Project on Investment Properties. We also note
that certain international accounting standards currently permit,
but do not require, fair valuation of certain real estate assets.
See International Accounting Standard 40, Investment Property. To
the extent that an adviser follows GAAP or another accounting
standard that requires or in the future requires real estate assets
to be fair valued, this limited exception to the use of fair value
measurement for real estate assets would not be available.
---------------------------------------------------------------------------

    The alternatives that commenters recommended (e.g., cost basis or
any method required by the private fund's governing documents other
than fair value) would not meet our objective of having more meaningful
and comparable valuation of private fund assets, and could result in a
significant understatement of appreciated assets.\101\ Moreover, these
alternative approaches could permit advisers to circumvent the Advisers
Act's registration requirements. Permitting the use of any valuation
standard set forth in the governing documents of the private fund other
than fair value could effectively yield to the adviser the choice of
the most favorable standard for determining its registration obligation
as well as the application of other regulatory requirements, and would
not provide consistent outcomes from similarly situated advisers.
Accordingly, we are adopting the requirement as proposed.
---------------------------------------------------------------------------

    \101\ See Merkl Exemptions Letter; MFA Letter; O'Melveny Letter;
Seward Letter; NYSBA Committee Letter.
---------------------------------------------------------------------------

    We also requested comment in the Implementing Proposing Release on
whether we should require advisers to report their assets under
management more frequently than annually. All commenters who responded
to our request asked that we continue to require annual reporting,
arguing that more frequent reporting would require additional
calculations only for purposes of Form ADV disclosure, thus placing an
unnecessary burden on advisers.\102\ As commenters recommended, we are
not changing the frequency of the reporting requirement.
---------------------------------------------------------------------------

    \102\ See, e.g., AIMA Letter; NRS Letter; O'Melveny Letter;
NYSBA Committee Letter. Under the Systemic Risk Reporting Release,
we proposed to require large advisers with $1 billion or more in
assets under management attributable to hedge funds, unregistered
money market funds or private equity funds to file systemic risk
reports quarterly. See Systemic Risk Reporting Release, supra note
71.
---------------------------------------------------------------------------

4. Switching Between State and Commission Registration
    Rule 203A-1 is designed to prevent an adviser from having to switch
frequently between state and Commission registration as a result of
changes in the value of its assets under management or the departure of
one or more clients. We are amending the rule to eliminate the current
buffer for advisers that have assets under management between $25
million and $30 million that permits these advisers to remain regulated
by the states, and we are replacing it with a similar buffer for mid-
sized advisers.\103\ We are also retaining, as proposed, the
requirement that eligibility for registration be determined annually as
part of an adviser's annual updating amendment, allowing an adviser to
avoid the need to change registration status based on fluctuations that
occur during the course of the year.\104\
---------------------------------------------------------------------------

    \103\ Amended rule 203A-1(a). Additionally, we are revising the
provision in rule 203A-1 that does not require an adviser to
withdraw its Commission registration until its assets under
management fall below $25 million to reflect the new, $90 million
threshold. See amended rule 203A-1(a)(1).
    \104\ Amended rule 203A-1(b)(2) (continuing to require an
adviser filing an annual updating amendment to its Form ADV
reporting that it is not eligible for Commission registration to
withdraw its registration within 180 days of its fiscal year end).
We are not renumbering this paragraph as proposed. Compare proposed
rule 203A-1(a)-(b) with amended rule 203A-1(b)(1)-(2).
---------------------------------------------------------------------------

    The amended rule provides a buffer for mid-sized advisers with
assets under management close to $100 million to determine whether and
when to switch between state and Commission

registration.\105\ The rule raises the threshold above which a mid-
sized investment adviser must register with the Commission to $110
million; but, once registered with the Commission, an adviser need not
withdraw its registration until it has less than $90 million of assets
under management.\106\
---------------------------------------------------------------------------

    \105\ Amended rule 203A-1(a).
    \106\ Amended rule 203A-1(a)(1). Mid-sized advisers eligible for
a rule 203A-2 exemption and advisers to a registered investment
company or business development company under the Investment Company
Act will not be able to rely on the buffer because they are required
to register with us regardless of whether they have $100 million of
assets under management. Amended rule 203A-1(a)(2). In addition,
advisers that rely on amended rule 203A-2(c) to register with the
Commission because they expect to be eligible for registration
within 120 days cannot rely on the buffer--they must have $100
million of assets under management within 120 days to remain
registered with the Commission. See Form ADV: Instructions for Part
1A, instrs. 2.a., 2.g. See also amended rule 203A-1(a)(2)(ii);
amended rule 203A-2(c).
---------------------------------------------------------------------------

    Although commenters did not object to elimination of the current
buffer, several argued that we need to include a new buffer for mid-
sized advisers that have close to $100 million of assets under
management.\107\ Some commenters, for example, asserted that the
current $5 million buffer was effective in preventing frequent
switching of registration attributable to market fluctuations,\108\
while another called the buffer an important element of regulatory
flexibility.\109\ Several advisers with close to $100 million of assets
under management asserted that a buffer is necessary to prevent them
from switching to and from Commission registration.\110\ Commenters
recommended several different buffers, including one for advisers with
between $100 million and $120 million (to retain the current buffer's
20 percent increase in assets under management),\111\ one that would
fall below $100 million,\112\ and a buffer that straddled above and
below $100 million.\113\
---------------------------------------------------------------------------

    \107\ Altruist Letter; Dezellem Letter; Dinel Letter; FSI
Letter; comment letter of Intelligent Capitalworks Investment
Advisors (Jan. 24, 2011) (``ICW Letter''); comment letter of JVL
Associates, LLC (Jan. 13, 2011) (``JVL Associates Letter''); comment
letter of Georg Merkl (Jan. 25, 2011) (``Merkl Implementing
Letter''); NASAA Letter; NRS Letter; NYSBA Committee Letter; comment
letter of The Wealth Coach, LLC (by Jeffrey W. McClure) (Dec. 31,
2010) (``Wealth Coach Letter''); and comment letter of WJM
Financial, LLC (Jan. 4, 2011) (``WJM Letter''). To prevent an
adviser from switching frequently between state and Commission
registration, we proposed to retain an adviser's ability to rely on
the reporting on Form ADV of assets under management in the annual
updating amendment for purposes of determining its eligibility to
register. See proposed rule 203A-1(b).
    \108\ See, e.g., Altruist Letter; NRS Letter.
    \109\ NASAA Letter.
    \110\ ICW Letter (for 3 years, adviser's assets under management
have been greater than $100 million by a few million dollars and at
various times throughout the year has been reduced to under $100
million by just a few days of downside market volatility); JVL
Associates Letter (adviser's assets under management have fluctuated
around $100 million since 2007). See also Wealth Coach Letter (from
October 2008 through March 2009, adviser's total assets under
management fell over 25%).
    \111\ Altruist Letter; FSI Letter; NASAA Letter; WJM Letter. See
also ICW Letter; Merkl Implementing Letter; NYSBA Committee Letter.
    \112\ Dezellem Letter ($80-$100 million); Dinel Letter ($80-$100
million); JVL Associates Letter ($90-$100 million); NRS Letter ($90-
$100 million).
    \113\ Wealth Coach Letter ($85-$115 million).
---------------------------------------------------------------------------

    We are persuaded by these comments that a buffer may prevent costs
and disruption to advisers that otherwise may have to switch between
federal and state registration frequently because of, for example, the
volatility of the market values of the assets they manage. Rule 203A-
1(a), as amended, raises the threshold above which a mid-sized
investment adviser must register with the Commission to $110
million.\114\ Once registered with the Commission, an adviser need not
withdraw its registration until it has less than $90 million of assets
under management.\115\ The amendment operates to provide a buffer of 20
percent of the $100 million statutory threshold for registration with
the Commission, which is the same percentage as the current
buffer.\116\ We believe a 20 percent buffer is appropriate because it
is large enough to accommodate market fluctuations or the departure of
one or more clients, and does not substantially increase or decrease
the $100 million threshold set by Congress in the Dodd-Frank Act.\117\
---------------------------------------------------------------------------

    \114\ We find that raising the threshold for mid-sized advisers
to register with the Commission is appropriate in accordance with
the purposes of the Advisers Act. Advisers Act section
203A(a)(2)(B)(ii), as amended by the Dodd-Frank Act.
    \115\ Amended rule 203A-1(a)(1). We find that not providing this
buffer and requiring advisers with assets under management of
between $90 million and $100 million to register with the states
would be unfair, a burden on interstate commerce, or otherwise
inconsistent with the purposes of section 203A of the Advisers Act.
Advisers Act section 203A(c). Advisers Act section 203A(c) permits
the Commission to exempt advisers from the prohibition on Commission
registration, including small and mid-sized advisers, if the
application of the prohibition from registration would be ``unfair,
a burden on interstate commerce, or otherwise inconsistent with the
purposes'' of section 203A. See supra note 20 for a discussion of
section 203A(c).
    \116\ Commenters said the current $5 million buffer, which is 20
percent of the $25 million statutory threshold, effectively limits
advisers having to switch registrations due to market changes in
their assets under management. See, e.g., Altruist Letter (current
$5 million buffer ``was useful in lessening the need to switch back
and forth between state and Federal regulation as an IA's AUM grew
or fell''). See also Advisers Act section 203A(a)(1); rule 203A-
1(a). The amendment we are adopting provides a $20 million buffer,
which is 20 percent of the $100 million statutory threshold. See
Advisers Act section 203A(a)(2), as amended by the Dodd-Frank Act;
amended rule 203A-1(a)(1).
    \117\ An adviser must register if its assets under management
are $110 million or more, which is $10 million higher than the $100
million statutory threshold. See Advisers Act section 203A(a)(2), as
amended by the Dodd-Frank Act; amended rule 203A-1(a)(1). See also
supra note 108 (citing commenters discussing market fluctuations);
Senate Committee Report, supra note 18, at 76 (stating that this
amendment increases the threshold above which all investment
advisers must register with the Commission from $25 million to $100
million).
---------------------------------------------------------------------------

5. Exemptions From the Prohibition on Registration With the Commission
    Using the authority provided by section 203A(c) of the Advisers
Act, we are adopting, as proposed, amendments to three of the
exemptions in rule 203A-2 from the prohibition on Commission
registration in section 203A to reflect developments since their
original adoption, including the enactment of the Dodd-Frank Act, which
we discuss below.\118\ Each of the exemptions (including those we are
not amending) also applies to mid-sized advisers, exempting them from
the prohibitions on registering with the Commission if they meet the
requirements of rule 203A-2.\119\
---------------------------------------------------------------------------

    \118\ Using the authority provided in section 203A(c) of the
Advisers Act, the Commission has permitted six types of investment
advisers to register with the Commission under rule 203A-2: (i)
NRSROs; (ii) certain pension consultants; (iii) certain investment
advisers affiliated with an adviser registered with the Commission;
(iv) investment advisers expecting to be eligible for Commission
registration within 120 days of filing Form ADV; (v) certain multi-
state investment advisers; and (vi) certain Internet advisers. See
supra notes 20-21 and accompanying text. We are also renumbering,
and making minor conforming changes to, rule 203A-2(c), (d) and (f)
regarding investment advisers affiliated with an SEC-registered
adviser, newly formed advisers expecting to be eligible for
Commission registration within 120 days, and Internet advisers,
respectively. See amended rule 203A-2(b), (c), and (e). We are
requiring advisers to comply with amended rule 203A-2 60 days after
publication in the Federal Register. See infra section III.
    \119\ Rule 203A-2 provides that advisers meeting the criteria
for a category of advisers under the rule will not be prohibited
from registering with us by Advisers Act section 203A(a). See rule
203A-2; NSMIA Adopting Release, supra note 17, at section II.D. The
new prohibition on mid-sized advisers registering with the
Commission also is established under Advisers Act section 203A(a);
therefore, mid-sized advisers meeting the requirements for a
category of exempt advisers under rule 203A-2 are eligible to
register with us. See section 410 of the Dodd-Frank Act; amended
rule 203A-2. We asked, but did not receive comment on, whether we
should limit rule 203A-2's application to small advisers; however,
one commenter agreed that these exemptions should apply to all
advisers, including mid-sized advisers. NRS Letter (strongly
supporting that the exemptions be applicable to all advisers no
matter their assets under management as it ``promotes uniformity,
clarity and a consistent standard for all.''). We are leaving rule
203A-2 unchanged in this regard.

---------------------------------------------------------------------------

a. Nationally Recognized Statistical Rating Organizations
    We are eliminating, as proposed, the exemption in rule 203A-2(a)
from the prohibition on Commission registration for nationally
recognized statistical rating organizations (``NRSROs'').\120\ Since we
adopted this exemption, Congress amended the Act to exclude certain
NRSROs from the Act's definition of ``investment adviser'' \121\ and
provided for a separate regulatory regime for NRSROs under the
Securities Exchange Act of 1934 (``Exchange Act'').\122\ Commenters
supported the elimination of this provision.\123\
---------------------------------------------------------------------------

    \120\ See rule 203A-2(a).
    \121\ Credit Rating Agency Reform Act of 2006, P.L. 109-291, 120
Stat. 1327 Sec.  4(b)(3)(B) (2006) (``Credit Rating Agency Reform
Act''). See also Advisers Act section 202(a)(11)(F) (excluding an
NRSRO from the definition of investment adviser unless it issues
recommendations about purchasing, selling, or holding securities or
engages in managing assets that include securities on behalf of
others).
    \122\ Credit Rating Agency Reform Act, supra note 121, at
sections 4(a), 5.
    \123\ NRS Letter (asserting that the proposal is consistent with
the Credit Rating Agency Reform Act, which amended the Advisers Act
to exclude NRSROs and to provide for a separate regulatory regime
for them under the Exchange Act); Pickard Letter (asserting that
continued availability of the NRSRO exemption is causing confusion
among advisers).
---------------------------------------------------------------------------

b. Pension Consultants
    We are amending rule 203A-2(b), the exemption available to pension
consultants, to increase the minimum value of plan assets required to
rely on the exemption from $50 million to $200 million.\124\ As
discussed in the Implementing Proposing Release, pension consultants
typically do not have ``assets under management,'' but we have required
these advisers to register with us because their activities have a
direct effect on the management of large amounts of pension plan
assets.\125\ As a result of this amendment, advisers currently relying
on the pension consultant exemption advising plan assets of less than
$200 million may be required to withdraw from Commission registration
and register with one or more states.\126\
---------------------------------------------------------------------------

    \124\ Amended rule 203A-2(a). Pension consultants provide
services to pension and employee benefit plans and their
fiduciaries, including assisting them to select investment advisers
that manage plan assets. See rule 203A-2(b)(2), (3); NSMIA Adopting
Release, supra note 17, at section II.D.2. The exemption does not
apply to pension consultants that solely provide services to plan
participants. See NSMIA Adopting Release, supra note 17, at section
II.D.2. To determine the aggregate value of plan assets, a pension
consultant may only include the portion of the plan's assets for
which the consultant provides investment advice. Rule 203A-2(b)(3).
    \125\ See Implementing Proposing Release, supra note 7, at
section II.A.5.b.; NSMIA Adopting Release, supra note 17, at section
II.D.2.; Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 1601, section
II.D.2. (Dec. 20, 1996) [61 FR 68480 (Dec. 27, 1996)].
    \126\ An adviser currently relying on the exemption, but that
advises plan assets of less than $200 million and files an annual
updating amendment to its Form ADV following the compliance date of
the amended rule, will be required to withdraw from Commission
registration within 180 days of the adviser's fiscal year end
(unless the adviser is otherwise eligible for SEC registration). See
rule 203A-1(b)(2); supra note 118.
---------------------------------------------------------------------------

    We proposed to increase the threshold to $200 million in light of
Congress's determination to increase from $25 million to $100 million
the amount of ``assets under management'' that requires all advisers to
register with the Commission, and to maintain the same ratio as today
of plan assets to the statutory threshold for registration.\127\
Commenters supported our proposal.\128\ One agreed that the new $200
million threshold would continue to ensure that the activities of a
pension consultant registered with the Commission are significant
enough to have an impact on national markets.\129\ We are adopting the
amendment, as proposed.
---------------------------------------------------------------------------

    \127\ Proposed rule 203A-2(a).
    \128\ See NRS Letter; Pickard Letter.
    \129\ NRS Letter. See also NSMIA Adopting Release, supra note
17, at n.60 (the $50 million ``higher threshold is necessary to
demonstrate that a pension consultant's activities have an effect on
national markets.''). The higher asset requirement also reflects
that a pension consultant has substantially less control over client
assets than an adviser that has ``assets under management.'' Id.
---------------------------------------------------------------------------

c. Multi-State Advisers
    We are adopting, as proposed, amendments to the multi-state adviser
exemption to align the rule with the multi-state exemption that
Congress provided for mid-sized advisers in section 410 of the Dodd-
Frank Act.\130\ Amended rule 203A-2(d) permits all investment advisers
who are required to register as an investment adviser with 15 or more
states to register with the Commission, rather than 30 states, as
currently required.\131\ An adviser relying on the rule must withdraw
from registration with the Commission when it is no longer required to
be registered with 15 states.\132\ We are also rescinding, as proposed,
the provision in the current rule that permits advisers to remain
registered until the number of states in which they must register falls
below 25 states, and we are not adopting a similar cushion for the 15-
state threshold.\133\
---------------------------------------------------------------------------

    \130\ Amended rule 203A-2(d). Form ADV will not be amended to
reflect the changes to the multi-state adviser exemption until the
end of the calendar year. See supra section II.A.1. Until that time,
both a mid-sized adviser eligible for the statutory multi-state
exemption and a small adviser eligible for the exemption under
amended rule 203A-2(d) because it is required to register as an
adviser in 15 or more states may register or remain registered (as
the case may be) with the Commission by checking the boxes (Item
2.A.(9) and the relevant section of Schedule D) indicating that it
is exempt because it is required to register in 30 or more states.
See supra note 118. Upon making its next amendments to Form ADV, the
adviser should revise its filing to report reliance on the new
multi-state adviser exemption.
    \131\ We note that amended rule 203A-2(d) permits an adviser
otherwise eligible to rely on the exemption to choose to maintain
its state registrations and not switch to SEC registration. See
amended rule 203A-2(d)(2) (adviser elects to rely on the exemption
by making the required representations on Form ADV).
    \132\ See amended rule 203A-2(d). To rely on this exemption, an
adviser also must continue to: (i) Include a representation on
Schedule D of Form ADV that the investment adviser has concluded
that it must register as an investment adviser with the required
number of states; (ii) undertake to withdraw from registration with
the Commission if the adviser indicates on an annual updating
amendment to Form ADV that it would be required by the laws of fewer
than 15 states to register as an investment adviser with the state;
and (iii) maintain a record of the states in which the investment
adviser has determined it would, but for the exemption, be required
to register. Amended rule 203A-2(d)(2)-(3). The adviser may not
include in the number of states those in which it is not required to
register because of applicable state laws or the national de minimis
standard of section 222(d) of the Advisers Act. See Exemption for
Investment Advisers Operating in Multiple States; Revisions to Rules
Implementing Amendments to the Investment Advisers Act of 1940;
Investment Advisers with Principal Offices and Places of Business in
Colorado or Iowa, Investment Advisers Act Release No. 1733, n.17
(July 17, 1998) [63 FR 39708 (July 24, 1998)].
    \133\ See rule 203A-2(e)(1). Eliminating this buffer simplifies
the requirements of the exemption. See NRS Letter (``The Dodd-Frank
Act has addressed the multi-state adviser exemption to simplify the
requirements of this exemption.'')
---------------------------------------------------------------------------

    Commenters generally agreed with our proposal to align our multi-
state exemption for small advisers with the statutory exemption for
mid-sized advisers.\134\ A few, however, recommended a lower threshold
of required state registrations for eligibility for the multi-state
exemption.\135\ In light of Congressional determination to set the
threshold at 15 states and our stated purpose in amending the rule to
align it with the Dodd-Frank Act, we have determined not to lower the
threshold further.\136\ We also note that the

requirement that advisers annually assess their eligibility for
registration and the grace periods provided to switch to and from state
registration should further mitigate the frequency with which an
investment adviser required to register in 15 states will have to
switch between state and federal registration.\137\
---------------------------------------------------------------------------

    \134\ See NASAA Letter; comment letter of the National Education
Association Member Benefits Corporation (Jan. 21, 2011) (``NEA
Letter''); NRS Letter; Pickard Letter; Seward Letter; Shearman
Letter.
    \135\ See Seward Letter and Shearman Letter (in each case
supporting the 15-state threshold we proposed, and suggesting the
burdens of maintaining multiple state registrations can be
significant). See also NEA Letter. One of these commenters also
would support further decreasing the number of states to five and
requiring advisers relying on the exemption to have at least $25
million of assets under management. Seward Letter. Another ``would
support an even lower threshold.'' Shearman Letter.
    \136\ See section 410 of the Dodd-Frank Act (a mid-sized adviser
that otherwise would be prohibited may register with the Commission
if it would be required to register with 15 or more states); H. Rep.
No. 111-517, at 867 (2010) (``Conference Committee Report'')
(``Those advisers who qualify to register with their home state must
register with the SEC should the adviser operate in more than 15
states.'').
    \137\ See supra section II.A.4.
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6. Elimination of Safe Harbor
    We are rescinding, as proposed, rule 203A-4, which has provided a
safe harbor from Commission registration for an investment adviser that
is registered with the state securities authority of the state in which
it has its principal office and place of business based on a reasonable
belief that it is prohibited from registering with the Commission
because it does not have sufficient assets under management.\138\ One
commenter argued that the safe harbor should be retained for mid-sized
advisers because advisers calculating regulatory assets under
management face similar challenges today as when the safe harbor was
adopted.\139\ We disagree. As stated in the Implementing Proposing
Release, the safe harbor was designed for smaller advisory businesses
with assets under management of less than $30 million, which may not
employ the same tools or otherwise have a need to calculate assets as
precisely as advisers with greater assets under management.\140\ We
also believe that the revisions we are adopting to the Form ADV
instructions to implement a uniform method for advisers to calculate
assets under management will clarify the requirements and reduce
confusion among advisers.\141\ Moreover, the rule is a safe harbor only
from our enforcement actions, and to our knowledge few, if any,
advisers have relied upon it in the 14 years since it was adopted.\142\
Accordingly, we are rescinding the rule.
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    \138\ Rule 203A-4.
    \139\ NYSBA Committee Letter. Another commenter asserted that
there has been and continues to be confusion among smaller advisers
in calculating assets under management. NRS Letter.
    \140\ Implementing Proposing Release, supra note 7, at section
II.A.6. (citing rule 203A-4; NSMIA Adopting Release, supra note 17,
at section II.B.3.).
    \141\ See supra section II.A.3.
    \142\ See NRS Letter (noting a belief that the safe harbor has
been little used by small advisers based upon the commenter's years
of consulting for such advisers).
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7. Mid-Sized Advisers
    We are amending Form ADV to require a mid-sized adviser registering
with us to affirm, upon application and annually thereafter, that it is
either: (i) Not required to be registered as an adviser with the state
securities authority in the state where it maintains its principal
office and place of business; or (ii) is not subject to examination as
an adviser by that state.\143\ These form revisions implement the Dodd-
Frank Act amendment to section 203A of the Advisers Act that prohibits
mid-sized advisers from registering with the Commission, but only: (i)
If the adviser is required to be registered as an investment adviser
with the securities commissioner (or any agency or office performing
like functions) of the state in which it maintains its principal office
and place of business; and (ii) if registered, the adviser would be
subject to examination as an investment adviser by such commissioner,
agency, or office.\144\ The Dodd-Frank Act does not explain how to
determine whether a mid-sized adviser is ``required to be registered''
or is ``subject to examination'' by a particular state securities
authority.\145\ We are therefore providing an explanation of these
provisions in instructions to Form ADV.\146\
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    \143\ See amended Form ADV, Part 1A, Item 2.A.(2). For a
discussion of changes to Form ADV, Part 1A, Item 2.A., see supra
section II.A.2.
    \144\ See section 410 of the Dodd-Frank Act. An adviser
reporting that it is no longer able to make this affirmation will
have 180 days from its fiscal year end to withdraw from Commission
registration. See amended rule 203A-1(b)(2). Thus, the rule will
operate to permit an adviser to rely on this affirmation reported in
its annual updating amendments for purposes of determining its
eligibility to register with the Commission.
    \145\ The Advisers Act defines the term ``state'' to include any
U.S. state, the District of Columbia, Puerto Rico, the Virgin
Islands, or any other possession of the United States. Advisers Act
section 202(a)(19). For purposes of section 203A of the Advisers Act
and the rules thereunder, rule 203A-3(c) defines ``principal office
and place of business'' to mean the executive office of the
investment adviser from which its officers, partners, or managers
direct, control, and coordinate its activities. We are not changing
this definition. See amended rule 203A-3(c). For a discussion of
amendments we are making to the calculation of assets under
management, see supra section II.A.3.
    \146\ See amended Form ADV: Instructions for Part 1A, instr.
2.b.
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a. Required To Be Registered
    The Form ADV instructions we are adopting reflect that the
``required to be registered'' standard that Congress included in new
section 203A(a)(2) of the Advisers Act for mid-sized advisers is
different from the ``regulated or required to be regulated'' standard
set forth in section 203A(a)(1) for small advisers.\147\ The
instruction explains that a mid-sized adviser ``is not required to be
registered'' with the state securities authority and must register with
the Commission (unless an exemption from registration with the
Commission otherwise is available)\148\ if the adviser is exempt from
registration under the law of the state in which it has its principal
office and place of business, or is excluded from the definition of
investment adviser in that state.\149\ Thus, for example, an adviser
with $75 million of assets under management that is exempt from
registration in the state in which its principal office and place of
business is located will have to register with the Commission (unless
an exemption from Commission registration is available). None of the
commenters disputed our interpretation or suggested an alternative
interpretation of the ``required to be registered'' element,\150\ and
we are adopting the instructions, as proposed.\151\
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    \147\ See amended Form ADV: Instructions for Part 1A, instr.
2.b. Under section 203A(a)(1) of the Act, an adviser that is not
regulated or required to be regulated as an investment adviser in
the state in which it has its principal office and place of business
must register with the Commission regardless of the amount of assets
it has under management. Advisers Act section 203A(a)(1). See also
Advisers Act section 203(a). We have interpreted ``regulated or
required to be regulated'' to mean that a state has enacted an
investment adviser statute, regardless of whether the adviser is
actually registered in that state. See NSMIA Adopting Release, supra
note 17, at section II.E.1. The bills originally introduced and
passed in the House and Senate increased up to $100 million the
threshold for Commission registration under the ``regulated or
required to be regulated'' standard that is used today in section
203A(a)(1). See The Wall Street Reform and Consumer Protection Act
of 2009, H.R. 4173, 111th Cong. Sec.  7418 (2009); Restoring
American Financial Stability Act of 2010, S. 3217, 111th Cong. Sec.
410 (2010). But the final version of the Dodd-Frank Act prohibits a
mid-sized adviser from registering with the Commission if, among
other things, it is ``required to be registered'' as an adviser with
the state securities authority where it maintains its principal
office and place of business. See section 410 of the Dodd-Frank Act.
    \148\ See, e.g., Advisers Act sections 203(a) and (b), 203A(b);
rule 203A-2.
    \149\ See, e.g., Uniform Securities Act Sec. Sec.  102(15),
403(b) (2002). An adviser not registered under a state adviser
statute in contravention of such statute, however, is not eligible
for registration with the Commission. Similarly, an adviser could
not voluntarily register with the Commission to avoid state
registration.
    \150\ One commenter suggested that we clarify whether mid-sized
advisers that are exempt from registration in their home states may
or are required to register with us. Sadis Letter. As discussed
above and in the Form ADV instructions, if a mid-sized adviser is
not required to be registered in the state where it has its
principal office and place of business, the adviser must register
with the Commission (unless an exemption from Commission
registration is available). See supra notes 148-149 and accompanying
text; amended Form ADV: Instructions for Part 1A, instr. 2.b.
    \151\ See amended Form ADV: Instructions for Part 1A, instr.
2.b.

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b. Subject to Examination
    As we discussed in the Implementing Proposing Release, our staff
contacted the state securities authority for each state and, based upon
information they have provided us, identified those states that do not
subject advisers registered with them to examination.\152\ We have
posted this list on our Web site,\153\ and it also will be available to
advisers using the IARD to register or amend their registration
forms.\154\ Based on those responses, advisers with their principal
office and place of business in Minnesota, New York and Wyoming with
assets under management between $25 million and $100 million must
register with the Commission.\155\
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    \152\ All state securities authorities other than Minnesota, New
York and Wyoming have advised our staff that advisers registered
with them are subject to examination. According to IARD data as of
April 7, 2011, there were 63 advisers with assets under management
between $25 million and $90 million and a principal office and place
of business in Minnesota, 286 in New York, and 1 in Wyoming.
    \153\ See http://www.sec.gov/divisions/investment/midsizedadviserinfo.htm.
    \154\ See amended Form ADV, Part 1A, Item 2.A.(2)(b); amended
Form ADV: Instructions for Part 1A, instr. 2.b. The staff also
requested that each state notify us promptly if advisers in the
state will begin to be subject to examination or will no longer be
subject to examination, and we will update the list on the IARD and
our Web site accordingly.
    \155\ See supra note 152. The requirement for such an adviser to
register with the Commission, as opposed to one of these states,
will be effective on July 21, 2011.
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    Several commenters agreed with our approach of relying on responses
from the state regulators rather than determinations by the Commission
to identify whether an adviser is ``subject to examination'' by a
state.\156\ Two commenters, however, suggested that we should instead
establish our own criteria for whether an adviser is ``subject to
examination,'' and one further recommended that we should engage in an
evaluation of each state's adviser examination program.\157\ We do not
believe that the alternatives suggested are practical or appropriate.
As we explained in the Implementing Proposing Release, the states are
the most familiar with their own circumstances and are in the best
position to determine whether advisers in their states are subject to
examination.\158\
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    \156\ See NASAA Letter (proposed approach ``complies with the
clear and unambiguous language of the statute'' and ``attempting to
define or otherwise interpret terms that are plain and direct is
contrary to long-established rules of statutory construction.'');
NRS Letter; Pickard Letter. See also Sadis Letter (recommending the
Commission clarify whether an adviser in a particular state is
required to register with the Commission).
    \157\ ABA Committees Letter (recommending the Commission
construe ``examination'' to indicate a ``structured adviser
examination program, rather than one conducted on an occasional,
sporadic or informal basis,'' and require an annual affirmation from
each state that it subjects advisers to examination); FSI Letter
(recommending the Commission engage in a stringent evaluation of
each state's adviser examination program and expressly define
``subject to examination'' to, at a minimum, include a ``uniform or
risk based routine examination process'' and that it ``mirrors the
frequency of broker-dealer examination by FINRA and the SEC'').
    \158\ See Implementing Proposing Release, supra note 7, at
section II.A.7.b.
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B. Exempt Reporting Advisers: Sections 407 and 408

    To implement new sections 203(l) and 203(m) of the Advisers Act, we
are adopting a new rule, as proposed, that requires advisers relying on
those exemptions from registration to submit to us, and to periodically
update, reports that consist of a limited subset of items on Form
ADV.\159\ We are also adopting the amendments we proposed to Form ADV
to permit the form to serve as both a reporting and registration form
and to specify the seven items these ``exempt reporting advisers'' must
complete.\160\
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    \159\ We refer to advisers that rely on the exemptions from
registration provided in either new section 203(l) or new section
203(m) of the Advisers Act as ``exempt reporting advisers.'' For a
brief discussion of these exemptions, see infra note 162 and
accompanying text; for a more in-depth discussion, see Exemptions
Adopting Release, supra note 4.
    \160\ For a discussion of additional amendments we are proposing
to Part 1 of Form ADV, see infra section II.C.
---------------------------------------------------------------------------

    As discussed above, the Dodd-Frank Act amends the Advisers Act, as
of July 21, 2011, to create two new exemptions from registration for
advisers to certain types of ``private funds'' and to repeal the
private adviser exemption contained in section 203(b)(3) of the
Advisers Act on which advisers to many hedge and other private funds
relied in order to avoid registration.\161\ Both section 203(l) (which
provides an exemption for an adviser that advises solely one or more
``venture capital funds'') and section 203(m) of the Advisers Act
(which instructs the Commission to exempt any adviser that acts solely
as an adviser to private funds and has assets under management in the
United States of less than $150 million) provide that the Commission
shall require such advisers to maintain such records and to submit such
reports ``as the Commission determines necessary or appropriate in the
public interest.'' \162\ The rules and amendments to Form ADV that we
are adopting today are designed to address the reporting aspects of
these two exemptions.\163\
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    \161\ Section 403 of the Dodd-Frank Act. Section 203(b)(3)
exempts from registration any investment adviser who during the
course of the preceding twelve months has had fewer than fifteen
clients and who neither holds himself out generally to the public as
an investment adviser nor acts as an investment adviser to any
investment company registered under the Investment Company Act, or a
company which has elected to be a business development company
pursuant to Section 54 of the Investment Company Act (15 U.S.C. 80a-
54). See supra note 4; Implementing Proposing Release, supra note 7,
at n.112 and accompanying text.
    \162\ See sections 407 and 408 of the Dodd-Frank Act, adding
Advisers Act sections 203(l) and (m). See supra note 5. See also
Exemptions Adopting Release, supra note 4, at section II.; section
204(a) of the Advisers Act and section 204(b)(5), as added by
section 404 of the Dodd-Frank Act.
    \163\ Recordkeeping requirements for exempt reporting advisers
will be addressed in a future release. See sections 407 and 408 of
the Dodd-Frank Act (providing that the Commission shall require
investment advisers exempt from registration under either section
407 or 408 of the Dodd-Frank Act to maintain such records as the
Commission determines necessary or appropriate in the public
interest or for the protection of investors.).
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1. Reporting Required
    Rule 204-4 requires exempt reporting advisers to file reports with
the Commission electronically on Form ADV through the IARD using the
same process used by registered investment advisers.\164\ An exempt
reporting adviser must submit its initial Form ADV within 60 days of
relying on the exemption from registration under either section 203(l)
or section 203(m) of the Advisers Act.\165\ Each Form ADV is considered
filed with the Commission upon acceptance by the IARD.\166\ An exempt
reporting adviser unable to file electronically as a result of
unanticipated technical difficulties may, like a registered adviser,
request a temporary hardship exemption of up to seven business days
after the filing was due.\167\ Advisers filing the form must

pay a filing fee designed to pay the reasonable costs associated with
the filing and maintenance of the system.\168\ We anticipate that
filing fees, which the Commission will consider separately, will be the
same as those for registered investment advisers, which currently range
from $40 to $225 based on the amount of assets an adviser has under
management.\169\
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    \164\ New rule 204-4. See amended Form ADV: General Instructions
6, 7, 8 and 9 (providing guidance about the IARD entitlement
process, signing the form, and submitting it for filing). We are
also adopting technical amendments, as proposed, to Form ADV-NR, to
enable exempt reporting advisers to appoint the Secretary of the
Commission as an agent for service of process for certain non-
resident advisers. See amended Form ADV-NR; amended Form ADV:
General Instruction 19.
    \165\ See amended Form ADV: General Instruction 13. An adviser
may not be both registered with us and filing as an exempt reporting
adviser at the same time. An SEC registered adviser switching from
being registered to being an exempt reporting adviser must first
file a Form ADV-W to withdraw its SEC registration before submitting
its first report as an exempt reporting adviser. We have modified
General Instruction 13 from the proposal to reflect IARD system
functionality, which we continue to develop.
    \166\ New rule 204-4(c). Cf. rule 0-4(a)(2) (``All filings
required to be made electronically with the * * * [IARD] shall,
unless otherwise provided by the rules and regulations in this part,
be deemed to have been filed with the Commission upon acceptance by
the IARD.'').
    \167\ See new rule 204-4(e) (providing a temporary hardship
exemption for an adviser having unanticipated technical difficulties
that prevent submission of a filing to IARD); amended Form ADV-H;
amended Form ADV: General Instruction 17.
    \168\ New rule 204-4(d).
    \169\ The current fee schedule applicable to advisers applying
for registration may be found on our Web site at http://www.sec.gov/divisions/investment/iard/iardfee.shtml.
---------------------------------------------------------------------------

    Several commenters expressed the view that use of Form ADV and the
IARD for exempt reporting advisers would be efficient, because the
system is familiar to many advisers and because it would integrate the
process of filing with the Commission with any parallel filing the
adviser may be obligated to make with state securities
authorities.\170\ Commenters agreed with our expectation that use of
Form ADV and the IARD would facilitate a transition from filing reports
with us to applying for registration with us.\171\ Two commenters urged
that we create a separate reporting system.\172\ One recommended a new,
more interactive system; and the other suggested a separate filing
system to avoid confusion among investors who might mistakenly assume
that an exempt reporting adviser is registered if its information comes
up in an IARD search. We share these commenters' general goals of
innovation and the avoidance of investor confusion as our staff works
with FINRA (our IARD contractor) to continue improving the IARD.\173\
However, the expense and delay of initiating and developing a new
system with adequate functionality, which neither commenter addressed,
argues against these commenters' recommendations. We are adopting rule
204-4 as proposed.
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    \170\ The Dodd-Frank Act exempts exempt reporting advisers from
registration with the Commission. See sections 407 and 408 of the
Dodd-Frank Act. It does not, however, exempt these advisers from
registering or filing reports with state securities regulators. See
also amended Form ADV: General Instruction 14 (noting that exempt
reporting advisers who file reports with the SEC may continue to be
subject to state registration, reporting, or other obligations).
    \171\ ABA Committees Letter; comment letter of Better Markets,
Inc. (Jan. 24, 2011) (``Better Markets Letter''); NRS Letter; NASAA
Letter. Form ADV, as amended, permits an adviser to transition from
filing reports with us to applying for registration under the Act by
simply amending its Form ADV; the adviser would check the box to
indicate it is filing an initial application for registration,
complete the items it did not have to answer as an exempt reporting
adviser, and update the pre-populated items that it already has on
file. See amended Form ADV: General Instruction 15 (providing
procedural guidance to advisers that no longer meet the definition
of exempt reporting adviser).
    \172\ Merkl Implementing Letter; Seward Letter. See also
Shearman Letter (making similar arguments regarding the potential
for investor confusion, but not advocating use of a different form
or reporting system).
    \173\ Our staff, for example, recently completed a study
mandated by section 919B of the Dodd-Frank Act on ways to improve
investor access to information about certain financial service
providers, including data contained in the IARD. See Staff of the
Office of Investor Education and Advocacy of the U.S. Securities and
Exchange Commission, Study and Recommendations on Improved Investor
Access to Registration Information about Investment Advisers and
Broker-Dealers, Jan. 2011, available at http://www.sec.gov/news/studies/2011/919bstudy.pdf.
---------------------------------------------------------------------------

2. Information in Reports
    We are also amending Form ADV to accommodate its use by exempt
reporting advisers. First, we are re-titling the form to reflect its
dual purpose as both the ``Uniform Application for Investment Adviser
Registration,'' as well as the ``Report by Exempt Reporting Advisers.''
Second, we are revising the cover page to require exempt reporting
advisers to indicate the type of report they are filing.\174\ Finally,
we are amending Item 2 of Part 1A, which today requires advisers to
indicate their eligibility for SEC registration, to add a new
subsection B that requires an exempt reporting adviser to identify the
exemption(s) on which it is relying to report, rather than register,
with the Commission.\175\
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    \174\ An exempt reporting adviser must indicate whether it is
submitting an initial report, an annual updating amendment, an
other-than-annual amendment, or a final report. We are also adopting
corresponding changes to General Instruction 2.
    \175\ An exempt reporting adviser must check that it qualifies
for an exemption from registration: (i) As an adviser solely to one
or more venture capital funds; and/or (ii) because it acts solely as
an adviser to private funds and has assets under management in the
United States of less than $150 million. See amended Form ADV, Part
1A, Item 2.B, questions 1 and 2. An exempt reporting adviser relying
on the latter exemption, for private fund advisers, must also
indicate the amount of private fund assets it manages in Section
2.B. of Schedule D to Form ADV, Part 1A. Investment advisers who
have their principal office and place of business outside of the
United States, however, need only include private fund assets that
they manage at a place of business in the United States. See
Exemptions Adopting Release, supra note 4, at section II.B.3. An
adviser that acts solely as an adviser to private funds but is no
longer eligible to check box 2.B.(2) because it has assets under
management in the United States of $150 million or more may, subject
to certain conditions, check a separate box to continue filing as an
exempt reporting adviser during the safe harbor transition period
described below. See infra note 211 and accompanying text. See also
amended Form ADV, Part 1A, Item 2.B, question 3; Form ADV: General
Instruction 15.
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    Some commenters asserted that it would be inconsistent with these
new exemptions to require exempt reporting advisers to submit reports
to the Commission,\176\ while others argued that we proposed to require
too much information.\177\ Congress, however, gave us broad authority
to require exempt reporting advisers to file reports as necessary or
appropriate in the public interest or for the protection of
investors.\178\ In addition, the Dodd-Frank Act neither limits the
types of information we could require in the reports nor specifies the
purpose for which we would use the information.
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    \176\ Comment letter of Avoca Capital Holdings (Dec. 21, 2011)
(``Avoca Letter''); AIMA Letter; comment letter of AustinVentures
(Jan. 21, 2011) (``AV Letter'').
    \177\ Comment letter of Berkeley Center for Law, Business and
the Economy (Jan. 31, 2011) (``BCLBE Letter''); Shearman Letter;
comment letter of Village Ventures, Inc. (Jan. 24, 2011) (``Village
Ventures Letter'').
    \178\ See sections 407 and 408 of the Dodd-Frank Act.
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    We are adopting, as proposed, a requirement that exempt reporting
advisers complete the following items of Part 1A of Form ADV: Items 1
(Identifying Information), 2.B. (SEC Reporting by Exempt Reporting
Advisers), 3 (Form of Organization), 6 (Other Business Activities), 7
(Financial Industry Affiliations and Private Fund Reporting), 10
(Control Persons), and 11 (Disclosure Information).\179\ In addition,
we are requiring, as proposed, that exempt reporting advisers also
complete corresponding sections of Schedules A, B, C, and D.\180\
Responses to these items will assist us to identify exempt reporting
advisers, their owners, and their business models. The information we
collect will provide us with information as to whether these advisers