[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Proposed Rules]
[Pages 77052-77190]
[FR Doc No: 2010-29956]

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Part II

Securities and Exchange Commission

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31 Parts 275 and 279

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

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

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

Rules Implementing Amendments to the Investment Advisers Act of
1940

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

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

Electronic Comments

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

Paper Comments

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

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

FOR FURTHER INFORMATION CONTACT: Jennifer R. Porter, Attorney-Adviser,
Daniele Marchesani, Senior Counsel, Melissa A. Roverts, Senior Counsel,
Devin F. Sullivan, Senior Counsel, Matthew N. Goldin, Branch Chief,
Daniel S. Kahl, Branch Chief, or Sarah A. Bessin, Assistant Director,
at<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 proposing rules 203A-5 and
204-4 [17 CFR 275.203A-5 and 275.204-4] under the Investment Advisers
Act of 1940 [15 U.S.C. 80b] (``Advisers Act'' or ``Act''),\1\
amendments to rules 0-7, 203A-1, 203A-2, 203A-3, 204-1, 204-2, 206(4)-
5, 222-1, and 222-2 [17 CFR 275.0-7, 275.203A-1, 275.203A-2, 275.203A-
3, 275.204-1, 275.204-2, 275.206(4)-5, 275. 222-1, and 275.222-2] under
the Advisers Act, and amendments to Form ADV, Form ADV-H, and Form ADV-
NR [17 CFR 279.1, 279.3, and 279.4] under the Advisers Act. The
Commission is also proposing to rescind rule 203A-4 [17 CFR 275.203A-4]
under the Advisers Act.
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    \1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified, and when we refer to rule 0-7, rule 202(a)(11)-1,
rule 203(b)(3)-1, rule 203(b)(3)-2, rule 203A-1, rule 203A-2, rule
203A-3, rule 203A-4, rule 203A-5, rule 204-1, rule 204-2, rule 204-
4, rule 206(4)-5, rule 222-1, or rule 222-2, or any paragraph of
these rules, we are referring to 17 CFR 275.0-7, 17 CFR
275.202(a)(11)-1, 17 CFR 275.203(b)(3)-1, 17 CFR 275.203(b)(3)-2, 17
CFR 275.203A-1, 17 CFR 275.203A-2, 17 CFR 275.203A-3, 17 CFR
275.203A-4, 17 CFR 275.203A-5, 17 CFR 275.204-1, 17 CFR 275.204-2,
17 CFR 275.204-4, 17 CFR 275.206(4)-5, 17 CFR 275.222-1, or 17 CFR
275.222-2, respectively, of the Code of Federal Regulations, in
which these rules are published, or would be published, if adopted.
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Table of Contents

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

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

I. Background

    On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'')
which, among other things, amends certain provisions of the Advisers
Act.\2\ Title IV of the Dodd-Frank Act includes most of the amendments
to the Advisers Act. These amendments include provisions that
reallocate responsibility for oversight of investment advisers by
delegating generally to the states responsibility over certain mid-
sized advisers, i.e., those that have between $25 and $100 million of
assets under management.\3\ This provision will require a significant
number of advisers currently registered with the Commission to withdraw
their registrations with the Commission and to switch to registration
with one or more State securities authorities. In addition, Title IV
repeals the ``private adviser exemption'' contained in section
203(b)(3) of the Advisers Act under which advisers, including those to
many hedge funds, private equity funds and venture capital funds, had
relied in order to avoid registration under the Act and our
oversight.\4\ In eliminating this provision, Congress created, or
directed us to adopt other, in some ways narrower, exemptions for
advisers to certain types of private funds--e.g., venture capital
funds--which provide that the Commission shall require such advisers to
submit reports ``as the Commission determines necessary or appropriate
in the public interest.'' \5\ These provisions in Title IV of the Dodd-
Frank Act will be effective on July 21, 2011.\6\
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    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ See section 410 of the Dodd-Frank Act; Advisers Act section
203A. See also National Securities Markets Improvement Act of 1996,
Public Law 104-290, 110 Stat. 3416, Sec.  303 (1996) (``NSMIA'')
(allocating to states responsibility for small investment advisers
with less than $25 million in assets under management).
    \4\ See section 403 of the Dodd-Frank Act. Section 203(b)(3)
exempts from registration any investment adviser who during the
course of the preceding twelve months has had fewer than fifteen
clients and who neither holds himself out generally to the public as
an investment adviser nor acts as an investment adviser to any
investment company registered under the Investment Company Act of
1940 (15 U.S.C. 80a-1) (``Investment Company Act''), or a company
which has elected to be a business development company pursuant to
section 54 of the Investment Company Act (15 U.S.C. 80a-54). Section
403 of the Dodd-Frank Act eliminates this ``private adviser''
exemption from section 203(b)(3) and replaces it with a new
exemption for ``foreign private advisers.'' We are proposing a rule
to clarify the definition of a ``foreign private adviser'' in a
separate release. Exemptions for Advisers to Venture Capital Funds,
Private Fund Advisers With Less Than $150 Million in Assets Under
Management, and Foreign Private Advisers, Investment Advisers Act
Release No. 3111, published elsewhere in this issue of the Federal
Register (``Exemptions Release''). Commenters wishing to address
issues related to foreign private advisers should submit comments on
the Exemptions Release.
    \5\ See sections 407 and 408 of the Dodd-Frank Act (``The
Commission shall require [such advisers to] provide to the
Commission such annual or other reports as the Commission determines
necessary or appropriate in the public interest or for the
protection of investors''). Section 407 of the Dodd-Frank Act, which
adds section 203(l) to the Advisers Act, exempts advisers solely to
one or more venture capital funds. Section 408, which added section
203(m) to the Advisers Act, exempts advisers solely to private funds
with assets under management in the United States of less than $150
million.
    \6\ See section 419 of the Dodd-Frank Act. For purposes of this
Release, when we refer to the effective date of the Dodd-Frank Act,
we are referring to the effective date of Title IV, which is July
21, 2011, unless we indicate otherwise.
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    We are proposing to adopt new rules and amend existing rules and
forms to give effect to these provisions. In addition, we are proposing
rule amendments, including amendments to the Commission's ``pay to
play'' rule, that address a number of other changes to the Advisers Act
made by the Dodd-Frank Act. Also, in light of our increased
responsibility for oversight of private funds, we are proposing to
require advisers to those funds to provide us with additional
information about the operation of those funds. As discussed in more
detail below, this information would permit us to provide better
oversight of these advisers by focusing our examination and enforcement
resources on those advisers to private funds that appear to present
greater compliance risks. Finally, we are proposing additional changes
to Form ADV that we believe would enhance our oversight of advisers and
also will enable us to identify advisers that are subject to the Dodd-
Frank Act's requirements concerning certain incentive-based
compensation arrangements.\7\
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    \7\ See section 956 of the Dodd-Frank Act.
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II. Discussion

A. Eligibility for Registration With the Commission: Section 410

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

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

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

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

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

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

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

value of the portfolio for which it provides sub-advisory services.
---------------------------------------------------------------------------

    \50\ See Exemptions Release at sections II.B.2. and II.C.5.
    \51\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(1).
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    Second, we propose to require such adviser to include in its
calculation of regulatory assets under management the amount of any
uncalled capital commitments made to the fund.\52\ Private funds, such
as venture capital and private equity funds, typically make investments
following capital calls on their investors, who are contractually
obligated to fund their committed capital amounts.\53\ Advisers to
these types of private funds provide supervisory or management services
to the funds in anticipation of all investors fully funding their
capital commitments, describe the size of their funds on the basis of
these capital commitments and, in the early years of a fund's life,
typically earn fees based on the total amount of capital committed.\54\
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    \52\ Id. A capital commitment is a contractual obligation of an
investor to acquire an interest in, or provide the total commitment
amount over time to, a private fund, when called by the fund.
    \53\ See, e.g., James Schell, Private Equity Funds: Business
Structure and Operations Sec.  1.01 (2010) (``Schell'') (typical
private equity fund partnership agreement requires investors to
commit to make capital contributions to the fund, which would be
paid as needed rather than upfront and would be used to pay expenses
and make investments); Stephanie Breslow & Phyllis Schwartz, Private
Equity Funds, Formation and Operation 2010, at Sec.  2:5.6
(discussing the various remedies that may be imposed in the event an
investor fails to fund its contractual capital commitment,
including, but not limited to, ``the ability to draw additional
capital from non-defaulting investors;'' ``the right to force a sale
of the defaulting partner's interests at a price determined by the
general partner;'' and ``the right to take any other action
permitted at law or in equity'').
    \54\ See, e.g., Schell, supra note 53 at Sec.  1.01 (noting that
capital contributions made by the investors are used to ``make
investments in a manner consistent with the investment strategy or
guidelines for the Fund.'') and at Sec.  1.03 (``Management fees in
a Venture Capital Fund are usually an annual amount equal to a fixed
percentage of total Capital Commitments.'').
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    Third, we propose to add an instruction to require advisers to use
the fair value of private fund assets in order to ensure that advisers
value private fund assets on a more meaningful and consistent
basis.\55\ Use of the cost basis (i.e., the value at which the assets
were originally acquired), for example, could under certain
circumstances grossly understate the value of appreciated assets, and
thus result in advisers avoiding registration with the Commission. Use
of the fair valuation method by all advisers, moreover, would result in
more consistent asset calculations and reporting across the industry
and, therefore, in a more coherent application of the Act's regulatory
requirements and of our staff's risk assessment program. We understand
that many, but not all, private funds value assets based on their fair
value in accordance with U.S. generally accepted accounting principles
(``GAAP'') or other international accounting standards.\56\ We
acknowledge some private funds do not use fair value methodologies,
which may be more difficult to apply when the fund holds illiquid or
other types of assets that are not traded on organized markets.\57\ We
believe, however, that for the reasons stated above it is important for
all advisers to use the fair valuation method to calculate their
private fund assets under management.
---------------------------------------------------------------------------

    \55\ See proposed Form ADV: Instructions for Part 1A, instr.
5.b.(4). A fund's governing documents may provide for a specific
process for calculating fair value (e.g., that the general partner,
rather than the board of directors, determines the fair value of the
fund's assets). An adviser would be able to rely on such a process
also for purposes of calculating its ``regulatory assets under
management.''
    \56\ See, e.g., Comment Letter of National Venture Capital
Association, dated July 28, 2009, at 2, commenting on the
Commission's proposed custody rule (Investment Advisers Act Release
No. 2876) (the ``vast majority of venture capital funds provide
their LPs [i.e., investors] quarterly and audited annual financial
reports. These reports are prepared under generally accepted
accounting principles, or GAAP, and audited under the standards
established for all investment companies, including the largest
mutual fund complexes.''); Comment Letter of Managed Funds
Association, dated July 28, 2009, at 3 (a ``substantial proportion
of hedge fund managers, whether or not they are registered with the
Commission, provide independently audited financial statements of
the [hedge] fund to investors.''). Furthermore, advisers to private
funds that prepare and distribute financial statements prepared in
accordance with GAAP may be deemed to satisfy certain requirements
of our custody rule. See rule 206(4)-2(b)(4) under the Advisers Act.
    \57\ Those assets include, for example, ``distressed debt''
(such as securities of companies or government entities that are
either already in default, under bankruptcy protection, or in
distress and heading toward such a condition) or certain types of
emerging market securities that are not readily marketable. See
Gerald T. Lins et al., Hedge Funds and Other Private Funds: Reg and
Comp Sec.  5:22 (2009) (``At any given time, some portion of a hedge
fund's portfolio holdings may be illiquid and/or difficult to value.
This is particularly the case for certain types of hedge funds, such
as those focusing on distressed securities, activist investing,
etc.'').
---------------------------------------------------------------------------

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

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

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

    Should we adopt a different approach altogether and allow advisers
to use a method other than fair value? Are there other methods that
would not understate the value of fund assets? Should the instructions
permit advisers to rely on the method set forth in a fund's governing
documents, or the method used to report the value of assets to
investors or to calculate fees (or other compensation) for investment
advisory services? What method should apply if a fund uses different
methods for different purposes? Should we modify the proposed rule to
require that the valuation be derived from audited financial statements
or be subject to review by auditors or another independent third party?
    Advisers are currently only required to update their assets under
management reported on Form ADV annually.\60\ Should we require more
frequent updating? For instance, should we require an adviser to update
its regulatory assets under management quarterly or any time the
adviser files an other-than-annual amendment? \61\
---------------------------------------------------------------------------

    \60\ See General Instruction 4 to Form ADV.
    \61\ See, e.g., Exemptions Release at section II.B.2. (proposed
rule 203(m)-1 would require quarterly evaluation of private fund
assets); Part 2 Release, supra note 46, at nn.46-48 and accompanying
text (requiring advisers to update the amount of assets under
management reported in Part 2 annually and when there are material
changes if the adviser files an interim amendment for a separate
reason).
---------------------------------------------------------------------------

4. Switching Between State and Commission Registration
    Rule 203A-1 currently contains two means of preventing an adviser
from having to switch frequently between State and Commission
registration as a result of changes in the value of its assets under
management or the departure of one or more clients.\62\ First, the rule
provides for a $5 million buffer that permits an investment adviser
having between $25 million and $30 million of assets under management
to remain registered with the states and does not subject the adviser
to cancellation of its Commission registration until its assets under
management fall below $25 million.\63\ Second, the rule permits an
adviser to rely on the firm's assets under management reported annually
in the firm's annual updating amendments for purposes of determining
its eligibility to register with the Commission, allowing an adviser to
avoid the need to change registration status based upon fluctuations
that occur during the course of the year.\64\ If an adviser is no
longer eligible for Commission registration, the rule provides a 180-
day grace period from the adviser's fiscal year end to allow it to
switch to State registration.\65\
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    \62\ See rule 203A-1(a), (b); NSMIA Adopting Release, supra note
10, at section II.C.; Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment Advisers Act Release No.
1601, section II.C. (Dec. 20, 1996) [61 FR 68480 (Dec. 27, 1996)]
(``NSMIA Proposing Release'').
    \63\ Rule 203A-1(a).
    \64\ Rule 203A-1(b). See also rule 204-1(a) (requiring annual
amendment to Form ADV within 90 days of fiscal year end); General
Instruction 4 (annual amendment to Form ADV must update amount of
assets under management reported). Other criteria to determine an
adviser's eligibility to register with the Commission must also be
determined annually. See rule 203A-1(b)(2).
    \65\ Rule 203A-1(b)(2).
---------------------------------------------------------------------------

    We propose to amend rule 203A-1 to eliminate the $5 million buffer
for advisers having between $25 million and $30 million of assets under
management, but to retain the ability of an adviser to avoid the need
to change registration status based upon intra-year fluctuations in its
assets under management for purposes of determining its eligibility to
register with the Commission.\66\ The current buffer seems unnecessary
in light of Congress's determination generally to require most advisers
having between $30 million and $100 million of assets under management
to be registered with the states.\67\ Moreover, at this time, we
believe it is not necessary to increase the $100 million threshold in
order to provide a similar buffer for advisers crossing that threshold
and becoming registered with the Commission under the amended statutory
provisions. We believe that the requirement that advisers only assess
their eligibility for registration annually and the grace periods
provided to switch to and from State registration will be sufficient to
address the concern that an investment adviser with assets under
management approaching $100 million or affected by changes in other
eligibility requirements will frequently have to switch between State
and Federal registration.\68\
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    \66\ See proposed rule 203A-1. In addition, the proposed rule
would permit an adviser to rely on an affirmation of other criteria
reported in its annual updating amendments for purposes of
determining its eligibility to register with the Commission. See
proposed rule 203A-1(b) (continuing to require an adviser filing an
annual updating amendment to its Form ADV reporting that it is not
eligible for Commission registration to withdraw its registration
within 180 days of its fiscal year end).
    \67\ See H.R. Rep. No. 111-517, at 867 (2010) (``Conference
Committee Report'') (discussing fact that legislation ``raise[d] the
assets threshold for Federal regulation of investment advisers from
$30 million to $100 million.'').
    \68\ If during the 180-day grace period to switch to State
registration an adviser's assets under management increase, making
the adviser eligible for Commission registration again, the adviser
could amend its Form ADV to indicate the new amount of assets under
management and continue to remain registered with the Commission.
See proposed rule 203A-1(b) (adviser must withdraw from SEC
registration within 180 days of its fiscal year end unless it then
is eligible for registration).
---------------------------------------------------------------------------

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

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

    \69\ See Advisers Act section 203A(c). An investment adviser
exempted from the prohibition on registration must register with the
Commission, unless it otherwise qualifies for an exemption from
registration under section 203(b) of the Advisers Act. Advisers Act
section 203(a).
    \70\ See supra note 14 and accompanying text. The Commission has
permitted six types of investment advisers to register with the
Commission under rule 203A-2: (i) NRSROs; (ii) pension consultants;
(iii) investment advisers affiliated with an adviser registered with
the Commission; (iv) investment advisers expecting to be eligible
for Commission registration within 120 days of filing Form ADV; (v)
multi-State investment advisers; and (vi) internet advisers.
    \71\ Today, rule 203A-2 provides that advisers meeting the
criteria for a category of advisers under the rule will not be
prohibited from registering with us by Advisers Act section 203A(a).
See rule 203A-2; NSMIA Adopting Release at section II.D. We are not
proposing to amend this part of rule 203A-2. The new prohibition on
mid-sized advisers registering with the Commission also is
established under Advisers Act section 203A(a); therefore, mid-sized
advisers meeting the requirements for a category of exempt advisers
under rule 203A-2 would be eligible to register with us. See section
410 of the Dodd-Frank Act; proposed rule 203A-2.
    \72\ We are also renumbering and making minor conforming changes
to, rule 203A-2(c), (d) and (f) regarding investment advisers
affiliated with an SEC-registered adviser, newly formed advisers
expecting to be eligible for Commission registration within 120
days, and internet advisers. See proposed rule 203A-2(b), (c) and
(e).
---------------------------------------------------------------------------

a. NRSROs
    We propose an amendment to eliminate the exemption in rule 203A-
2(a) from the prohibition on Commission registration for nationally
recognized statistical rating organizations (``NRSROs''). Since we
adopted this exemption, Congress amended the Act to exclude NRSROs from
the Act \73\ and provided for a separate regulatory regime for NRSROs
under the Securities Exchange Act of 1934 (``Exchange Act'').\74\ Only
one NRSRO remains registered as an investment adviser under the Act and
reports that it has more than $100 million of assets under management
and thus would not rely on the exemption.\75\ Should we retain this
exemption? If so, why?
---------------------------------------------------------------------------

    \73\ Credit Rating Agency Reform Act of 2006, Public Law 109-
291, 120 Stat. 1327, Sec.  4(b)(3)(B) (2006) (``Credit Rating Agency
Reform Act''). See also Advisers Act section 202(a)(11)(F)
(excluding an NRSRO from the definition of investment adviser unless
it issues recommendations about purchasing, selling, or holding
securities or engages in managing assets that include securities).
    \74\ Credit Rating Agency Reform Act, supra note 73, at sections
4(a), 5.
    \75\ Based on IARD data as of September 1, 2010.
---------------------------------------------------------------------------

b. Pension Consultants
    We propose to amend the exemption available to pension consultants
in rule 203A-2(b) to increase the minimum value of plan assets from $50
million to $200 million.\76\ Pension consultants typically do not have
``assets under management,'' but we have required these advisers to
register with us because their activities have a direct effect on the
management of large amounts of pension plan assets.\77\ We had set the
threshold at $50 million of plan assets for these advisers to ensure
that, in order to register with us, a pension consultant's activities
are significant enough to have an effect on national markets.\78\ We
propose to increase this threshold to $200 million in light of
Congress's determination to increase from $25 million to $100 million
the amount of ``assets under management'' that requires all advisers to
register with the Commission.\79\ This threshold would maintain a ratio
to the statutory threshold that is the same as the ratio of the $50
million plan asset threshold and $25 million assets under management
threshold currently in place. As a result, advisers currently relying
on the pension consultant exemption advising plan assets of less than
$200 million may be required to register with one or more states.\80\
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    \76\ See proposed rule 203A-2(a).
    \77\ See NSMIA Adopting Release at section II.D.2.; NSMIA
Proposing Release at section II.D.2. Pension consultants provide
services to pension and employee benefit plans and their
fiduciaries, including assisting them to select investment advisers
that manage plan assets. See rule 203A-2(b)(2), (3); NSMIA Adopting
Release at section II.D.2. The exemption does not apply to pension
consultants that solely provide services to plan participants. See
NSMIA Adopting Release at section II.D.2.
    \78\ See NSMIA Adopting Release at n. 60 (the $50 million
``higher threshold is necessary to demonstrate that a pension
consultant's activities have an effect on national markets.''). The
higher asset requirement also reflects that a pension consultant has
substantially less control over client assets than an adviser that
has ``assets under management.'' Id. To determine the aggregate
value of plan assets, a pension consultant may only include the
portion of the plan's assets for which the consultant provided
investment advice. Rule 203A-2(b)(3).
    \79\ See section 410 of the Dodd-Frank Act.
    \80\ We note, however, that a pension consultant required to
register in 15 or more states would be eligible to register with the
SEC pursuant to proposed rule 203A-2(d). See infra section II.A.5.c.
of this Release.
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    We request comment on our proposed amendment. Does an adviser
advising plan assets of $200 million or more have an impact on national
markets? Should we use another amount instead? Does an adviser advising
a smaller amount of plan assets also have an impact on national
markets? Should we instead increase the threshold by the same amount
that Congress increased the statutory threshold of assets under
management, which would be $125 million of plan assets?
c. Multi-State Advisers
    We propose to amend the multi-state adviser exemption to align the
rule with the multi-State exemption Congress built into the mid-sized
adviser provision under section 410 of the Dodd-Frank Act.\81\ Under
rule 203A-2(e), the prohibition on registration with the Commission
does not apply to an investment adviser that is required to register in
30 or more states. Once registered with the Commission, the adviser
remains eligible for Commission registration as long as it would be
obligated, absent the exemption, to register in at least 25 states.\82\
The Dodd-Frank Act provides that a mid-sized adviser that otherwise
would be prohibited may register with the Commission if it would be
required to register with 15 or more states.\83\
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    \81\ See proposed rule 203A-2(d).
    \82\ Rule 203A-2(e)(1). An investment adviser relying on this
exemption also must: (i) include a representation on Schedule D of
Form ADV that the investment adviser has concluded that it must
register as an investment adviser with the required number of
states; (ii) undertake to withdraw from registration with the
Commission if the adviser indicates on an annual updating amendment
to Form ADV that it would be required by the laws of fewer than 25
states to register as an investment adviser with the State; and
(iii) maintain a record of the states in which the investment
adviser has determined it would, but for the exemption, be required
to register. Rule 203A-2(e)(2)-(4). Advisers relying on rule 203A-
2(e) may not include in the number of states those in which they are
not required to register because of applicable State laws or the
national de minimis standard of section 222(d) of the Advisers Act.
See Exemption for Investment Advisers Operating in Multiple States;
Revisions to Rules Implementing Amendments to the Investment
Advisers Act of 1940; Investment Advisers with Principal Offices and
Places of Business in Colorado or Iowa, Investment Advisers Act
Release No. 1733, n. 17 (July 17, 1998) [63 FR 39708 (July 24,
1998)] (``Multi-State Adviser Adopting Release'').
    \83\ See section 410 of the Dodd-Frank Act (``* * * if by effect
of this paragraph an investment adviser would be required to
register with 15 or more States, then the adviser may register under
section 203.''). Section 203A(a)(1) of the Advisers Act does not
include a similar exemption from the prohibition on Commission
registration for small advisers required to register in a particular
number of states.
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    We believe that this provision of the Dodd-Frank Act reflects a
Congressional view on the number of states with which an adviser must
be required to be registered before the regulatory burdens associated
with such regulation warrant registration solely with the Commission
and application of the preemption provision.\84\ Thus, we are
reconsidering the threshold of our multi-State exemption, and propose
to amend rule 203A-2(e) to permit all investment advisers required to
register as an investment adviser with 15 or more states to register
with the Commission.\85\ We also propose to eliminate the provision in
the rule that permits advisers to remain registered until the number of
states in which they must register falls below 25 states, and we are
not proposing a similar cushion for the 15-State threshold.\86\ The
Dodd-Frank Act contains no such cushion for mid-sized advisers.\87\ We
also believe that the requirement that advisers only assess their
eligibility for registration annually and the grace periods provided

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

a. Required To Be Registered
    Under section 203A(a)(1) of the Act, an adviser that is not
regulated or required to be regulated as an investment adviser in the
State in which it has its principal office and place of business must
register with the Commission regardless of the amount of assets it has
under management.\96\ We have interpreted ``regulated or required to be
regulated'' to mean that a State has enacted an investment adviser
statute, regardless of whether the adviser is actually registered in
that State.\97\ This interpretation has two relevant consequences.
First, advisers with a principal office and place of business in
Wyoming, or in foreign countries, must register with the Commission
regardless of whether they have assets under management and would not
otherwise be eligible for one of our exemptive rules.\98\ Second, some
smaller advisers exempt from State registration are not subject to
registration with either the Commission or any of the states.\99\
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    \96\ Advisers Act section 203A(a)(1). See also Advisers Act
section 203(a).
    \97\ See NSMIA Adopting Release at section II.E.1.
    \98\ See NSMIA Adopting Release at section II.E.; NSMIA
Proposing Release at section II.E. Currently, all U.S. states except
Wyoming require certain investment advisers to register. See
Transition Rule for Ohio Investment Advisers, Investment Advisers
Act Release No. 1794, n. 4 (Mar. 25, 1999) [64 FR 15680 (Apr. 1,
1999)].
    \99\ See, e.g., Advisers Act section 203A(a)(1); Uniform
Securities Act Sec. Sec.  102(15), 403(b) (2002) (``Uniform
Securities Act'') (defining ``investment adviser'' and providing
exemptions from State registration as an investment adviser).
---------------------------------------------------------------------------

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

has its principal office and place of business such that it is ``not
required to be registered'' with the State securities authority \102\
must register with the Commission, unless an exemption from
registration with the Commission otherwise is available.\103\ An
adviser not registered under a State adviser statute in contravention
of the statute, however, would not be eligible for registration with
the Commission.
---------------------------------------------------------------------------

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

    We are proposing changes to Form ADV to require a mid-sized adviser
filing with us to affirm, upon application and annually thereafter,
that it is not required to be registered as an adviser with the State
securities authority in the State where it maintains its principal
office and place of business.\104\ An adviser reporting that it is no
longer able to make such an affirmation thereafter would have 180 days
from its fiscal year end to withdraw from Commission registration.\105\
Thus, the rule would operate to permit an adviser to rely on this
affirmation reported in its annual updating amendments for purposes of
determining its eligibility to register with the Commission.\106\
Should these requirements apply to mid-sized advisers? Are there
alternative interpretations of ``required to be registered'' that we
should consider and why?
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    \104\ See proposed Form ADV, Part 1A, Item 2.A.(2)(a). For a
discussion of proposed changes to Form ADV, Part 1A, Item 2, see
supra section II.A.2. of this Release.
    \105\ See proposed rule 203A-1(b).
    \106\ This would allow an adviser to change registration status
based upon a change during the course of the year regarding whether
it is required to be registered with a State.
---------------------------------------------------------------------------

b. Subject to Examination
    Not all State securities authorities conduct compliance
examinations of advisers registered with them.\107\ Congress therefore
determined to require a mid-sized adviser to register with the
Commission if the adviser is not subject to examination as an
investment adviser by the State in which the adviser has its principal
office and place of business.\108\
---------------------------------------------------------------------------

    \107\ See, e.g., North American Securities Administrators
Association, Inc., State Securities Regulators Report on Regulatory
Effectiveness and Resources with Respect to Broker-Dealers and
Investment Advisers, 7 (2010) (``NASAA Report''). The NASAA Report
was submitted in connection with the Commission's study regarding
obligations of brokers, dealers, and investment advisers, and is
available on the Commission's Web site at http://www.sec.gov/comments/4-606/4606-2789.pdf.
    \108\ See section 410 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commission does not intend either to review or evaluate each
State's investment adviser examination program.\109\ Instead, we will
correspond with each State securities commissioner (or official with
similar authority) and request that each advise us whether an
investment adviser registered in the State would be subject to
examination as an investment adviser by that State's securities
commissioner (or agency or office with similar authority).\110\ We
believe that the states, being most familiar with their own
circumstances, are in the best position to determine whether advisers
in their State are subject to examination. Using the responses that we
receive, we will identify for advisers filing on IARD the states in
which the securities commissioner did not certify that advisers are
subject to examination and incorporate that list into IARD to ensure
that only mid-sized advisers with their principal office and place of
business in one of those states (or, as discussed above, mid-sized
advisers that are not registered with the states where they maintain
their principal office and place of business) will register with the
Commission.\111\ We request comment on whether the Commission should
take additional steps to determine whether an investment adviser would
be subject to examination in a State, as well as any alternatives the
Commission may adopt. We also request comment on the steps the
Commission should take if a State determines not to respond to our
request.
---------------------------------------------------------------------------

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

B. Exempt Reporting Advisers: Sections 407 and 408

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

    To implement sections 203(l) and 203(m), we are proposing a new
rule to require exempt reporting advisers to submit, and to
periodically update, reports to us by completing a limited subset of
items on Form ADV.\115\ We are also proposing amendments to Form ADV to
permit the form to serve as a reporting, as well as a registration,
form and to specify the seven items exempt reporting advisers must
complete.\116\
---------------------------------------------------------------------------

    \115\ Recordkeeping requirements for exempt reporting advisers
will be addressed in a future release. See sections 407 and 408
(providing that the Commission shall require investment advisers
exempt from registration under either section 407 or 408 to maintain
such records as the Commission determines necessary or appropriate
in the public interest or for the protection of investors.).
    \116\ For a discussion of additional amendments we are proposing
to Part 1 of Form ADV, see infra section II.C. of this Release.

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1. Reporting Required
    We are proposing a new rule, rule 204-4, to require exempt
reporting advisers to file reports with the Commission electronically
on Form ADV.\117\ Rule 204-4 would require these advisers to submit
their reports through the IARD using the same process as registered
investment advisers.\118\ Each Form ADV would be considered filed with
the Commission upon acceptance by the IARD,\119\ and advisers filing
the form would be required to pay a filing fee.\120\ As we do for IARD
filings by registered advisers, we would approve, by order, the amount
of the filing fee charged by FINRA.\121\ We anticipate that filing fees
would be the same as those for registered investment advisers, which
currently range from $40 to $200, based on the amount of assets an
adviser has under management.\122\ The filing fees would be set at
amounts that are designed to pay the reasonable costs associated with
the filing and the maintenance of the IARD.
---------------------------------------------------------------------------

    \117\ Proposed rule 204-4(a).
    \118\ Proposed rule 204-4(b). See General Instructions 6, 7, 8
and 9 (providing guidance about the IARD entitlement process,
signing the form, and submitting it for filing).
    \119\ Proposed rule 204-4(c). Cf. rule 0-4(a)(2) (``All filings
required to be made electronically with the * * * [IARD] shall,
unless otherwise provided by the rules and regulations in this part,
be deemed to have been filed with the Commission upon acceptance by
the IARD.'').
    \120\ Proposed rule 204-4(d).
    \121\ See section 204(b) of the Advisers Act.
    \122\ The current fee schedule may be found on our Web site at
http://www.sec.gov/divisions/investment/iard/iardfee.shtml.
---------------------------------------------------------------------------

    The reports filed by exempt reporting advisers would be publicly
available on our Web site.\123\ Exempt reporting advisers unable to
file electronically as a result of unanticipated technical difficulties
may qualify for a temporary hardship exemption.\124\ We also are
proposing technical amendments to Form ADV-H, the form advisers use to
request a hardship exemption from electronic filing, and Form ADV-NR,
used to appoint the Secretary of the Commission as an agent for service
of process for certain non-resident advisers.\125\
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    \123\ The Investment Adviser Public Disclosure System (``IAPD'')
allows the public to access the most recent Form ADV filing made by
an investment adviser and is available at http://www.adviserinfo.sec.gov. We would, however, make it clear to the
public viewing reports filed by an exempt reporting adviser on IAPD
that the adviser is not registered with us.
    \124\ See proposed rule 204-4(e) (providing a temporary hardship
exemption for an adviser having unanticipated technical difficulties
that prevent submission of a filing to IARD). The temporary hardship
exemption is based on a similar exemption for registered advisers
contained in rule 203-3(a) under the Act [17 CFR 275.203-3(a)],
which provides an exemption of no more than seven business days
after the filing was due.
    \125\ See proposed amended Form ADV-H, proposed amended Form
ADV-NR, and proposed General Instruction 18. The amendments to Form
ADV-H and Form ADV-NR would reflect that exempt reporting advisers
would be filing on IARD and the forms would be used in the same way
and for the same purpose as they are currently used by registered
investment advisers.
---------------------------------------------------------------------------

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

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

    Form ADV is today designed to obtain information from registered
advisers that provide a wide variety of types of

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

3. Updating Requirements
    We are also proposing to amend rule 204-1 under the Advisers Act,
which requires advisers to update their Form ADV filings, to require
exempt reporting advisers to file updating amendments to reports filed
on Form ADV.\137\ Proposed rule 204-1(a) would require an exempt
reporting adviser, like a registered adviser, to amend its reports on
Form ADV: (i) At least annually, within 90 days of the end of the
adviser's fiscal year; and (ii) more frequently, if required by the
instructions to Form ADV. Consequently, we are proposing to amend
General Instruction 4 to Form ADV to require an exempt reporting
adviser to update Items 1 (Identification Information), 3 (Form of
Organization), or 11 (Disciplinary Information) promptly if they become
inaccurate in any way, and to update Item 10 (Control Persons) if it
becomes materially inaccurate.\138\ We are proposing the same updating
requirements with respect to these Items as are applicable to
registered advisers because we believe it is equally important for
exempt reporting advisers to report information on a timely basis. We
also believe it could create confusion to apply different updating
standards within each item of the form depending on who completes the
item. Consequently, we are proposing to require exempt reporting
advisers to follow the same instructions applicable to the items they
must complete, although they are required to complete fewer items than
a registered adviser.
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    \137\ Proposed rule 204-1. We also propose to amend the title of
the rule to be ``Amendments to Form ADV,'' rather than ``Amendments
to application for registration,'' to reflect use of the Form by
exempt reporting advisers.
    \138\ See General Instruction 4 to Form ADV.
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    We request comment on the proposed amendments to rule 204-1 to
extend its requirements to exempt reporting advisers. Should exempt
reporting advisers be permitted to update Form ADV, or certain items,
less frequently? If so, what should be the updating requirements, and
should we be concerned that, as a result, an exempt reporting adviser
that is also registered with a State securities regulator would have to
update its Form ADV on a different schedule than an exempt reporting
adviser that is not also registered with a State? Would less frequent
reporting result in information that is less useful or materially
inaccurate? Should exempt reporting advisers be required to update
other items more frequently than annually?
    We propose to include a provision in rule 204-4 to require an
exempt reporting adviser to file an amendment to its Form ADV when it
ceases to be an exempt reporting adviser.\139\ The exempt reporting
adviser would indicate in this amendment that it is filing a final
report pursuant to rule 204-4 in order to alert us that the adviser no
longer will be filing reports, and allow us to distinguish such a filer
from one that is inattentive to its filing obligations.\140\ We request
comment on this proposed final report requirement. Is there an
alternative approach we could take?
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    \139\ See proposed rule 204-4(f).
    \140\ Proposed rule 204-4(f). Advisers filing a final report
would not be required to pay a filing fee. We note that failure to
file a final report would result in a violation of the rule.
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    Finally, we propose amending the instructions to Form ADV to
provide guidance to exempt reporting advisers who file final reports
because they must register with the Commission. Such a transition may
occur, for example, if an adviser relying on the ``venture capital
exemption'' in section 203(l) of the Advisers Act accepts a client that
is not a venture capital fund,\141\ or the value of the assets under
management in the United States of an adviser relying on the ``private
fund exemption'' in section 203(m) of the Advisers Act meets or exceeds
$150 million.\142\ A transitioning adviser would file an amendment to
its Form ADV simultaneously indicating that the filing will be its
final ``report'' on Form ADV and applying for registration with the
Commission.\143\ We request comment on this proposed guidance.
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    \141\ See section 407 of the Dodd-Frank Act.
    \142\ See section 408 of the Dodd-Frank Act.
    \143\ See proposed General Instruction 14. In the Exemptions
Release we propose that an adviser relying on the private fund
adviser exemption would have three months from the end of a calendar
quarter at which it failed to qualify for the exemption because of a
fluctuation in private fund assets to apply to the Commission for
registration unless it qualifies for another exemption. See proposed
rule 203(m)-1(d).
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4. Transition
    We propose requiring each exempt reporting adviser to file its
initial report with us on Form ADV no later than August 20, 2011, 30
days after the July 21, 2011 effective date of the Dodd-Frank Act.\144\
We believe this would provide sufficient time to enable an adviser to
determine whether it must report to us and to take the steps necessary
to complete and submit its initial filing. We request comment on our
proposed transition, including the amount of time we propose for exempt
reporting advisers to submit their initial reports.
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    \144\ See sections 403, 407, 408, and 419 of the Dodd Frank Act.
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    As discussed above, our ability to effect this transition may be
affected by our need to reprogram IARD.\145\ We are working closely
with FINRA, our IARD contractor, to make the needed modifications, but
the programming may not be completed until after we adopt these rules.
If IARD is unable to accept filings of amended Form ADV by that time,
we may want to delay the reporting deadline until the system can accept
electronic filing of the revised form. Should we instead require an
alternative procedure, such as a paper filing, for advisers to indicate
their eligibility for this exemption from registration and to satisfy
their reporting requirements?
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    \145\ See supra section II.A.1. of this Release.
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C. Form ADV

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

non-advisory activities and their financial industry affiliations. We
are also proposing certain additional changes intended to improve our
ability to assess compliance risks and also to identify advisers that
are subject to the Dodd-Frank Act's requirements concerning certain
incentive-based compensation arrangements.\147\ We understand that
advisers would have ready access to all of the new information as part
of their normal operations or compliance programs, and thus these new
requirements should impose few additional regulatory burdens. We
request comment on whether our understanding is correct. In addition to
(or instead of) these three areas of operations, are there other areas
about which we should require advisers to report additional
information?
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    \146\ In addition, we are proposing several clarifying or
technical amendments based on frequently asked questions we receive
from advisers as well as in our experience administering the form.
See infra section II.C.6. of this release.
    \147\ See section 956 of the Dodd-Frank Act.
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1. Private Fund Reporting: Item 7.B.
    We propose to expand the information we require advisers to provide
us about the private funds they advise in response to Item 7.B., and
Schedule D. Both registered and exempt reporting advisers would
complete this Item. The information would provide us with a more
complete understanding of the private funds advised by advisers and
would permit us to enhance our assessment of private fund advisers for
purposes of targeting our examinations. The information also would help
us identify particular practices that may harm investors. We have been
concerned that unregistered funds have been used as a vehicle for
perpetrating fraud on investors.\148\ The private fund reporting
requirements we are proposing would provide a level of transparency
that we believe would help us to identify practices that may harm
investors,\149\ and would deter advisers' fraud and facilitate earlier
discovery of potential misconduct.\150\
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    \148\ For example, since January 2009, the Commission has
brought more than 50 enforcement cases in which we assert hedge fund
advisers have defrauded hedge fund investors or used the fund to
defraud others.
    \149\ For instance, census data about a private fund's
gatekeepers, including administrators and auditors, would be
available on proposed Section 7.B.1. of Schedule D and would be
verifiable by investors and the Commission. Recent enforcement
actions suggest that the availability of such information could be
helpful. See, e.g., SEC v. Grant Ivan Grieve, et al., Litigation
Release No. 21402 (Feb. 2, 2010) (default judgment against hedge
fund adviser that was alleged to have fabricated and disseminated
false financial information for the fund that was ``certified'' by a
sham independent back-office administrator and phony accounting
firm); See In the Matter of John Hunting Whittier, Investment
Advisers Act Release No. 2637 (Aug. 21, 2007) (settled action
against hedge fund manager for, among other things, misrepresenting
to fund investors that a particular auditor audited certain hedge
funds, when in fact it did not).
    \150\ See, e.g., Second Amended Complaint, SEC v. Hoover, Civil
Action No. 01-10751-RGS, (D. Mass. Mar. 20, 2002) available at
http://www.sec.gov/litigation/complaints/complr17487.htm (adviser
allegedly participated in a scheme to defraud clients of his
advisory firm by, among other things, misappropriating assets and
overbilling expenses. When he became aware that the Commission staff
was investigating his firm, he established a separate, unregistered
advisory firm and perpetuated his fraud through use of a hedge fund
he created and controlled.); SEC v. Hoover, Litigation Release No.
17981 (Feb. 11, 2003) (announcing final judgment by consent).
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    Currently, Item 7 requires each adviser to complete Section 7.B. of
Schedule D for any ``investment-related limited partnership'' that the
adviser or a related person advises. A separate Schedule D must be
completed for each partnership. We propose to modify the scope of Item
7 by requiring completion of Section 7.B. only for a private fund that
the adviser (and not a related person) advises. This amendment would
incorporate the new term ``private fund,'' defined in section
202(a)(29) of the Act, the primary effect of which would be to require
advisers to report pooled investment vehicles regardless of whether
they are organized as limited partnerships.\151\ We would no longer
require an adviser to report to us funds that are advised by
affiliates, which in many cases would now be reported to us by an
affiliate that is either registered under the Act or is now an exempt
reporting adviser.\152\
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    \151\ See supra note 45 (discussing the definition of private
fund). In 2004, the Commission adopted amendments to Form ADV to
require reporting of ``private fund'' information, including a
similar amendment to Item 7. A Federal appeals court vacated the
2004 amendments to Item 7 that we had adopted for private funds. See
Registration under the Advisers Act of Certain Hedge Fund Advisers,
Investment Advisers Act Release No. 2333 (Dec. 2, 2004) [69 FR 72054
(Dec. 10, 2004)] (``Hedge Fund Adviser Registration Release'');
Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C.
Cir. June 23, 2006) (``Goldstein''). The amendments we propose
would, in part, reinstate these amendments we adopted in 2004.
    \152\ Currently, a related person may be able to rely on the
private adviser exemption from registration, which, as discussed
above, was repealed by the Dodd Frank Act effective July 21, 2011.
See supra at sections I, II.B. of this Release.
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    To avoid multiple reporting for each private fund, we propose to
permit a sub-adviser to exclude private funds for which an adviser is
reporting on another Schedule D,\153\ and would permit an adviser
sponsoring a master-feeder arrangement to submit a single Schedule D
for the master fund and all of the feeder funds that would otherwise be
submitting substantially identical data.\154\ Finally, we propose to
permit an adviser with a principal office and place of business outside
the United States to omit a Schedule D for a private fund that is not
organized in the United States and that is not offered to, or owned by,
``United States persons.'' \155\ This approach is designed to limit the
reporting burden imposed on foreign advisers with respect to funds in
which U.S. investors have no direct interest.
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    \153\ If an investment adviser completes section 7.B.1. of
Schedule D for a private fund, other advisers to that fund (most of
which are likely to be sub-advisers) would not have to complete
section 7.B.1. for that private fund. See proposed Form ADV, Part
1A, Note to Item 7.B.; proposed Section 7.B.2. of Schedule D. When