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

    \368\ Rule 0-7(a) defines ``small entities'' under the Advisers
Act for purposes of the Regulatory Flexibility Act.
    \369\ See amended rule 0-7(a)(1) (stating that the term ``small
business'' or ``small organization'' for purposes of the Advisers
Act means an investment adviser that: ``Has assets under management,
as defined under Section 203A(a)(3) of the Act (15 U.S.C. 80b-
3a(a)(3)) and reported on its annual updating amendment to Form ADV
[17 CFR 279.1], of less than $25 million, or such higher amount as
the Commission may by rule deem appropriate. * * *''); Implementing
Proposing Release, supra note 7, at section II.D.2.c.
---------------------------------------------------------------------------

d. Rule 222-1
    We are replacing, as proposed, the term ``principal place of
business'' in rule 222-1(b) \370\ under the Advisers Act

with the term ``principal office and place of business'' to conform to
the Dodd-Frank Act's amendments to section 222 of the Advisers
Act.\371\ We are not modifying the definition.
---------------------------------------------------------------------------

    \370\ Rule 222-1 contains definitions relevant to section 222 of
the Advisers Act's provisions regarding state regulation of
investment advisers. Amended rule 222-1(b) defines ``principal
office and place of business'' exactly as it defined ``principal
place of business'' of an investment adviser: ``The executive office
of the investment adviser from which the officers, partners, or
managers of the investment adviser direct, control, and coordinate
the activities of the investment adviser.''
    \371\ See section 985 of the Dodd-Frank Act (replacing the term
``principal place of business'' each time it appears--i.e., six
times--with the term ``principal office and place of business'' in
section 222 of the Advisers Act).
---------------------------------------------------------------------------

e. Rule 222-2
    We are adopting, as proposed, amendments to rule 222-2 to define
``client'' for purposes of the national de minimis standard by cross-
referencing the definition of ``client'' in rule 202(a)(30)-1 rather
than the definition in rule 203(b)(3)-1. The cross-reference to rule
203(b)(3)-1 must be updated because we are rescinding rule 203(b)(3)-
1.\372\ We are also changing, as proposed, a cross-reference to
paragraph (b)(6) of rule 203(b)(3)-1 to paragraph (b)(4) of rule
202(a)(30)-1 to account for the changed location of that particular
provision.
---------------------------------------------------------------------------

    \372\ See supra section II.D.2.a. (discussing rescinding rule
203(b)(3)-1); new rule 202(a)(30)-1; Exemptions Adopting Release,
supra note 4, at section II.C.1. (discussing the definition of
``client'' in rule 202(a)(30)-1).
---------------------------------------------------------------------------

    We are not adopting a proposed amendment to specify that, for
purposes of the national de minimis standard, an adviser is not
required to count as a client any person for whom the adviser provides
investment advisory services without compensation.\373\ We received a
comment letter opposing this amendment, citing the fact that under
proposed rule 202(a)(30)-1, an adviser would be required to count such
a person as a client for purposes of the ``foreign private adviser''
definition in section 202(a)(30) of the Act.\374\ The commenter stated
that it would be confusing and inconsistent to require an adviser to
count the same person as a client for purposes of the ``foreign private
adviser'' definition, but not for the national de minimis standard. We
agree. Thus, in the interests of consistency and clarity, advisers must
count such clients for both purposes.
---------------------------------------------------------------------------

    \373\ See Implementing Proposing Release, supra note 7, at
section II.D.2.e.
    \374\ See NASAA Letter; Exemptions Adopting Release, supra note
4, at section II.C.1.
---------------------------------------------------------------------------

f. Rule 202(a)(11)-1
    We are rescinding rule 202(a)(11)-1 under the Advisers Act.\375\
Although the rule was vacated by a federal appeals court (and is
therefore not in effect), it has remained in the CFR.\376\
---------------------------------------------------------------------------

    \375\ Rule 202(a)(11)-1. Rule 202(a)(11)-1 addressed the
application of the Advisers Act to broker-dealers offering certain
types of brokerage programs.
    \376\ See Financial Planning Association v. SEC, 482 F.3d 481
(DC Cir. 2007).
---------------------------------------------------------------------------

III. Effective and Compliance Dates

A. Effective Dates

    The effective date of rules 204-4 and 203A-5(b) and (c), amendments
to rules 0-7, 203A-1, 203A-2, 203A-3, 204-1, 204-2, 206(4)-5, 222-1,
and 222-2, and amendments to Forms ADV, ADV-E, ADV-H, and ADV-NR is
September 19, 2011. The effective date of rule 203A-5(a) and the
amendment to rule 203-1 is July 21, 2011.\377\ Rules 202(a)(11)-1,
203(b)(3)-1, 203(b)(3)-2, and 203A-4 are rescinded effective September
19, 2011.
---------------------------------------------------------------------------

    \377\ See section IV infra (discussing certain administrative
law matters associated with the effective date for new rule 203A-
5(a) and amended rule 203-1(e)).
---------------------------------------------------------------------------

B. Compliance Dates

1. Transition to State Registration and Form ADV
    As discussed in section II.A.1 above, new rule 203A-5 provides 90
days from December 31, 2011 for each adviser registered with us to
determine whether it is eligible for Commission registration.\378\
Accordingly, the rule requires all registered advisers to file an
amended Form ADV by March 30, 2012,\379\ which for most of our
registrants will be their annual updating amendments that are due 90
days after their December 31, 2011 fiscal year ends.\380\ For an
adviser that is no longer eligible to remain registered with us, rule
203A-5 provides an additional 90 days for it to register in one or more
of the states and withdraw its registration with us.\381\ After January
1, 2012, any adviser filing an amendment to Form ADV to meet the filing
requirements of rule 203A-5 or for any other purpose will be required
to provide responses to the form revisions we are adopting today.\382\
Our staff is working closely with FINRA, our IARD contractor, to re-
program IARD and we understand that the system is expected to be able
to accept filings of revised Form ADV by January 1, 2012.\383\
Investment advisers filing initial applications for registration after
the IARD is re-programmed to accommodate filing of the revised Form ADV
must complete the revised form.
---------------------------------------------------------------------------

    \378\ See new rule 203A-5; supra section II.A.1.
    \379\ See new rule 203A-5(b); supra section II.A.1.
    \380\ Advisers not filing an annual updating amendment from
January 1 to March 30, 2012, must file an other than annual
amendment updating Form ADV.
    \381\ See new rule 203A-5(c)(1). A mid-sized adviser that must
switch to state registration may not withdraw its SEC registration
until January 1, 2012. See new rule 203A-5(a); supra section II.A.1.
    \382\ See supra note 25 and accompanying text.
    \383\ As discussed in section II.B.1, we are also making
technical amendments to Forms ADV-H and ADV-NR to account for the
fact that exempt reporting advisers, along with registered advisers,
will file these forms.
---------------------------------------------------------------------------

2. Advisers Previously Exempt Under Section 203(b)(3)
    We are adopting a transition provision in rule 203-1 for advisers
that are newly required to register due to the Dodd-Frank Act's repeal
of the ``private adviser'' exemption in section 203(b)(3).\384\ Under
rule 203-1(e), an adviser that was relying on, and was entitled to rely
on, the ``private adviser'' exemption in section 203(b)(3) on July 20,
2011, may delay registering with the Commission until March 30,
2012.\385\ Because initial applications for registration can take up to
45 days to be approved, advisers relying on this transition provision
to remain unregistered until March 30, 2012 should file a complete
application, both Part 1 and a brochure(s) meeting the requirements of
Part 2 of Form ADV at least by February 14, 2012.\386\
---------------------------------------------------------------------------

    \384\ See amended rule 203-1(e); section 203(b)(3) of the
Advisers Act.
    \385\ See amended rule 203-1(e). See also Letter from Robert E.
Plaze, Associate Director, Division of Investment Management, U.S.
Securities and Exchange Commission, to David Massey, Deputy
Securities Administrator, North Carolina Securities Division, and
President, NASAA (Apr. 8, 2011) available at http://www.sec.gov/rules/proposed/2010/ia-3110-letter-to-nasaa.pdf (stating that the
Commission would potentially consider extending the date by which
these advisers must register and come into compliance with the
obligations of a registered adviser until the first quarter of
2012).
    \386\ See section 203(c)(2) of the Advisers Act (providing that
the Commission will grant registration or institute proceedings to
determine whether registration should be denied within 45 days of
the date an adviser files an application for registration).
---------------------------------------------------------------------------

    To qualify for the delayed transition under rule 203-1(e) an
adviser must, during the course of the preceding 12 months, have had
fewer than 15 clients and neither hold itself out generally to the
public as an investment adviser nor act as an adviser to a registered
investment company or business development company.\387\ The

transition period will provide these advisers with needed additional
time to work through any technical issues associated with applying for
registration and to establish compliance with Advisers Act provisions
and rules to which they are newly subject as advisers required to
register.\388\ As such, we believe that the temporary extension of the
registration deadline provided by rule 203-1(e) will assure an orderly
transition to registration that will minimize costs to these advisers
and their clients.
---------------------------------------------------------------------------

    \387\ See amended rule 203-1(e). An adviser relying on the
transition provision must come into compliance with Advisers Act
statutory provisions and rules applicable to registered advisers by
the time it is registered, which must occur no later than March 30,
2012. However, nothing in the transition provision exempts these
advisers from Advisers Act provisions and rules to which they are
currently subject. For example, the Advisers Act pay to play rule,
rule 206(4)-5, currently applies to advisers exempt from
registration under the ``private adviser'' exemption in section
203(b)(3) of the Act. See supra section II.D.1. (discussing our
amendments to the pay to play rule, one of which is designed so that
advisers exempt from registration under the ``private adviser''
exemption in section 203(b)(3) continue to be subject to the pay to
play rule after the Dodd-Frank Act eliminates the exemption).
    \388\ We received a number of comment letters requesting that
these advisers have additional time after July 21, 2011 (the date
the Dodd-Frank Act's repeal of the section 203(b)(3) private adviser
exemption becomes effective) to become registered and to establish
compliance with all provisions of the Advisers Act and rules
thereunder to which they are newly subject by virtue of their
required registration. See CompliGlobe Letter; MFA Letter; Schnase
Letter; Shearman Letter. We are using our authority under section
206A of the Act to implement this transition to registration. We
believe that providing advisers newly required to register with this
additional transition period is necessary or appropriate in the
public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the
Advisers Act.
---------------------------------------------------------------------------

3. Exempt Reporting Advisers
    Exempt reporting advisers must file their first reports on Form ADV
through IARD between January 1 and March 30, 2012. We originally
proposed to require exempt reporting advisers to file initial reports
by August 20, 2011.\389\ However, we are further delaying the
compliance date to accommodate re-programming of the IARD system on
which these reports will be filed.\390\ The extended deadline of March
30, 2012 will also address concerns raised by commenters that advisers
will not have sufficient time to determine whether they qualify for the
new exemptions, familiarize themselves with Form ADV and IARD, collect
the data necessary to file an initial report, and to file the
report.\391\
---------------------------------------------------------------------------

    \389\ See Implementing Proposing Release, supra note 7, at
section II.B.4.
    \390\ See supra section II.A.1. (discussing the expectation that
the IARD will be re-programmed in November 2011).
    \391\ See ABA Committees Letter; Merkl Implementing Letter.
---------------------------------------------------------------------------

4. Other Amendments
    As discussed in section II.A.5., advisers may rely on our
amendments to rule 203A-2 beginning on September 19, 2011.\392\ These
include our amendments to increase the threshold for pension
consultants from $50 million to $200 million and to create a uniform
threshold for small and mid-sized advisers that permits them to
register with the Commission if they are required to register in 15 or
more states.\393\ Advisers may begin relying on our amendment to the
buffer in rule 203A-1 on September 19, 2011. In addition, as discussed
in section II.D.1, we are extending the compliance date for the pay to
play rule's ban on third-party solicitation from September 13, 2011 to
June 13, 2012. Advisers must comply with any other amendments not
discussed in this section III.B by their effective dates.
---------------------------------------------------------------------------

    \392\ See supra note 118.
    \393\ See supra section II.A.5.
---------------------------------------------------------------------------

IV. Certain Administrative Law Matters

    As discussed in section III.A above, the effective date for rule
203A-5(a) and the amendment to rule 203-1 is July 21, 2011. The
Administrative Procedure Act generally requires that an agency publish
a final rule in the Federal Register not less than 30 days before its
effective date.\394\ However, this requirement does not apply if the
rule is a substantive rule which grants or recognizes an exemption or
relieves a restriction, if the rule is interpretive, or if the agency
finds good cause to make the rule effective less than 30 days after its
date of publication in the Federal Register.\395\ Effective July 21,
2011, the Dodd-Frank Act amends section 203A of the Advisers Act to
prohibit certain mid-sized advisers from registering with the
Commission, and eliminates the ``private adviser'' exemption in section
203(b)(3), requiring advisers relying on that exemption to register as
of July 21, 2011.\396\ Rule 203A-5(a) provides a temporary extension of
the deadline by which certain mid-sized advisers must withdraw their
Commission registration, and rule 203-1(e) provides a temporary
extension of the registration deadline for advisers relying on the
``private adviser'' exemption in section 203(b)(3).\397\ Thus, both
rule 203A-5(a) and rule 203-1(e) recognize an exemption or relieve a
restriction. Furthermore, as discussed in sections II.A and III.B.2 of
this Release, we believe that these temporary extensions are necessary
to facilitate an orderly process for advisers relying on the ``private
adviser'' exemption in section 203(b)(3) to apply for registration and
for mid-sized advisers to withdraw from registration, and to provide
sufficient time for the re-programming of IARD. Thus, we find good
cause to make rules 203A-5(a) and 203-1(e) effective on July 21, 2011.
---------------------------------------------------------------------------

    \394\ See 5 U.S.C. 553(d).
    \395\ See id.
    \396\ See sections 403, 410, and 419 of the Dodd-Frank Act;
sections 203(b)(3), 203A(a)(2) of the Advisers Act; supra sections I
and II.A.
    \397\ See amended rule 203-1(e) and new rule 203A-5(a); supra
section II.A and section III.B.2.
---------------------------------------------------------------------------

V. Cost-Benefit Analysis

    We are sensitive to the costs and benefits imposed by our rules,
and understand that there will be costs associated with compliance with
the new rules and rule amendments. The new rules and amendments we are
adopting are designed to give effect to provisions of Title IV of the
Dodd-Frank Act that: (i) Reallocate responsibility for oversight of
investment advisers by delegating generally to the states
responsibility over certain mid-sized advisers; (ii) repeal the
``private adviser'' exemption contained in section 203(b)(3) of the
Advisers Act; and (iii) provide for reporting by advisers to certain
types of private funds that are exempt from registration. As part of
these amendments, we are also adopting amendments to the Advisers Act
pay to play rule, rule 206(4)-5. Additionally, we are identifying the
advisers that may be subject to the Dodd-Frank Act's requirements
concerning certain incentive-based compensation arrangements. Because
many of the new rules and rule amendments will implement or clarify
provisions of the Dodd-Frank Act, they will not create benefits and
costs separate from the benefits and costs considered by Congress in
passing the Dodd-Frank Act.\398\ However, certain of the rules and rule
amendments that we are adopting will generate costs and benefits
independent of those generated by the Dodd-Frank Act itself. These
costs and benefits are discussed below.\399\
---------------------------------------------------------------------------

    \398\ See Dodd-Frank Act, supra note 2; Conference Committee
Report, supra note 136; Senate Committee Report, supra note 18;
supra section I. Rules and amendments not generating costs and
benefits independent of those generated by the Dodd-Frank Act
include the amendments to rules 0-7, 204-2, 222-1, 222-2 and our
rescinding of rules 202(a)(11)-1, 203(b)(3)-1, and 203(b)(3)-2.
    \399\ To indicate the scale of the market which is addressed by
Title IV of the Dodd-Frank Act and the amendments to Advisers Act
rules we are adopting today--the market for investment advisory
services--based on IARD data as of April 7, 2011, our staff
estimates that SEC-registered advisers manage approximately $43.822
trillion in assets.
---------------------------------------------------------------------------

    In the Implementing Proposing Release, we requested comment on the
proposed rules and amendments, suggestions for additional changes to
the existing rules, and comment on other matters that might have an
effect on our proposals. We received approximately 73 comment letters
on the proposal. Commenters generally supported our approach
facilitating mid-sized advisers' transition from Commission to state
registration, and our amendments to

Form ADV requiring disclosure of additional information about private
funds. Many, however, urged us to take a different approach to revising
the pay to play rule.

A. Benefits

1. Eligibility to Register With the Commission: Section 410
    Section 410 of the Dodd-Frank Act amends section 203A of the
Advisers Act to create a new category of ``mid-sized advisers'' and
shifts primary responsibility for their regulatory oversight to the
states. Specifically, section 410 prohibits an investment adviser from
registering with the Commission if the adviser is required to be
registered and is subject to examination as an investment adviser in
the state in which it maintains its principal office and place of
business, and has assets under management between $25 million and $100
million.\400\ We are adopting rules and rule amendments that provide us
with a means of identifying advisers that must transition to state
regulation, clarify the application of new statutory provisions, and
modify certain exemptions we previously adopted under section 203A of
the Act.
---------------------------------------------------------------------------

    \400\ See supra notes 18-19 and accompanying text (discussing
section 410 of the Dodd-Frank Act, which amends section 203A of the
Advisers Act to increase the threshold above which all investment
advisers must register with the Commission from $25 million to $100
million).
---------------------------------------------------------------------------

Transition to State Registration
    We are adopting new rule 203A-5, which requires each investment
adviser registered with us on January 1, 2012 to file an amendment to
its Form ADV no later than March 30, 2012, and withdraw from Commission
registration by June 28, 2012, if no longer eligible.\401\ As a
consequence of section 410 of the Dodd-Frank Act, we estimate that
approximately 3,200 SEC-registered advisers will be required to
withdraw their registration and register with one or more state
securities authorities.\402\ We believe this filing is necessary for
each adviser to confirm its current eligibility for Commission
registration in light of multiple statutory changes (as well as changes
to the rules that we are today adopting) that could affect whether the
adviser may register with the Commission.\403\ Given this significant
realignment of regulatory authority over numerous advisers, requiring
all advisers to file the new Form ADV and complete all items also will
allow us and the state securities authorities to easily and efficiently
identify the advisers that are subject to our regulatory authority and
which advisers have switched to state registration after the
implementation of the Dodd-Frank Act's amendment to section 203A of the
Advisers Act. Additionally, the filing will help minimize any potential
uncertainty among investors and other market participants about the
effects of the Dodd-Frank Act on the registration status of a
particular adviser by providing a simple, efficient means of
determining an adviser's registration status after the implementation
of the Dodd-Frank Act through the IARD as of a specific date. This
could help minimize any disruption in advisory business that such
uncertainty could provoke. One commenter agreed with our expectation
that the transition rule will benefit advisers, noting that the rule
will ``assist mid-sized advisers in transitioning from federal to state
registration.'' \404\
---------------------------------------------------------------------------

    \401\ New rule 203A-5(b)-(c); supra section II.A.1. Mid-sized
advisers registered with the Commission as of July 21, 2011 must
remain registered with the Commission (unless an exemption from
Commission registration otherwise is available) until January 1,
2012. New rule 203A-5(a). See supra note 28.
    \402\ See supra note 22 and accompanying text.
    \403\ In addition, we believe that requiring advisers to
complete all of the items will provide the Commission and the state
regulatory authorities with essential information about the advisers
that are transitioning to state registration and the advisers that
are remaining registered with the Commission. See infra section
II.C.
    \404\ Pickard Letter.
---------------------------------------------------------------------------

    Rule 203A-5 that we are adopting today differs from the one we
proposed in several respects. First, rule 203A-5 requires advisers
already registered with the Commission to refile Form ADV beginning on
January 1, 2012, instead of beginning on July 21, 2011 as
proposed.\405\ We stated in the Implementing Proposing Release that a
delay might be necessary if the IARD was not re-programmed to reflect
the revised Form ADV by July 21.\406\ We now understand that beginning
in November 2011, the IARD will be updated to reflect the revisions to
Form ADV that we are adopting today.\407\ Several commenters agreed
with our approach to delay the transition instead of adopting
alternative requirements, such as requiring interim paper filings, to
reduce burdens for both advisers and regulators.\408\ Additionally, we
believe that delaying the beginning of the transition until January 1,
2012 will allow the Commission and state regulators to manage the
transition of mid-sized advisers in an orderly manner, and will
accommodate the re-programming of the IARD that eliminates the need and
cost of alternatives such as interim paper filings.
---------------------------------------------------------------------------

    \405\ See new rule 203A-5(b); proposed rule 203A-5(a); supra
section II.A.1.
    \406\ Implementing Proposing Release, supra note 7, at section
II.A.1.
    \407\ FINRA informed us that the IARD will be updated to reflect
the revisions to Form ADV that we are adopting today beginning in
November. See supra section II.A.1.
    \408\ See Dezellem Letter (urging the Commission to wait for the
IARD to be reprogrammed because it is efficient and reduces risks of
misplacing paper documents and possible filing errors); NASAA Letter
(``the benefits of electronic filing, including easy public access
to the documents, are significant and would outweigh any
disadvantages imposed by a delay in filing deadlines.''); NRS Letter
(urging Commission not to ``regress to paper filings'' which would
be ``a huge step into the past'' and ``appears to be counter to
Dodd-Frank Act purposes of transparency and consistency.''). See
also NYSBA Committee Letter.
---------------------------------------------------------------------------

    Second, rule 203A-5 provides a 180-day transition period, which is
longer than the 90-day period we proposed.\409\ Advisers will be
required to file an amended Form ADV by March 30, 2012 (instead of
August 20, 2011, as proposed), and mid-sized advisers no longer
eligible for Commission registration will be required to withdraw by
June 28, 2012 (instead of October 19, 2011, as proposed).\410\ Changing
the deadline for advisers to refile amended Form ADV to March 30, 2012,
which coincides with most advisers' required annual updating amendment,
significantly reduces the burden of rule 203A-5 by eliminating the
costs associated with a special one-time filing requirement for most
registered advisers.\411\ In addition, the change in deadline to refile
also coincides with the filing deadline for newly registering private
fund advisers, which, as one commenter pointed out, eliminates the need
for these advisers also to file Form ADV solely for the purposes of
determining eligibility for registration.\412\ Also, the June 28, 2012
deadline to withdraw from registration

will provide additional time for advisers to complete the switch to
state registration and to comply with their obligations under state
law, and will reduce administrative burdens for the state securities
authorities that must review and process mid-sized adviser state
registrations, as underscored by several commenters.\413\ Several
commenters expressed concerns about the burdens of requiring all
advisers to amend all of Form ADV solely to indicate their eligibility
to register \414\ and requiring mid-sized advisers to switch to state
registration within 90 days after July 21, 2011.\415\ The revised
transition discussed above should allay these concerns. We believe that
providing advisers with 180 days, rather than 90 days, to transition to
state registration will allow them to do so in a more orderly
manner.\416\ It will provide them greater time to collect the
information necessary for state registration and to assess and to come
into compliance with state regulations governing advisers. As such, it
may promote efficiency and reduce advisers' costs.
---------------------------------------------------------------------------

    \409\ See new rule 203A-5(b)-(c); proposed rule 203A-5(a)-(b)
and supra section II.A.1.
    \410\ See new rule 203A-5(b)-(c); proposed rule 203A-5(a)-(b);
Implementing Proposing Release, supra note 7, at section II.A.1.
    \411\ See, e.g., CMC Letter (suggesting ``timing of the
transition from Federal to state registration could be centered
around renewals for 2012''). As of April 7, 2011, 10,636 SEC-
registered advisers had a fiscal year ending on December 31. We
expect that these advisers will comply with new rule 203A-5(b)'s
Form ADV filing requirement by submitting their annual updating
amendment. The 868 SEC-registered advisers not required to file an
annual updating amendment between January 1, 2012 and March 30, 2012
will file an other-than-annual amendment, but they will complete all
of the items on the form (not just the items required to be updated
in a typical other-than-annual amendment). See supra note 48.
    \412\ See MFA Letter.
    \413\ Many commenters urged us to provide additional time for
mid-sized advisers to complete the switch to state registration. See
ABA Committees Letter; Altruist Letter; CMC Letter; Dezellem Letter;
Dinel Letter; FSI Letter; Klein Letter; NRS Letter; NYSBA Committee
Letter; Sadis Letter; Schnase Letter; Seward Letter; Shearman
Letter. Several commenters echoed concerns about timely state
processing of applications, noting, in particular, additional
registration and compliance requirements in many states and expected
delays to approve state registrations given the increase in filings
as a result of the Dodd-Frank Act. See ABA Committees Letter (``some
states may be unable to process such filings in a timely and
efficient manner.''); Altruist Letter (noting that it took 122 days
for a state to approve its application). See also CMC Letter;
Dezellem Letter; Klein Letter; NRS Letter; NYSBA Committee Letter;
Schnase Letter; Seward Letter. One commenter, while supporting the
method and timeline for transition contained in proposed rule 203A-
5, suggested that it would be prudent to include in the rule
flexibility to extend this timeline if necessary. See NASAA Letter.
    \414\ See, e.g., ICI Letter; MFA Letter; NYSBA Committee Letter;
Shearman Letter.
    \415\ See, e.g., ABA Committees Letter; Altruist Letter; CMC
Letter; Dezellem Letter; Dinel Letter; FSI Letter; Klein Letter; NRS
Letter; NYSBA Committee Letter; Sadis Letter; Schnase Letter; Seward
Letter; Shearman Letter. Only one commenter supported the proposed
90-day grace period. Pickard Letter.
    \416\ Our current rules provide an SEC-registered adviser that
has to switch to state registration a period of 180 days after its
fiscal year end to file an annual amendment to Form ADV and to
withdraw its SEC registration after reporting to us that it is no
longer eligible to remain registered with us. See rule 203A-1(b)(2);
cf. rule 204-1(a). Several commenters recommended the Commission
match the current 180-day period. See Altruist Letter; Dezellem
Letter; FSI Letter; Klein Letter; NYSBA Committee Letter; Schnase
Letter; Seward Letter; Shearman Letter.
---------------------------------------------------------------------------

    Finally, we are providing additional flexibility for an adviser to
choose the date by which it must calculate its assets under management
that it reports on Form ADV by requiring the same 90 day period as in
Form ADV today, instead of 30 days, as proposed.\417\ This change will
make an additional administrative burden unnecessary for the majority
of advisers that already value assets on a quarterly basis, as
underscored by several commenters.\418\
---------------------------------------------------------------------------

    \417\ See new rule 203A-5(b); amended Form ADV: Instructions for
Part 1A, instr. 5.b.(4); supra section II.A.1.
    \418\ Several commenters recommended that advisers be able to
calculate assets under management as of the quarter-end. See
Altruist Letter; NYSBA Committee Letter; Seward Letter; Shearman
Letter.
---------------------------------------------------------------------------

Switching Between State and Commission Registration
    Rule 203A-1 is designed to prevent an adviser from having to switch
frequently between state and Commission registration as a result of
changes in the value of its assets under management or the departure of
one or more clients. We are amending the rule to eliminate the current
buffer for advisers with assets under management between $25 million
and $30 million that permits these advisers to remain regulated by the
states, and we are replacing it with a similar buffer for mid-sized
advisers with assets under management of close to $100 million.\419\
The rule raises the threshold above which a mid-sized adviser must
register with the Commission to $110 million; but, once registered with
the Commission, an adviser need not withdraw its registration until it
has less than $90 million of assets under management.\420\ Commenters
did not object to elimination of the current buffer, but several argued
that we need to include a new buffer for mid-sized advisers that have
close to $100 million of assets under management.\421\ These comments
persuaded us to adopt a buffer that, as discussed below, may prevent
costs and disruption to advisers that otherwise may have had to switch
between federal and state registration frequently.\422\ The rule also
maintains the 180-day grace period from the adviser's fiscal year end
for advisers no longer eligible to switch to state registration,\423\
which further addresses commenters' concerns about advisers frequently
having to switch registration.\424\
---------------------------------------------------------------------------

    \419\ See amended rule 203A-1(a); supra note 103 and
accompanying text.
    \420\ See amended rule 203A-1(a); supra note 106.
    \421\ See Altruist Letter; Dezellem Letter; Dinel Letter; FSI
Letter; ICW Letter; JVL Associates Letter; Merkl Implementing
Letter; NASAA Letter; NRS Letter; NYSBA Committee Letter; Wealth
Coach Letter; WJM Letter.
    \422\ Several commenters discussed the costs of switching
frequently between Federal and state registration. See, e.g.,
Altruist Letter; ICW Letter; JVL Associates Letter; NRS Letter;
Wealth Coach Letter.
    \423\ See amended rule 203A-1(b)(2); supra note 104 and
accompanying text.
    \424\ See Altruist Letter; Dezellem Letter; Dinel Letter; FSI
Letter; ICW Letter; JVL Associates Letter; Merkl Implementing
Letter; NRS Letter; NYSBA Committee Letter; Wealth Coach Letter; WJM
Letter.
---------------------------------------------------------------------------

    We are eliminating the current $5 million buffer, as proposed,
because, as one commenter noted, it seems ``unnecessary and potentially
confusing,'' \425\ particularly in light of Congress's determination
generally to require most advisers having between $25 million and $100
million of assets under management to be registered with the
states.\426\ Elimination of the current buffer also promotes efficiency
and competition by making the registration requirements for advisers
with assets under management between $25 million and $30 million
consistent with the requirements for advisers with assets under
management between $30 million and $100 million.
---------------------------------------------------------------------------

    \425\ ABA Committees Letter.
    \426\ See supra note 18.
---------------------------------------------------------------------------

    The new buffer yields several benefits, also identified by
commenters, including enhancing efficiency because it will prevent
advisers from frequently switching to and from Commission registration
due to market fluctuations.\427\ The buffer also will eliminate the
additional costs and resulting competitive disadvantages these advisers
would therefore incur (such as paying filing fees and changing
compliance programs to reflect a different regulatory regime).\428\ The
amendment operates to provide a buffer of 20 percent of the $100
million

statutory threshold for registration with the Commission, which is the
same percentage as the current buffer. We believe a 20 percent buffer
is appropriate because it is large enough to create a flexible regime
that accommodates market fluctuations or the departure of one or more
clients, and does not substantially increase or decrease the $100
million threshold set by Congress in the Dodd-Frank Act.\429\
Commenters further asserted that the buffer will reduce burdens for
investors, clients and regulators,\430\ and will provide regulatory
flexibility.\431\
---------------------------------------------------------------------------

    \427\ Commenters said a 20 percent buffer should prevent
advisers from having to switch as a result of changes in market
values due to volatility in the securities markets. See, e.g.,
Dezellem Letter; Dinel Letter; WJM Letter. See also Altruist Letter;
FSI Letter; ICW Letter; Merkl Implementing Letter; NYSBA Committee
Letter. Several advisers with close to $100 million of assets under
management asserted that a buffer is necessary to prevent them from
switching to and from Commission registration. ICW Letter (for three
years, adviser's assets under management have fluctuated above and
below $100 million due to market volatility); JVL Associates Letter
(adviser's assets under management have fluctuated around $100
million since 2007). See also Wealth Coach Letter (from October 2008
through March 2009, adviser's total assets under management fell
over 25 percent).
    \428\ See ICW Letter (having to switch back and forth ``would
create a disproportionate regulatory burden and cost structure'' and
would ``place them at a significant operating and financial
disadvantage to advisory firms clearly exposed to only one
regulatory regime that is not likely to change.''); WJM Letter (not
having a buffer potentially puts an unreasonable and unfair burden
on the smaller SEC advisers and could mean they would re-register
several times before getting into a ``safe'' zone). See also
Dezellem Letter; FSI Letter; Wealth Coach Letter.
    \429\ See supra note 117.
    \430\ See Dezellem Letter (arguing new registrations are time
consuming and costly for regulators and advisers, and adopting a
buffer will decrease investor confusion); FSI Letter (arguing a
buffer will reduce costs associated with re-registration that would
be passed on to investors); Wealth Coach Letter (arguing different
registrations could overwhelm clients, and the resources required to
change registration could negatively impact an adviser's client
services and portfolio management); WJM Letter (arguing clients
would be ``puzzled or concerned'' by registration changes, and
multiple re-registrations would put additional burdens on states).
    \431\ See NASAA Letter (arguing a buffer ``provides an element
of regulatory flexibility.'').
---------------------------------------------------------------------------

Exemptions From the Prohibition on Registration With the Commission
    We are amending three of the exemptions from the prohibition on
registration in rule 203A-2 to reflect developments since their
original adoption, including the enactment of the Dodd-Frank Act.\432\
First, we are eliminating the exemption in rule 203A-2(a) from the
prohibition on Commission registration for NRSROs.\433\ Currently, no
advisers indicate that they are NRSROs by marking Item 2.A.(5) of Part
1A of Form ADV.\434\ Given that NRSROs do not currently rely on the
exemption and Congress excluded certain NRSROs from the Act's
definition of ``investment adviser'' since we adopted this
exemption,\435\ the amendment will not generate any benefits or costs
and will not impact efficiency, competition or capital formation,
separate from the benefit of simplifying our rules and, as one
commenter noted, will increase ``consistency across legislative and
regulatory requirements.''\436\
---------------------------------------------------------------------------

    \432\ See amended rule 203A-2; supra section II.A.5. We are also
renumbering and making minor conforming changes to rule 203A-2(c),
(d) and (f). See amended rule 203A-2(b), (c) and (e). Each of the
exemptions from the prohibition on registration in rule 203A-2
(including those we are not amending) also apply to mid-sized
advisers, which one commenter asserted ``promotes uniformity,
clarity and a consistent standard for all.'' NRS Letter. See supra
note 119.
    \433\ See supra section II.A.5.a.
    \434\ Based on IARD data as of April 7, 2011.
    \435\ See supra notes 121-122.
    \436\ NRS Letter (asserting that the proposal is consistent with
the Credit Rating Agency Reform Act, which amended the Advisers Act
to exclude NRSROs and to provide for a separate regulatory regime
for them under the Exchange Act). See also Pickard Letter (asserting
that continued availability of the NRSRO exemption is causing
confusion among advisers).
---------------------------------------------------------------------------

    Second, we are amending the exemption available to pension
consultants in rule 203A-2(b) to increase the minimum value of plan
assets on which an adviser must consult from $50 million to $200
million.\437\ We are increasing the threshold to $200 million in light
of Congress's determination to increase from $25 million to $100
million the amount of assets under management that requires advisers to
register with the Commission, and to maintain the same ratio as today
of plan assets to the statutory threshold for registration.\438\ This
amendment will provide the benefit to these firms of registering with a
single securities regulator, and will provide the regulatory benefit of
allowing the Commission to focus its resources on oversight of those
pension consultants that are more likely to have an effect on national
markets.\439\
---------------------------------------------------------------------------

    \437\ See amended rule 203A-2(a); supra section II.A.5.b.
    \438\ See supra note 127.
    \439\ One commenter expressed support for the $200 million
threshold. See NRS Letter (agreeing that the $200 million threshold
would continue to ensure that the activities of a pension consultant
registered with the Commission are significant enough to have an
impact on national markets).
---------------------------------------------------------------------------

    Finally, we are amending the multi-state adviser exemption to align
the rule with the multi-state exemption Congress provided for mid-sized
advisers in section 410 of the Dodd-Frank Act.\440\ Amended rule 203A-
2(d) permits all investment advisers who are required to register as an
investment adviser with 15 or more states to register with the
Commission, rather than 30 states, as currently required.\441\ An
adviser relying on the rule must withdraw from registration with the
Commission when it is no longer required to register with 15
states.\442\ We believe this change reflects the Congressional
determination to set the threshold at 15 states.\443\ This amendment
reduces the regulatory burdens on advisers required to be registered
with at least 15 states, but less than 30, by allowing them to register
with a single securities regulator--the Commission.\444\ Additionally,
the amendment promotes efficiency and reduces the effect on competition
between small and mid-sized investment advisers by imposing a
consistent multi-state exemption standard.\445\ We also are rescinding,
as proposed, the provision in the current rule that permits advisers to
remain registered until the number of states in which they must
register falls below 25 states, and we are not adopting a similar
cushion for the 15-state threshold.\446\ We do not see any significant
benefit of retaining this buffer, and we believe it is unnecessary
because advisers elect to rely on the exemption and we are lowering the
number of states from 30 to 15. As one commenter observed, eliminating
the buffer also simplifies the requirements of the exemption.\447\
---------------------------------------------------------------------------

    \440\ See amended rule 203A-2(d); supra section II.A.5.c.
    \441\ See supra note 131.
    \442\ See supra note 132.
    \443\ See supra note 136.
    \444\ See Seward Letter, and Shearman Letter (in each case
supporting the 15-state threshold we proposed, and suggesting the
burdens of maintaining multiple state registrations can be
significant). See also NEA Letter. One of these commenters also
would support further decreasing the number of states to five and
requiring advisers relying on the exemption to have at least $25
million of assets under management. Seward Letter. Another ``would
support an even lower threshold.'' Shearman Letter.
    \445\ NASAA Letter (supporting amendment ``as an effort to be
more consistent in the registration requirements for all advisers
when analyzing the thresholds for registration with the SEC or the
states.''); NRS Letter (``Establishing one uniform standard for all
advisers of a 15-state requirement provides a uniform and clear
standard.''). See also NEA Letter (strongly recommending the 15-
state threshold be applied to both small and mid-sized advisers).
    \446\ See rule 203A-2(e)(1); supra section II.A.5.c.
    \447\ See NRS Letter (``The Dodd-Frank Act has addressed the
multi-state adviser exemption to simplify the requirements of this
exemption.'').
---------------------------------------------------------------------------

Elimination of Safe Harbor
    We are rescinding, as proposed, rule 203A-4, which has provided a
safe harbor from Commission registration for an investment adviser that
is registered with the state securities authority of the state in which
it has its principal office and place of business based on a reasonable
belief that it is prohibited from registering with the Commission
because it does not have sufficient assets under management.\448\ As
discussed above, the safe harbor was designed for smaller advisory
businesses with assets under management of less than $30 million, which
may not employ the same tools or otherwise have a need to calculate
assets as precisely as advisers with greater assets under
management.\449\ We also believe that the revisions we are adopting to
the Form ADV instructions to implement a uniform method for advisers to
calculate assets under management will clarify the requirements and
reduce confusion

among advisers.\450\ Moreover, the rule is a safe harbor only from our
enforcement actions, and to our knowledge few, if any, advisers have
relied upon it in the 14 years since it was adopted.\451\ We believe
rescinding the safe harbor will simplify our rules in general, thereby
marginally reducing costs of compliance, and will have little, if any,
other effect on efficiency, competition or capital formation.
---------------------------------------------------------------------------

    \448\ See rule 203A-4; supra section II.A.6.
    \449\ See supra note 140.
    \450\ See supra note 141.
    \451\ See supra note 142.
---------------------------------------------------------------------------

Mid-Sized Advisers
    The Dodd-Frank Act does not explain how to determine whether a mid-
sized adviser is ``required to be registered'' or is ``subject to
examination'' by a particular state securities authority for purposes
of section 203A(a)(2)'s prohibition on mid-sized advisers registering
with the Commission.\452\ We are providing in the instructions to Form
ADV an explanation of how we construe these statutory provisions.\453\
Our instructions are intended to clarify the meaning of these
provisions, promoting efficiency by mitigating uncertainty about their
meaning. For example, as underscored by commenters, because we are
identifying to advisers filing on the IARD the states that do not
subject advisers to examination, a mid-sized adviser will not be
required to independently determine whether it is subject to
examination in a particular state.\454\ Simplifying the process for
mid-sized advisers to determine whether they are required to register
with us would decrease any competitive disadvantages compared to
smaller advisers.
---------------------------------------------------------------------------

    \452\ See supra note 145.
    \453\ See amended Form ADV: Instructions for Part 1A, instr.
2.b.; supra section II.A.7.
    \454\ See NRS Letter (noting ``the wide range of state
regulatory regimes and processes'' and supporting ``efforts to
verify those states which do or will subject advisers to
examinations.''); Sadis Letter (noting different state examination
practices and arguing that clarification of registration
requirements ``is vital to the compliance of mid-sized advisers in
states * * * which do not have routine examination programs in place
for its investment advisers.'').
---------------------------------------------------------------------------

2. Exempt Reporting Advisers: Sections 407 and 408
    Congress gave us broad authority under sections 203(l) and 203(m)
of the Advisers Act to require exempt reporting advisers to file
reports as necessary or appropriate in the public interest or for the
protection of investors.\455\ To implement these new sections of the
Advisers Act, we are adopting new rule 204-4, as proposed, that
requires exempt reporting advisers to submit to us, and to periodically
update, reports that consist of a limited subset of items on Form
ADV.\456\ We are also adopting the amendments we proposed to Form ADV
to permit the form to serve as both a reporting and registration form
and to specify the seven items that exempt reporting advisers must
complete.\457\
---------------------------------------------------------------------------

    \455\ See sections 407 and 408 of the Dodd-Frank Act, codified
as new sections 203(l) and 203(m) of the Advisers Act.
    \456\ New rule 204-4(a); amended Form ADV: General Instructions
3 and 4. See supra section II.B.
    \457\ See supra section II.B.2.
---------------------------------------------------------------------------

    While the benefits of the reporting requirement under new rule 204-
4 are difficult to quantify, we believe they are substantial. The
information exempt reporting advisers provide on Form ADV will be
beneficial to both the Commission and investors. This information will
help us to identify exempt reporting advisers, their owners, and their
business models and will provide us with information as to whether
these advisers or their activities might present concerns sufficient to
warrant our further attention in order to protect their clients,
investors, and other market participants.\458\ The reports, which will
be publicly available, will also provide investors with some basic
information about these advisers and their businesses. Several
commenters agreed, expressing general support for the proposed
reporting requirements.\459\
---------------------------------------------------------------------------

    \458\ One commenter agreed. ABA Committees Letter.
    \459\ See, e.g., AFL-CIO Letter; CII Letter; NRS Letter; Better
Markets Letter; ABA Committees Letter; NASAA Letter.
---------------------------------------------------------------------------

    Under rule 204-4, exempt reporting advisers are required to file
their Form ADV reports electronically through the IARD.\460\ We believe
that using Form ADV and the IARD for exempt reporting adviser reports
will yield several important benefits. For instance, using Form ADV and
the IARD creates efficiencies that benefit both us and filers by taking
advantage of an established and proven filing system, while avoiding
the expense and delay of developing a new form and filing system.
Several commenters agreed,\461\ and one explained that, in its view,
there is ``no reason to create a new form or filing system when the
existing ones have been designed for use by advisers and are suitable
for that purpose.'' \462\ In addition, because an exempt reporting
adviser may be required to register on Form ADV with one or more state
securities authorities, use of the existing form and filing system
(which is shared with the states) should reduce regulatory burdens for
exempt reporting advisers because they can satisfy multiple filing
obligations through a uniform form.\463\ Commenters agreed with our
expectation that regulatory burdens would be diminished for an exempt
reporting adviser that later finds it can no longer rely on an
exemption and would be required to register with us because the adviser
would simply file an amendment to its current Form ADV to apply for
Commission registration.\464\ Finally, certain items in Form ADV Part 1
are also linked to Form BD, which will create efficiencies if the
exempt reporting adviser were to apply for broker-dealer
registration.\465\
---------------------------------------------------------------------------

    \460\ New rule 204-4(b) and (d).
    \461\ See, e.g., AFL-CIO Letter; Better Markets Letter; NRS
Letter; NASAA Letter. Responding to our request for comment
regarding the possible use of EDGAR in place of the IARD, one
commenter argued that ``[s]uch an approach would be confusing and
burdensome for any adviser that transitions between [exempt
reporting adviser] and SEC-registered status.'' ABA Committees
Letter.
    \462\ ABA Committees Letter.
    \463\ See supra note 170 and accompanying text.
    \464\ See ABA Committees Letter; Better Markets Letter; NRS
Letter; NASAA Letter. Form ADV, as amended, permits an adviser to
transition from filing reports with us to applying for registration
under the Act by simply amending its Form ADV; the adviser would
check the box to indicate it is filing an initial application for
registration, complete the items it did not have to answer as an
exempt reporting adviser, and update the pre-populated items that it
already has on file. See amended Form ADV: General Instruction 15
(providing procedural guidance to advisers that no longer meet the
definition of exempt reporting adviser).
    \465\ Form BD is the Uniform Application for Broker-Dealer
Registration. 17 CFR 249.501.
---------------------------------------------------------------------------

    Requiring exempt reporting advisers to file their reports through
the IARD will also benefit investors, prospective investors, and other
members of the public who can readily access the information, without
cost, through the Commission's Web site on the Investment Adviser
Public Disclosure (IAPD) system. Investors will have access to some
information that may have been previously unavailable or not easily
attainable, such as whether an exempt reporting adviser has certain
disciplinary events and whether its affiliates present conflicts of
interest or allow broader access to other financial services.
    Several commenters supported the public availability of exempt
reporting adviser reports as beneficial to the protection of
investors.\466\ Investor advocacy groups, for instance, lauded the
Commission's initiative to create, for the first time, a database of
public information on advisers to private investment funds.\467\ Others
added that an investor would be better able to perform due diligence if
the information were made available to the public,\468\

and could make an informed decision regarding the integrity of a
prospective adviser if he or she were able to review the disciplinary
history of the exempt reporting adviser and its employees.\469\ In
addition, requiring exempt reporting advisers to complete Section 7.B.
of Schedule D for each private fund they manage should result in many
of the same benefits that this information produces with respect to
registered advisers that we address in the discussion of the amendments
to Form ADV below.\470\
---------------------------------------------------------------------------

    \466\ AFL-CIO Letter; CII Letter; Better Markets Letter.
    \467\ Id.
    \468\ Merkl Implementing Letter.
    \469\ CII Letter.
    \470\ See infra notes 483-488 and accompanying text.
---------------------------------------------------------------------------

    We have considered the broad public interest in making this
information generally available, and we agree with commenters who
assert there will be important benefits of providing information about
these advisers to the public. In addition to furnishing us with
important data about the private funds advised by exempt reporting
advisers that we can use to identify practices that may harm
investors,\471\ and to administer our regulatory programs, these
reports will create a publicly accessible foundation of basic
information that could aid investors and prospective investors in
conducting due diligence and could further help investors and other
industry participants protect against fraud.\472\ The easy availability
of information about these advisers and their advisory affiliates may
also discourage advisers from engaging in certain practices (such as
maintaining client assets with a related person custodian) or hiring
certain persons (such as those with disciplinary history). Investors'
access to information may also facilitate greater competition among
advisers, which may in turn benefit clients.
---------------------------------------------------------------------------

    \471\ For instance, census data about a private fund's
gatekeepers, including administrators and auditors, would be
available on amended Section 7.B.(1) of Schedule D and would be
verifiable by investors and the Commission. Recent enforcement
actions suggest that the availability of such information could be
helpful. See, e.g., SEC v. Grant Ivan Grieve, et al., Litigation
Release No. 21402 (Feb. 2, 2010) (default judgment against hedge
fund adviser that was alleged to have fabricated and disseminated
false financial information for the fund that was ``certified'' by a
sham independent back-office administrator and phony accounting
firm); In the Matter of John Hunting Whittier, Investment Advisers
Act Release No. 2637 (Aug. 21, 2007) (settled action against hedge
fund manager for, among other things, misrepresenting to fund
investors that a particular auditor audited certain hedge funds,
when in fact it did not).
    \472\ See infra section V.A.3.
---------------------------------------------------------------------------

    Electronic reporting by exempt reporting advisers of certain items
within Form ADV will give us better access to information about these
advisers, which will improve the administration of our regulatory
programs and allow us to identify advisers whose activities suggest a
need for closer scrutiny. We routinely use the IARD to generate reports
on the advisory industry, its characteristics and trends. These reports
would help us anticipate regulatory problems, identify potential
conflicts of interest, allocate our resources, and more fully evaluate
various regulatory actions we may consider taking, which should
increase both the efficiency and effectiveness of our programs and thus
increase investor protection.
    We are also amending rule 204-1 under the Advisers Act, which
addresses when and how advisers must amend their Form ADV, to require
that exempt reporting advisers file updating amendments to reports
filed on Form ADV.\473\ As amended, rule 204-1 requires an exempt
reporting adviser, like a registered adviser, to amend its reports on
Form ADV: (i) at least annually, within 90 days after the end of the
adviser's fiscal year; and (ii) more frequently, if required by the
instructions to Form ADV. Similarly, we are amending General
Instruction 4 to Form ADV to require an exempt reporting adviser, like
a registered adviser, to update promptly Items 1 (Identification
Information), 3 (Form of Organization), and 11 (Disciplinary
Information) if they become inaccurate in any way, and to update Item
10 (Control Persons) if it becomes materially inaccurate.\474\
---------------------------------------------------------------------------

    \473\ Amended rule 204-1. See supra section II.B.4.
    \474\ See Form ADV: General Instruction 4.
---------------------------------------------------------------------------

    Requiring advisers to amend and update their reports assures that
we have access to updated information. For example, these updates will
allow us to know when an exempt reporting adviser has added or no
longer advises a private fund client or has reported a disciplinary
event, which will provide us with the information necessary to assess
whether the adviser might present sufficient concerns to warrant our
further inquiry. Updated information also benefits investors,
prospective investors, and other members of the public that could use
this information in evaluating, for example, whether to invest in a
venture capital fund managed by an exempt reporting adviser. Many
commenters who addressed updating and amendment requirements agreed
with our approach to update the report annually and to amend it
according to the same schedule as is applicable to registered
advisers.\475\
---------------------------------------------------------------------------

    \475\ See NRS Letter (expressing general support); Merkl
Implementing Letter (stating that less frequent reporting would
result in information that is less useful or materially inaccurate);
CII Letter (expressing general support); ABA Committees Letter
(asserting that information reported by exempt reporting advisers
that is allowed to become significantly outdated or inaccurate would
not serve the Commission's or public's interest or protect investors
as mandated by the Dodd-Frank Act, and could be misleading).
---------------------------------------------------------------------------

    When an adviser ceases to be an exempt reporting adviser, new rule
204-4 requires the adviser to file an amendment to its Form ADV to
indicate that it is filing a final report.\476\ Final report filings
will allow us and the public to distinguish such a filer from one that
is failing to meet its filing obligations.\477\ Commenters who
addressed the proposal to require a final report endorsed the
Commission's approach.\478\
---------------------------------------------------------------------------

    \476\ New rule 204-4(f); Form ADV: General Instruction 15. See
section II.B.5.
    \477\ New rule 204-4(f). Advisers filing a final report are
required only to update Item 1 of Part 1A of Form ADV and are not
required to pay a filing fee. An adviser that failed to file a final
report would violate rule 204-4(f).
    \478\ ABA Committees Letter (agreeing that a final report is a
reasonable way for an exempt reporting adviser to notify the
Commission that it is no longer an exempt reporting adviser and
endorsing the concept of allowing exempt reporting advisers that are
transitioning to registration to use a single Form ADV filing for
the purposes of submitting their final report and their application
for registration); Merkl Implementing Letter (indicating that the
Commission should not require some other approach than a final
report when an adviser ceases to be an exempt reporting adviser).
---------------------------------------------------------------------------

    To accommodate their use by exempt reporting advisers, we also are
making technical amendments to Form ADV-H, the form advisers use to
request a hardship exemption from electronic filing,\479\ and Form ADV-
NR, the form certain non-resident advisers use to appoint the Secretary
of the Commission as an agent for service of process.\480\ Rule 204-
4(e) and the amendments to Form ADV-H benefit exempt reporting advisers
by allowing them to avoid non-compliance with reporting requirements
based purely on unanticipated technical difficulties. The amendments to
Form ADV-NR benefit investors by allowing us to obtain appropriate
consent to permit the Commission and other parties to bring actions
against non-resident partners or agents for violations of the federal
securities laws. Commenters did not

specifically address these changes to Form ADV-H and ADV-NR.
---------------------------------------------------------------------------

    \479\ New rule 204-4(e) allows exempt reporting advisers having
unanticipated technical difficulties that prevent submission of a
filing to the IARD to request a temporary hardship exemption from
electronic filing requirements.
    \480\ See amended Form ADV-H; amended Form ADV-NR; amended Form
ADV: General Instruction 19. The amendments to Form ADV-H and Form
ADV-NR reflect that exempt reporting advisers use the forms in the
same way and for the same purpose as they are currently used by
registered investment advisers.
---------------------------------------------------------------------------

3. Form ADV Amendments
    As discussed above, we are adopting amendments to Form ADV that
will require advisers to provide us additional information about: (i)
The private funds they advise, (ii) their advisory business and
conflicts of interest, and (iii) their non-advisory activities and
financial industry affiliations.\481\ We are also adopting certain
additional changes intended to improve our ability to assess compliance
risks and to identify the advisers that are covered by section 956 of
the Dodd-Frank Act, which addresses certain incentive-based
compensation arrangements.
---------------------------------------------------------------------------

    \481\ See supra section II.C.
---------------------------------------------------------------------------

Private Fund Reporting Requirements
    We are adopting amendments to Item 7.B. and Schedule D of Form ADV
that expand the information advisers must report to us about the
private funds they advise. This reporting will provide us with
information designed to help us better understand private fund
investment activities and the scope and potential impact of those
activities on investors and markets. The information will also assist
us in identifying particular practices that may harm investors and will
allow us to conduct targeted examinations of private fund advisers
based on these practices or other criteria. The amended reporting items
are designed to improve our ability to assess risk, identify funds with
service provider arrangements that raise a ``red flag,'' identify firms
for examination, and allow us to more efficiently conduct examinations.
For instance, it would be relevant to us to know that a private fund is
using a service provider that we are separately investigating for
alleged misconduct. Responses to the service provider questions will
also allow us to identify private funds that do not make use of
independent service providers and provide other key information
regarding the identity and role of these private fund gatekeepers.
Advisers are required to report the gross asset value of the fund,
which will help us understand the scope of its operations.\482\ While
no particular item of information may by itself indicate an elevated
risk of a compliance failure, the reporting as a whole is designed to
serve as an input to the risk metrics by which our staff identifies
potential risk and allocates examination resources. The staff conducts
similar analyses today, but with fewer inputs.
---------------------------------------------------------------------------

    \482\ See amended Form ADV, Part 1A, Schedule D, Section
7.B.(1)A., question 11.
---------------------------------------------------------------------------

    Several commenters agreed with our assessment that the new
information will allow us to identify harmful practices, improve risk
assessment and more efficiently target examinations,\483\ and a U.S.
Senator added that the data would aid the Financial Stability Oversight
Council in monitoring systemic risk.\484\ In its comment letter, NASAA
wrote that ``the information required of these advisers will be of
critical importance to regulators in identifying practices that may
harm investors.'' One commenter who criticized certain aspects of the
proposal nonetheless conceded that ``these disclosures would assist the
Commission in seeking to achieve these goals [protecting against fraud
and assisting in systemic risk evaluation].'' \485\
---------------------------------------------------------------------------

    \483\ See infra note 265.
    \484\ Sen. Levin Letter.
    \485\ Seward Letter.
---------------------------------------------------------------------------

    Prospective and current private fund investors will also benefit
from the public disclosure of this expanded private fund reporting.
Private fund advisers must report information about their business,
affiliates, owners, gatekeepers, and disciplinary history. This will
create a publicly accessible foundation of basic information that could
aid investors in conducting due diligence and could further help
investors and other industry participants protect against fraud. For
example, investors (and their consultants) will be able to compare
representations made on Schedule D with those made in private offering
documents or other materials provided to prospective investors. Fund
service providers, such as administrators and auditors, may review the
information that advisers report in order to uncover false
representations regarding the identity of service providers.\486\ Some
commenters agreed that the public availability of private fund data
would aid investors.\487\ We continue to believe that public disclosure
of this information will be valuable to investors precisely because
they will be able to compare the Form ADV information to the
information they have received in offering documents and as a result of
due diligence.\488\
---------------------------------------------------------------------------

    \486\ See Implementing Proposing Release, supra note 7, at n.149
and accompanying text.
    \487\ See, e.g., AFL-CIO Letter; CII Letter; Better Markets
Letter (each lauding the Commission's initiative to create, for the
first time, a database of public information on private investment
funds).
    \488\ See supra note 270. See, e.g., Merkl Implementing Letter
(noting that a potential investor would be better able to perform
due diligence if the information were made available to the public).
---------------------------------------------------------------------------

    The expanded private fund reporting will also benefit investors and
market participants by providing us and other policy makers with
improved data. This data will enhance our ability to form and frame
regulatory policies regarding the private fund industry and its
advisers, and to evaluate the effect of our policies and programs on
this industry, including for the protection of private fund investors.
Today, we frequently have to rely on data from other sources, when
available. Private fund reporting will provide us with important
information about this rapidly growing segment of the U.S. financial
system.
Other Amendments to Form ADV
    We are adopting other amendments to Form ADV that refine or expand
existing questions. These changes will give us a more complete picture
of an adviser's practices, help us better understand an adviser's
operations, business and services, and provide us with more information
to determine an adviser's risk profile and prepare for examinations.
The information reported will help us to identify practices that may
harm clients, including by detecting data or patterns that suggest
further inquiry may be warranted and distinguishing additional
conflicts of interest that advisers may face. For example, the new
reporting on related persons will allow us to link disparate pieces of
information to which we have access concerning an adviser and its
affiliates to identify whether those relationships present conflicts of
interest that create higher risks for advisory clients. Another example
is the amendment that requires advisers to switch from ranges to
approximate numbers of employees; although this change refines data we
previously received, it will enable us to better develop risk-based
profiles of advisers. The expanded list of activities in which an
adviser might engage will help us better understand the operations of
advisers. Additionally, requiring advisers to report whether they have
$1 billion or more in assets will help us to identify the advisers that
could be subject to rules regarding certain excessive incentive-based
compensation arrangements required by section 956 of the Dodd-Frank
Act. Overall, the information to be collected on amended Form ADV is
designed to improve our risk-assessment capabilities and help us
improve our allocation of examination resources. Commenters who
addressed these proposed amendments to Form

ADV expressed general support.\489\ One commenter, for instance, agreed
that these amendments will improve our ability to gather data about
firms, to conduct appropriate inquiries, inspections, and other
activities based on that data, and to focus examination and enforcement
resources on those advisers that appear to present greater compliance
risks.\490\ Another indicated that the additional information the
amended form will collect would assist the Commission to identify fund
advisers, to verify the existence and location of assets and to carry
out general market surveillance.\491\
---------------------------------------------------------------------------

    \489\ See supra note 216.
    \490\ See IAA General Letter.
    \491\ See CPIC Letter.
---------------------------------------------------------------------------

    Advisory clients and prospective clients will also benefit from the
changes to Form ADV. As one commenter indicated, information reported
on Form ADV is publicly available, allowing investors to use the IAPD
as a resource in evaluating potential managers and understanding their
practices.\492\ For example, clients and prospective clients will be
able to see whether an adviser or one of its control persons is a
public reporting company registered under the Exchange Act and then
access additional public information about the adviser and/or the
control person on the EDGAR system. Requiring an adviser to report
whether it has $1 billion or more of assets helps to inform the
adviser, its clients and the public whether or not the adviser may be
subject to section 956 of the Dodd-Frank Act and any rules or
guidelines thereunder. The additional information about the adviser's
related persons will assist investors that compare business practices,
strategies, and conflicts of a number of advisers, which may help them
to select the most appropriate adviser for them. Clients may also
benefit indirectly because advisers may be incentivized to implement
stronger controls and practices, particularly related to any conflicts
of interest or business practices that may result in additional risks,
because of enhanced client awareness. Third parties will also be able
to access the new information reported in filings of the amended form,
allowing academics, businesses, and others to access additional
information about registered investment advisers and exempt reporting
advisers, which they can use to study the advisory industry.
---------------------------------------------------------------------------

    \492\ CPIC Letter.
---------------------------------------------------------------------------

    Among the amendments to Form ADV are improvements to its
instructions. We expect these changes to assist advisers in determining
their regulatory assets under management and whether they are eligible
or required to register with us, which may result in cost savings for
some advisers because they may more readily be able to make this
determination.\493\ Eliminating the choices we have given advisers in
the Form ADV instructions for calculating assets under management, for
example, provides for a uniform method of determining assets under
management for purposes of the form and the new exemptions from
registration under the Advisers Act. These updates will also include,
for the first time, specific instructions on how to determine the
amount of private fund assets an adviser has under management. We
expect that these changes will promote competition, increase certainty
when an adviser chooses to rely on an exemption from registration, and
improve consistency in reporting across the industry.\494\ Some of the
technical amendments we are adopting, such as those to Item 9, are
designed, at commenter request, to alleviate adviser confusion.\495\
---------------------------------------------------------------------------

    \493\ See section II.A.3.
    \494\ See id. See also Exemptions Adopting Release at sections
II.B.2., II.C., II.C.5. (discussing exemption for foreign private
advisers and certain private fund advisers).
    \495\ See supra section II.C.5. We are also making a technical
amendment to Form ADV-E to reflect the requirement that the
accountant's report be filed electronically. Staff notified advisers
in November 2010 that the IARD system had been programmed to accept
Form ADV-E. See 2009 Custody Release,  supra note 310 at n.53 and
accompanying text (establishing the requirement for Form ADV-E to be
filed electronically, explaining that accountants performing
surprise examinations should continue paper filing of Form ADV-E
until the IARD system is programmed to accept Form ADV-E, and noting
that advisers would be informed when that programming was
completed). This technical change will alleviate adviser confusion
about the appropriate filing method for this form.
---------------------------------------------------------------------------

4. Amendments to Pay to Play Rule
    We are making two amendments to the pay to play rule that we
believe are appropriate as a result of the enactment of the Dodd-Frank
Act.\496\ First, we are amending the rule to make it continue to apply
to advisers that previously relied on the ``private adviser''
exemption, including exempt reporting advisers and foreign private
advisers.\497\ We are making this amendment to prevent the narrowing of
the application of the rule as a result of the amendments to the Act
made by the Dodd-Frank Act.\498\ We do not believe that this amendment
will create any benefits (or costs) beyond those created by the rule as
originally adopted,\499\ but rather will merely assure that the rule
continues to apply to the same advisers as we intended when we adopted
the rule.
---------------------------------------------------------------------------

    \496\ See section II.D.1.
    \497\ Rule 206(4)-5(a). See section II.D.1.
    \498\ See supra section II.D.1. Rule 206(4)-5 currently applies
to ``private advisers'' exempt from registration with the Commission
under section 203(b)(3) of the Advisers Act. As discussed in note 4,
the Dodd-Frank Act has eliminated the ``private adviser'' exemption
from registration with the Commission in section 203(b)(3), but has
created new exemptions for exempt reporting advisers and foreign
private advisers. Advisers that qualify for these new exemptions
generally are subsets of the advisers that qualify for the existing
section 203(b)(3) ``private adviser'' exemption.
    \499\ See Pay to Play Release, supra note 340, at section IV.
---------------------------------------------------------------------------

    Second, we are amending the rule to add municipal advisors to the
categories of registered entities--referred to as ``regulated
persons''--excepted from the rule's prohibition on advisers paying
third parties to solicit government entities.\500\ To qualify as a
``municipal advisor'' (and thereby a ``regulated person''), a solicitor
must be registered under section 15B of the Securities Exchange Act and
subject to pay to play rules adopted by the MSRB.\501\ Notably, for
municipal advisors to qualify as ``regulated persons,'' we must find
that applicable MSRB pay to play rules: (i) impose substantially
equivalent or more stringent restrictions on municipal advisors than
the pay to play rule imposes on investment advisers; and (ii) are
consistent with the objectives of the pay to play rule.\502\
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    \500\ See amended rule 206(4)-5(a)(2)(i)(A), (f)(9). ``Regulated
persons'' also include registered investment advisers and broker-
dealers subject to the rules of a registered national securities
association, such as FINRA, that has adopted pay to play rules that
the Commission determines satisfy the criteria of amended rule
206(4)-5(f)(9)(iii)(B).
    \501\ See amended rule 206(4)-5(f)(9)(iii).
    \502\ See amended rule 206(4)-5(f)(9)(iii)(B).
---------------------------------------------------------------------------

    Our amendment will continue to permit advisers to pay two other
categories of persons to solicit government entities on their behalf--
investment advisers and broker-dealers--so long as such third parties
are registered with us and subject to pay to play rules of their
own.\503\ Due to the fact that the definition of a municipal advisor
may include categories of persons other than registered investment
advisers and broker-dealers, our amendment may increase the number of
solicitors that an adviser could hire.\504\ This could benefit

advisers by increasing competition in the market for solicitation
services and reducing the cost of such services. It could also benefit
those solicitors that are not registered investment advisers or broker-
dealers, but may meet the municipal advisor definition, by allowing
advisers to hire them.
---------------------------------------------------------------------------

    \503\ Pay to Play Release, supra note 340, at section
II.B.2.(b).
    \504\ Our current ``regulated person'' definition does not
include, for example, advisers prohibited from registering with the
Commission under section 203A of the Advisers Act, such as state-
registered advisers, or advisers unregistered in reliance on an
exemption other than section 203(b)(3) of the Act. The definition of
``municipal advisor'' does not exclude these advisers. See section
975 of the Dodd-Frank Act. We adopted the third party solicitor ban
to prevent advisers from circumventing the rule through third
parties. See section II.B.2.(b) of the Pay to Play Release. Given
the Dodd-Frank Act's creation of the ``municipal advisor'' category,
and given that it requires these persons to register with the
Commission and subjects them to MSRB rulemaking authority, we
believe that expanding the current ``regulated person'' exception to
the third party solicitor ban to include registered municipal
advisors subject to pay to play rules would not undermine the ban's
purpose. By allowing advisers to choose from a broader set of
potential third party solicitors, we believe our amendments may
promote efficiency and competition in the market for advisory
services to the extent third party solicitors that are not
registered investment advisers or broker-dealers participate.
---------------------------------------------------------------------------

5. Advisers Previously Exempt Under Section 203(b)(3)
    We are adopting a transition provision in rule 203-1 for advisers
that are newly required to register due to the Dodd-Frank Act's repeal
of the ``private adviser'' exemption in section 203(b)(3).\505\
Specifically, under rule 203-1(e), an adviser that was relying on, and
was permitted to rely on, the ``private adviser'' exemption in section
203(b)(3) on July 20, 2011, may delay registering with the Commission
until March 30, 2012.\506\ The transition period will provide these
advisers with needed additional time to work through any technical
issues associated with applying for registration and to establish
compliance with Advisers Act provisions and rules to which they are
newly subject as advisers required to register.\507\ As such, we
believe that the temporary extension of the registration deadline
provided by rule 203(e)-1 will assure an orderly transition to
registration that will minimize costs to these advisers--costs that
could otherwise be passed on to clients. We believe that maintaining an
orderly transition process promotes efficiency and may reduce the costs
of filing an initial application for registration and coming into
compliance with Advisers Act provisions and rules to which these
advisers are newly subject.
---------------------------------------------------------------------------

    \505\ See rule 203-1(e); section 203(b)(3) of the Advisers Act;
supra section III.B.2.
    \506\ See rule 203-1(e); supra note 385.
    \507\ We received a number of comment letters requesting that
these advisers have additional time after July 21, 2011 (the date
the Dodd-Frank Act's repeal of the section 203(b)(3) private adviser
exemption becomes effective) to become registered and to establish
compliance with all provisions of the Advisers Act and rules
thereunder to which they are newly subject by virtue of their
required registration. See CompliGlobe Letter; MFA Letter; Schnase
Letter; Shearman Letter.
---------------------------------------------------------------------------

B. Costs

1. Eligibility To Register With the Commission: Section 410
Transition to State Registration
    Rule 203A-5 will impose one-time costs on certain investment
advisers registered with us by requiring them to file an amendment to
Form ADV, and on advisers that are no longer eligible to remain
registered with us by requiring them to file Form ADV-W to withdraw
from Commission registration.\508\ According to IARD data,
approximately 11,500 investment advisers are registered with us and
will be required to file an amended Form ADV,\509\ and approximately
3,200 of those advisers will be required to withdraw their registration
and register with one or more state securities authorities.\510\ As we
discuss below, although all SEC-registered advisers will be required to
file Form ADV, we estimate that only 3,900 of them will have to make an
additional filing not in the usual course of business.\511\
---------------------------------------------------------------------------

    \508\ See new rule 203A-5; supra section II.A.1.
    \509\ Based on IARD data as of April 7, 2011, 11,504 investment
advisers are registered with the Commission. We have rounded this
number to 11,500 for purposes of our analysis.
    \510\ According to data from the IARD as of April 7, 2011, 3,531
SEC-registered advisers either: (i) had assets under management
between $25 million and $90 million and did not indicate on Form ADV
Part 1A that they are relying on an exemption from the prohibition
on Commission registration; or (ii) were permitted to register with
us because they rely on the registration of an SEC-registered
affiliate that has assets under management between $25 million and
$90 million and are not relying on an exemption from registration.
We estimate that 350 of these advisers will not switch to state
registration because their principal office and place of business is
located in Minnesota, New York, or Wyoming. See supra note 152
(according to IARD data as of April 7, 2011, there were 63 mid-sized
advisers in Minnesota, 286 in New York, and 1 in Wyoming). As a
result, we estimate that approximately 3,200 advisers will switch to
state registration. 3,531 SEC-registered advisers--350 advisers not
switching to state registration = 3,181 advisers. In the
Implementing Proposing Release, we estimated that approximately
4,100 SEC-registered advisers would be required to withdraw their
registrations and register with one or more state securities
authorities, based on IARD data as of September 1, 2010. See
Implementing Proposing Release, supra note 7, at n.15. We have
lowered our estimate by 900 advisers to account for the advisers
that have between $90 million and $100 million of assets under
management that may remain registered with us as a result of the
amendments we are adopting to rule 203A-1, the advisers that have
withdrawn their registrations with us since that time, and as
discussed above, the advisers that will not switch registration
because they have a principal office and place of business in
Minnesota, New York or Wyoming. See supra note 22.
    \511\ Based on IARD data as of April 7, 2011, 10,636 advisers
reported on Form ADV a December 31 fiscal year end, of which we
estimate approximately 3,013 will file a Form ADV to comply with the
Form ADV filing requirement of new rule 203A-5 before switching to
state registration because they reported assets under management of
less than $90 million and either: (i) they did not indicate on Part
1A of Form ADV that they are relying on an exemption from the
prohibition on Commission registration; or (ii) they do not have a
principal office and place of business in Minnesota, New York or
Wyoming. Additionally, 868 advisers reported a fiscal year end other
than December 31 and will file an additional, other-than-annual
amendment to comply with new rule 203A-5. 3,013 + 868 = 3,881. We
have rounded this number to 3,900 for purposes of our analysis. The
revised PRA burden for Form ADV includes the annual amendment filing
by the approximately 7,623 advisers with a December 31 fiscal year
end that we estimate will remain registered with us after the switch
because they reported assets under management of more than $90
million, indicated on Part 1A of Form ADV that they are relying on
an exemption from the prohibition on Commission registration, or
have a principal office and place of business in Minnesota, New York
or Wyoming. See infra section VI.B. We have rounded this number to
7,600 for purposes of our analysis.
---------------------------------------------------------------------------

    Some commenters argued that we should decrease the costs of
proposed rule 203A-5 by exempting advisers unaffected by the statutory
changes from the Form ADV filing requirement,\512\ or only requiring
advisers to report their assets under management.\513\ As discussed
above, we believe there are significant benefits of requiring all
advisers to file Form ADV, including having each adviser confirm its
eligibility for Commission registration in light of multiple statutory
and rule changes, and allowing us and the state regulatory authorities
to easily and efficiently identify the advisers that are transitioning
to state registration and the advisers that are remaining registered
with the Commission.\514\ We also note that commenters' concerns also
should be allayed by the new March 30, 2012 deadline for filing Form
ADV that will coincide with most advisers' required annual updating
amendment, eliminating the requirement that they file an additional
amendment to their Form ADV,\515\ and that will coincide with the
filing requirements for newly registering private fund advisers.\516\
In addition, providing additional flexibility for an adviser to choose
the date by which it must calculate its assets under management
reported on Form ADV further reduces the cost of the filing and
promotes uniformity by

requiring the same 90 day period as in Form ADV today.\517\ We believe
that the rule will have little impact on competition among advisers
registered with us because they will all be subject to these
requirements, but the rule could have an impact of limited duration on
competition between advisers registered with us as of July 21, 2011 who
are subject to the rule, and state-registered advisers who are
not.\518\ We also believe that the rule will have little, if any,
effect on capital formation.
---------------------------------------------------------------------------

    \512\ ICI Letter (recommending exempting advisers that do not
rely on assets under management to register with the SEC); MFA
Letter (recommending exempting private fund advisers that file an
initial Form ADV by July 21); NYSBA Committee Letter (recommending
exempting advisers who will continue to be eligible for Commission
registration and advisers relying on the section 203(b)(3) exemption
that we proposed would have to register with the Commission by July
21, 2011).
    \513\ Shearman Letter.
    \514\ See supra section II.C.
    \515\ See supra note 511.
    \516\ See MFA Letter (``Requiring private fund managers to file
two Form ADV's would be costly, inefficient and potentially
confusing.''). See also supra section III.
    \517\ See new rule 203A-5(b); Form ADV: Instructions for Part
1A, instr. 5.b.(4). Several commenters that requested more
flexibility asserted that the use of end of quarter numbers
precludes an administrate burden for many advisers that value assets
on a quarterly basis because most advisers already value assets
quarterly to calculate fees. See, e.g., Altruist Letter; NYSBA
Committee Letter; Seward Letter; Shearman Letter.
    \518\ For example, the rule requires mid-sized advisers
registered with us on July 21, 2011 to remain registered (unless an
exemption from Commission registration is available) until they
switch to state registration in 2012. See supra note 23. All of
these advisers must file an amended Form ADV with us by March 30,
2012, and any advisers maintaining dual registrations with the SEC
and states will incur renewal fees and compliance costs to maintain
both registrations until the beginning of 2012. See, e.g., infra
note 543. Mid-sized advisers that are not registered with us on July
21, 2011 will not have similar costs.
---------------------------------------------------------------------------

    For purposes of calculating the currently approved Paperwork
Reduction Act (``PRA'') burden for Form ADV, we estimated that an
annual updating amendment will take each adviser approximately 6
hours,\519\ and we estimate the one-time transition amendment will have
a similar burden. In addition, for purposes of the increased PRA burden
for Form ADV, we estimate that the amendments to Part 1A of Form ADV
will take each adviser approximately 4.5 hours, on average, to
complete.\520\ As a result, we estimate a total average time burden of
10.5 hours for each adviser completing the amendment to Form ADV
required by rule 203A-5 (excluding private fund information which is
addressed below).\521\ We estimate that each adviser will incur average
costs of approximately $2,667.\522\
---------------------------------------------------------------------------

    \519\ See infra section VI.B.2.a.iii.
    \520\ See infra sections VI.B.1.a.
    \521\ 6 hours (Form ADV amendment) + 4.5 hours (new Form ADV
items) = 10.5 hours.
    \522\ We expect that the performance of this function will most
likely be equally allocated between a senior compliance examiner and
a compliance manager. Data from the Securities Industry Financial
Markets Association's Management & Professional Earnings in the
Securities Industry 2010 (``SIFMA Management and Earnings Report''),
modified to account for an 1,800-hour work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead, suggest that costs for a senior compliance examiner and a
compliance manager are $235 and $273 per hour, respectively. (5.25
hours x $235 = $1,233.75) + (5.25 hours x $273 = $1,433.25) =
$2,667.
---------------------------------------------------------------------------

    Proposed rule 203A-5 would have required all advisers registered
with us on July 21, 2011 to file a Form ADV amendment, in addition to
the amendment that each adviser is required to file annually,\523\ and
we estimated that 11,850 advisers would file the form.\524\ To address
commenters' concerns about the burdens of an additional filing,\525\ we
modified the rule so that approximately 7,600 advisers that will remain
registered with the SEC after the transition will satisfy the Form ADV
filing requirement by filing their annual amendment following their
fiscal year ending on December 31, 2011.\526\ This reduces the number
of advisers that will file an additional Form ADV attributable to the
rule 203A-5 to approximately 3,900.\527\ As a result, the total
aggregate cost of the Form ADV filing requirement will be approximately
$10,401,300.\528\ In addition, of these 3,900 registered advisers, we
estimate that 850 advise one or more private funds and will have to
complete the private fund reporting requirements.\529\ We expect this
will take 8,373 hours,\530\ in the aggregate, for a total cost of
$2,126,742.\531\ As a result, the total estimated costs associated with
filing amended Form ADV as required by rule 203A-5 will be
$12,528,042.\532\
---------------------------------------------------------------------------

    \523\ See proposed rule 203A-5(a).
    \524\ See Implementing Proposing Release, supra note 7, at n.293
and accompanying text.
    \525\ See supra note 414 and accompanying text.
    \526\ See supra note 511.
    \527\ See id.
    \528\ 3,900 advisers x $2,667 = $10,401,300.
    \529\ Based on IARD data as of April 7, 2011, 839 advisers out
of the estimated 3,700 current SEC-registered advisers that advise
private funds do not have a December fiscal year end or are expected
to switch to state registration. We have rounded this number to 850
for purposes of this analysis.
    \530\ Based on IARD data as of April 7, 2011, we estimate that
approximately 52 percent of these 850 private fund advisers, or 442,
currently advise an average of 3 private funds each; 43 percent, or
365 advisers, currently advise an average of 10 private funds each;
and the remaining 5 percent, or 43 advisers, currently advise an
average of 79 private funds each. See infra note 697 and
accompanying text. (442 advisers x 3 funds x 1 burden hour per fund)
+ (365 x 10 funds x 1 burden hour per fund) + (43 advisers x 79
funds x 1 burden hour per fund) = 1,326 hours + 3,650 hours + 3,397
hours = 8,373 hours.
    \531\ (4,186.5 hours x $235) + (4,186.5 x $273) = $983,827.5 +
$1,142,914.5 = $2,126,742. As noted above, we expect that the
performance of this function will most likely be equally allocated
between a senior compliance examiner and a compliance manager. See
supra note 522.
    \532\ $10,401,300 (total cost for Form ADV filing excluding
private fund reporting) + $2,126,742 (total cost for private fund
reporting) = $12,528,042 (total cost for Form ADV filing).
---------------------------------------------------------------------------

    For the estimated 3,200 advisers that will be required to withdraw
their registrations, we estimate that the average burden for each
respondent is 0.25 hours for filing a partial withdrawal on Form ADV-
W.\533\ An adviser will likely use compliance clerks to prepare the
filings and review the prepared Form ADV-W.\534\ We estimate that each
adviser will incur average costs of approximately $16.75 \535\ to
comply with the Form ADV-W filing requirements, for a total one-time
cost of $53,600.\536\ As a result, rule 203A-5 will result in a total
one-time cost of $12,581,642.\537\
---------------------------------------------------------------------------

    \533\ Form ADV-W is designed to accommodate the different types
of withdrawals an investment adviser may file. An investment adviser
ceasing operations will complete the entire form to withdraw from
all of the jurisdictions in which it is registered (full
withdrawal), while an adviser withdrawing from some, but not all, of
the jurisdictions in which it is registered will omit certain items
that we do not need from an adviser continuing in business as a
state-registered adviser. We expect that advisers required to file
Form ADV-W will file only a partial withdrawal because switching to
state registration only requires a partial withdrawal. Compliance
with the requirement to complete Form ADV-W imposes an average
burden of 0.25 hours for an adviser filing for partial withdrawal.
    \534\ We have assumed for purposes of the current approved PRA
burden for rule 203-2 and Form ADV-W that advisers will use clerical
staff to file a partial withdrawal. Data from the Securities
Industry Financial Markets Association's Office Salaries in the
Securities Industry 2010 (``SIFMA Office Salaries Report'') modified
to account for an 1,800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead,
suggest that the hourly rate for a compliance clerk is $67.
    \535\ 0.25 hours x $67 (hourly wage for clerk) = $16.75 (total
cost for Form ADV-W filing).
    \536\ $16.75 x 3,200 = $53,600.
    \537\ $12,528,042 (total cost for Form ADV filing) + $53,600
(total cost for Form ADV-W filing) = $12,581,642 (total cost for new
rule 203A-5).
---------------------------------------------------------------------------

Switching Between State and Commission Registration
    We are adopting amendments to rule 203A-1 to eliminate the $5
million buffer that permits, but does not require, an adviser to
register with the Commission if the adviser has between $25 million and
$30 million of assets under management.\538\ Specifically, the
amendment will require advisers with between $25 million and $30
million in assets under management that relied on the buffer to switch
their registration to the states.\539\ As of April 7, 2011,
approximately 300 advisers registered

with the Commission had between $25 million and $30 million of assets
under management.\540\ Because the Dodd-Frank Act has amended section
203A to prohibit approximately 240 of these advisers from registering
with the Commission, we believe that 240 advisers will see increased
costs as a result of the amendment.\541\ These costs include those
associated with withdrawing their registration with the Commission and
registering with the states, including filing a notice of withdrawal on
Form ADV-W in accordance with rule 203-2 under the Advisers Act. We
have estimated for purposes of our current approved hour burden under
the PRA for rule 203-2 and Form ADV that a partial withdrawal imposes
an average burden of approximately 0.25 hours for an adviser, and the
filing (and costs associated with the filing) by these 240 advisers are
included in our discussion above of the Form ADV-W filing requirement
under rule 203A-5.\542\ These advisers also will incur the costs of
state registration and of compliance with state laws and regulations,
which we expect will vary widely depending on the number of, and which,
states with which each adviser is required to register. For example,
individual state registration fees generally range from approximately
$60 to $400 annually, and some states require advisers to submit
documentation in addition to Form ADV.\543\
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    \538\ See amended rule 203A-1(a); supra section II.A.4.
    \539\ See supra section II.A.4. Under the Dodd-Frank Act, a mid-
sized adviser (with at least $25 million of assets under management)
is not prohibited from registering with the Commission if: (i) the
adviser is not required to be registered as an investment adviser
with the securities commissioner (or any agency or office performing
like functions) of the state in which it maintains its principal
office and place of business; (ii) if registered, the adviser will
not be subject to examination as an investment adviser by that
securities commissioner; or (iii) the adviser is required to
register in 15 or more states. See section 410 of the Dodd-Frank
Act; supra section II.A.
    \540\ Based on IARD data as of April 7, 2011, 305 advisers
registered with the Commission had between $25 million and $30
million of assets under management. We have rounded this number to
300 for purposes of this analysis.
    \541\ See supra section II.A. (discussing new section 203A(a)(2)
of the Advisers Act, which prohibits certain mid-sized advisers from
registering with the Commission). Based on IARD data as of April 7,
2011, 242 advisers registered with the Commission had between $25
million and $30 million of assets under management. For purposes of
this analysis, we have rounded this number to 240 and assume that
all of these advisers will not remain eligible to register with the
Commission because they will be required to be registered and
subject to examination by securities authorities in the states where
they maintain their respective principal offices and places of
business. See Advisers Act section 203A(a)(2) (as amended by the
Dodd-Frank Act); supra section II.A.7.b. (discussing the fact that
each state securities commissioner (or official with similar
authority) advised our staff whether investment advisers registered
in the state will be subject to examination as an investment adviser
by that state's securities commissioner (or agency or office with
similar authority)). All state securities authorities other than
Minnesota, New York, and Wyoming have advised our staff that
advisers registered with them are subject to examination. See supra
note 152.
    \542\ See supra notes 533-536 and accompanying text (addressing
the costs of filing Form ADV-W for advisers that will be required to
withdraw their registrations).
    \543\ See, e.g., Colorado Division of Securities Fee Schedule
($60 registration fee), available at http://www.dora.state.co.us/securities/feeschedule.htm; Illinois Secretary of State, Securities
Fees ($400 registration fee), available at http://www.sos.state.il.us/departments/securities/investment_advisers/fees.html; Ohio Rev. Code Sec.  1707.17(B)(3) (2010) ($100
registration fee); Ark. Code Sec.  23-42-304(a)(3) (2010) ($300
registration fee); Texas State Securities Board, Check Sheet For a
Sole Proprietor Corporation LLC or Partnership Applying For
Registration as an Investment Adviser ($275 registration fee and
requiring copies of adviser's organizational documents, balance
sheet, fee schedule, advisory contract, and brochure or disclosure
document delivered to clients), available at http://www.ssb.state.tx.us/Dealer_And_Investment_Adviser_Registration/Check_Sheet_For_a_Sole_Proprieter_Corporation_LLC_or_Partnership_Applying_For_Registration_as_an_Investment_Adviser.php; North American Securities Administrators Association,
Inc., State Securities Regulators Report on Regulatory Effectiveness
and Resources with Respect to Broker-Dealers and Investment
Advisers, 7 (2010) (among other things, states review registrants'
disclosure history, financial status, business practices, and
provisions in client contracts).
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    The buffer we are adopting for mid-sized advisers with assets under
management of close to $100 million may marginally increase costs for
advisers initially as they determine how to comply with the new
requirements and complete the amended Form ADV,\544\ but, as
underscored by several commenters, the buffer decreases costs for
advisers in the aggregate.\545\ As discussed above, the buffer permits
mid-sized advisers to determine whether and when to switch between
state and Commission registration, which will prevent costs and
disruption for these advisers to frequently switch their
registrations.\546\ We believe these amendments will have little, if
any, effect on capital formation.
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    \544\ The PRA burdens for Form ADV and rule 203A-5 include a
burden of 4.5 hours per adviser to complete the amended Form ADV,
including the assets under management calculation and eligibility
requirements. See infra sections IV.B.1. and IV.C.
    \545\ Several commenters argued that the buffer would decrease
costs, for example, by preventing advisers with close to $100
million of assets under management from having to switch to and from
Commission registration frequently. See, e.g., Altruist Letter;
Dezellem Letter; Dinel Letter; FSI Letter; ICW Letter; JVL
Associates Letter; Merkl Implementing Letter; NRS Letter; Wealth
Coach Letter; and WJM Letter.
    \546\ See supra notes 427-428 and accompanying text.
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Exemptions from the Prohibition on Registration With the Commission
    Amending the exemption from the prohibition on registration
available to pension consultants in rule 203A-2(b) to increase the
minimum value of plan assets from $50 million to $200 million \547\ may
impose costs on some of the approximately 325 advisers that currently
rely on the exemption.\548\ These costs, which include those associated
with withdrawing their registration with the Commission and registering
with the states, if required, will have a negative impact on
competition for the advisers that no longer qualify for the exemption
and potentially must register as an adviser with more than one state
securities authority. We estimate that 50 of the 325 advisers relying
on the exemption will have to file a notice of withdrawal on Form ADV-W
in accordance with rule 203-2 under the Advisers Act and withdraw their
registration.\549\ We have estimated that a partial withdrawal imposes
an average burden of approximately 0.25 hours for an adviser.\550\
Thus, we estimate that the amendment to rule 203A-2(b) associated with
filing Form ADV-W will generate a burden of 12.5 hours \551\ at a cost
of approximately $840.\552\ These advisers will incur the costs of
state registration, which we expect will vary widely depending on the
number of, and which, states with which an adviser is required to
register.\553\ We believe the amendment will have little, if any,
effect on capital formation.
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    \547\ See amended rule 203A-2(a); supra section II.A.5.b.
    \548\ Based on IARD data as of April 7, 2011, 322 SEC-registered
advisers, which we rounded to 325, indicated that they rely on the
exemption for pension consultants by marking Item 2.A.(6) on Part 1A
of Form ADV. These advisers do not report the amount of plan assets
for which they provide investment advice, so we are unable to
determine how many have between $50 million and $200 million of plan
assets and, therefore, may have to register with the state
securities authorities as a result of the amendment. It is also
difficult to determine whether such advisers will be prohibited from
registering with the Commission because they are required to
register with and are subject to examination by the state securities
authority where they maintain a principal office and place of
business under the Dodd-Frank Act.
    \549\ Based on IARD data as of April 7, 2011, approximately 190
pension consultants reported assets under management of less than
$90 million, and 166 of those advisers reported assets under
management of less than $25 million. We believe that most pension
consultants relying on the exemption provide advice regarding a
large amount of plan assets, so we expect the number of advisers
affected by the amendment to be one quarter of the advisers with
less than $25 million of assets under management, or 42 advisers
(which is approximately 15 percent of all advisers relying on this
exemption). We have rounded this number to 50 for purposes of our
analysis. We expect that advisers that will be required to file Form
ADV-W will file only a partial withdrawal because they will be
registering with the states. See supra note 533. Compliance with the
requirement to complete Form ADV-W imposes an average burden of
approximately 0.25 hours for an adviser filing for partial
withdrawal. See id.
    \550\ See supra note 533.
    \551\ 50 responses on Form ADV-W x 0.25 hours = 12.5 hours.
    \552\ 12.5 hours x $67 = $837.50.
    \553\ See supra note 543.
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    As discussed above, the amendment to the multi-state adviser
exemption in rule 203A-2(e) will reduce costs for advisers in the
aggregate because more

advisers will be permitted to register with one securities regulator--
the Commission--rather than being required to register with multiple
states.\554\ Advisers newly relying on the amended exemption will incur
costs associated with completing and filing Form ADV for purposes of
registration with the Commission, and all of the advisers relying on
the exemption will incur the costs associated with keeping records
sufficient to demonstrate that they would be required to register with
15 or more states. In addition, these advisers will incur costs of
complying with the Advisers Act and our rules.
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    \554\ See amended rule 203A-2(d); supra section II.A.5.c.
Several commenters suggested that the burdens of maintaining
multiple state registrations can be significant. See Seward Letter;
Shearman Letter. See also NEA Letter.
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    We estimate that, in addition to the approximately 40 advisers that
rely on the exemption currently, approximately 115 will rely on the
exemption as amended.\555\ For purposes of the PRA, we have estimated
that these advisers will incur an average one-time initial burden of
approximately 8 hours, and an average ongoing burden of approximately 8
hours per year, to keep records sufficient to demonstrate that they
meet the 15-state threshold.\556\ We further estimate that a senior
operations manager will maintain the records at an hourly rate of $331,
resulting in average initial and annual recordkeeping costs associated
with our amendments to rule 203A-2(e) of $2,648 per adviser,\557\ and
total increased costs of approximately $304,520 per year.\558\ Advisers
newly relying on the amended exemption will also incur costs associated
with completing and filing Form ADV for purposes of registration with
the Commission. For purposes of the increase in our PRA burden for Form
ADV, we have estimated that advisers newly registering with the
Commission will incur an average amortized hour burden of approximately
13.58 hours per year,\559\ resulting in costs of approximately $3,450
per adviser \560\ and total increased costs of approximately $396,750
per year.\561\ Additionally, we estimate that approximately 30 of the
newly registering advisers will use outside legal services, and 60 will
use outside compliance consulting services, to assist them in preparing
their Part 2 brochures,\562\ for a cost of $132,000, and $300,000,
respectively, resulting in a total non-labor cost among the newly
registering advisers of $432,000.\563\ The rule could also impact
competition between advisers who rely on the exemption and are subject
to our full regulatory program, including examinations and our rules,
and state-registered advisers who do not rely on the exemption. We
believe these amendments will have little, if any, effect on capital
formation.
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    \555\ Based on IARD data as of April 7, 2011, of the
approximately 11,500 SEC-registered advisers, 40 checked Item
2.A.(9) of Part 1A of Form ADV to indicate their basis for SEC
registration under the multi-state advisers rule. Of the advisers
that have less than $90 million of assets under management,
approximately 100 currently file notice filings with 15 or more
states. However, state notice filing requirements for SEC-registered
advisers may differ from registration requirements because Form ADV
does not distinguish between states where registration is mandatory
and where registration is voluntary. In addition, we estimate that
15 advisers currently registered with 15 or more states could rely
on the exemption and register with us. Thus, we estimate that
approximately 155 advisers will rely on the exemption (40 currently
relying on it + estimated 100 advisers eligible based on IARD data +
15 advisers required to be registered in 15 or more states that are
not registered with us today).
    \556\ These estimates are based on an estimate that each year an
investment adviser will spend approximately 0.5 hours creating a
record of its determination whether it must register as an
investment adviser with each of the 15 states required to rely on
the exemption, and approximately 0.5 hours to maintain the record,
for a total of 8 hours. See infra note 665 and accompanying text.
    \557\ 8 hours x $331 = $2,648. The $331 compensation rate used
is the rate for a senior operations manager in the SIFMA Management
and Earnings Report, modified by Commission staff to account for an
1,800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
    \558\ 115 new advisers relying on the exemption x $2,648 =
$304,520.
    \559\ See infra note 695 and accompanying text.
    \560\ We expect that the performance of this function will most
likely be equally allocated between a senior compliance examiner at
$235 per hour and a compliance manager at $273 per hour. See infra
note 579. (6.79 hours x $235 = $1,596) + (6.79 hours x $273 =
$1,854) = $3,450.
    \561\ 115 advisers relying on the exemption x $3,450 = $396,750.
    \562\ We estimate that a quarter of medium-sized advisers seek
the help of outside legal services and half seek the help of
compliance consulting services. See section VI.B.2.a.iv. As
discussed above, we have estimated that 115 new advisers will begin
relying on the exemption, in addition to the 40 advisers that
currently rely on it. See supra note 555. 0.25 x 115 new advisers
relying on the exemption = 28.75 advisers seeking outside legal
services. 0.5 x 115 new advisers relying on the exemption = 57.5
advisers seeking compliance consulting services. We have rounded
these numbers to 30 and 60, respectively, for the purpose of this
analysis.
    \563\ We estimate that the initial cost related to preparation
of Part 2 of Form ADV would be $4,400 for legal services and $5,000
for compliance consulting services for those medium-sized advisers
who engage legal counsel or consultants. See infra note 729 and
accompanying text. (30 advisers seeking outside legal services x
$4,400 for legal services) + (60 advisers seeking compliance
consulting services x $5,000 for compliance consulting services) =
$132,000 for legal services + $300,000 for compliance consulting
services = $432,000. The currently approved burden associated with
Form ADV already accounts for similar estimated costs to be incurred
by current registrants. See id.
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Mid-Sized Advisers
    As discussed above, the Dodd-Frank Act does not explain how to
determine whether a mid-sized adviser is ``required to be registered''
or is ``subject to examination'' by a particular state securities
authority for purposes of section 203A(a)(2)'s prohibition on mid-sized
advisers registering with the Commission, and we are providing in Form
ADV an explanation of how we construe these provisions.\564\ We do not,
however, believe that they will generate costs independent of any costs
associated with Congress' enactment of section 203A(a)(2), and will
have little, if any, effect on capital formation.
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    \564\ See supra section II.A.7.
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2. Exempt Reporting Advisers: Sections 407 and 408
    While we believe that our approach to implementing the Dodd-Frank
Act's reporting provisions applicable to exempt reporting advisers will
minimize costs inherent in such reporting, we acknowledge that it will
impose costs on these advisers.\565\ These costs include filing fees,
although not significant, paid for submitting initial and annual
filings through the IARD. We anticipate that filing fees, which the
Commission will consider separately, will be the same as those for
registered investment advisers, which currently range from $40 to $225
based on the amount of assets an adviser has under management.\566\ In
order to estimate the costs associated with filing fees, we assume for
purposes of this analysis that exempt reporting advisers will pay a fee
of $225 per initial or annual report.\567\ We estimate that
approximately 2,000 advisers will qualify as exempt reporting advisers
pursuant to section 203(l) of the Advisers Act, as added by the Dodd-
Frank Act, and rule 203(m)-1 thereunder, and will have to file Form ADV
on the IARD.\568\ As a result, we

expect exempt reporting advisers to incur a total annual cost of
approximately $450,000 in filing fees.\569\
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    \565\ See amended rule 204-1 and new rule 204-4; amended Form
ADV, Part 1A; supra section II.B.
    \566\ The current fee schedule for registered advisers may be
found on our Web site at http://www.sec.gov/divisions/investment/iard/iardfee.shtml. We amended this fee schedule in December 2010.
See Order Approving Investment Adviser Registration Depository
Filing Fees, Investment Advisers Act Release No. 3126 (Dec. 22,
2010), available at http://www.sec.gov/rules/other/2010/ia-3126.pdf.
    \567\ This is the fee applicable to registered advisers with
$100 million or more in assets under management. There will be no
fee for filing an other-than-annual amendment to a report.
    \568\ See infra note 734. While this is an estimate of the total
number of advisers that may file reports rather than register with
the Commission, a number of these advisers may choose to register
with the Commission rather than file reports. We cannot determine in
advance the precise number of these advisers that will choose to
register rather than report. Therefore, in order to avoid under-
estimating the costs of these amendments, we are using the total
number of potential exempt reporting advisers in our estimates.
    \569\ 2,000 exempt reporting advisers x $225 per year =
$450,000. Advisers pay for initial Form ADV submissions and for
annual amendments; there is no charge for an interim amendment.
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    In addition to filing fees, exempt reporting advisers will incur
internal costs associated with collecting, reviewing, reporting, and
updating a limited subset of Form ADV items in Part 1A, including Items
1, 2.B., 3, 6, 7, 10, 11 and corresponding schedules. We expect this
cost to be substantially less than that incurred by registered advisers
because exempt reporting advisers are not required to complete the
remainder of Part 1A or Part 2 of Form ADV. The costs of completing the
relevant items of Form ADV will vary from adviser to adviser, depending
in large part on the number of private funds an adviser manages.
    We believe, and several commenters confirmed, that the information
these items require should be readily available to any adviser
(particularly the identifying, private fund and control person
information required by Items 1, 3, 7.B. and 10), which mitigates the
costs and burdens of reporting.\570\ Similarly, Item 6 requires the
adviser to indicate if it engages in other specific business
activities, information which we believe should also be readily
available to these advisers. Item 2.B. elicits the information an
exempt reporting adviser would already have gathered for purposes of
determining if it is eligible for an exemption from registration under
section 203(l) of the Act or rule 203(m)-1 thereunder, and as such,
this item should impose few, if any, costs to complete. Commenters who
addressed Section 7.A. of Schedule D urged that we limit the reporting
of related persons, which could be significant in the case of advisers
that are part of a large organization.\571\ Many of these commenters
pointed out that in some cases the adviser and its clients have no
business dealings with some affiliates and thus there is less of a
chance of conflicts developing.\572\ We agree and have revised the
proposed item to permit an adviser to omit reporting about certain
related persons in a manner that is similar to the approach suggested
by a commenter.\573\ We are neither reducing nor eliminating the
disciplinary reporting requirements that we proposed in Item 11, and no
commenters suggested that we do so.\574\ Although we believe, as noted
above, that the information an adviser needs to complete Section
7.B.(1) is readily available in fund offering documents, we acknowledge
that this Section of Form ADV could be time-consuming to complete,
particularly for an exempt reporting adviser's initial filing,
depending on the number of funds the exempt reporting adviser manages.
The primarily check-the-box style of this item and most of the other
items exempt reporting advisers must complete, as well as some of the
features of the IARD (such as drop-down boxes for common responses and
the ability to pre-populate responses) should help decrease the average
completion time for these advisers. Based on views expressed by some
commenters,\575\ we expect the changes we are adopting to Section
7.B.(1) (including the removal of some of the questions that commenters
identified as most burdensome) that reduce the amount of information
required in respect of private funds \576\ will also alleviate concerns
that the reports require too much information or that the requirements
will impose excessive burdens.\577\
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