or their activities might present sufficient concerns to warrant our
further attention in order to protect their clients, investors, and
other market participants.\181\ The reports will also provide the
public with some basic information about these advisers and their
businesses.
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    \179\ See amended Form ADV: General Instruction 3. We will
continue to monitor whether we should also require exempt reporting
advisers to complete other items on Form ADV (e.g., Part 2).
    \180\ See id.; Implementing Proposing Release, supra note 7, at
section II.B.2.
    \181\ One commenter agreed. See ABA Committees Letter (stating
that most of the information exempt reporting advisers would have to
provide is of a nature that will assist the Commission to identify
compliance risks posed by exempt reporting advisers and thus such
disclosure responds to the mandate set forth in the Dodd-Frank Act).
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    Items 1, 3, and 10 elicit basic identification details such as
name, address, contact information, form of organization, and who
controls the adviser. Items 6 and 7.A. provide us with details
regarding other business activities in which the adviser and its

affiliates are engaged, which would permit us to identify conflicts
that the adviser may have with its clients that may suggest significant
risks to those clients. Item 11 requires advisers to disclose the
disciplinary history of the adviser and its employees and to complete a
separate schedule containing details of each disciplinary event.\182\
Item 7.B. and Section 7.B. of Schedule D require advisers to private
funds, which these advisers manage by terms of the exemptions, to
disclose information regarding each private fund they advise. As
discussed in more detail in Section II.C. of this Release, we are
adopting significant amendments to Section 7.B. of Schedule D that are
designed to provide us with a comprehensive overview, or census, of
private funds.\183\ Exempt reporting advisers' responses to Item 7.B.,
and Section 7.B.(1) of Schedule D, in conjunction with information
provided by registered advisers, will provide us with important data
about these funds that we would use to identify risks to their
investors.
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    \182\ See amended Form ADV, Part 1A, Disclosure Reporting Pages.
    \183\ For instance, advisers who complete Section 7.B.(1) of
Schedule D would have to provide identifying information about each
private fund, such as its name and domicile, as well as information
about its service providers and its gross assets. See amended Form
ADV, Part 1A, Schedule D, Section 7.B.(1). See also infra Section
II.C.1.
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    Several commenters expressed general support for the Commission's
proposed reporting requirement.\184\ One commenter urged us not to
require exempt reporting advisers to report information about their
other business activities in response to Item 6, their related persons
in response to Item 7.A., their private funds in response to Item 7.B.,
and their control persons in response to Item 10 because, among other
reasons, such information ``would not add to the Commission's ability
to protect the public interest or investors.'' \185\ We disagree.
Without this information, the reports would contain little more than
basic identifying data, which would be inadequate to help us to
meaningfully identify significant risks to an exempt reporting
adviser's clients, investors, or other market participants. Moreover,
to require such limited information to be reported would deny investors
an opportunity to verify disclosures they receive directly from the
adviser.
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    \184\ See, e.g., AFL-CIO Letter; comment letter of Council of
Institutional Investors (Jan. 20, 2011) (``CII Letter''); NRS
Letter; Better Markets Letter; ABA Committees Letter; NASAA Letter.
    \185\ Village Ventures Letter (asserting also that the
requirements would be burdensome). We address the anticipated costs
and burdens associated with these requirements below. See infra
Section V.
---------------------------------------------------------------------------

    Some commenters urged that we broaden the scope of information we
proposed to collect, suggesting among other things that the Commission
should require all or some of the additional information that
registered advisers must submit on Form ADV, including a requirement to
prepare and deliver a client brochure (Part 2) and brochure
supplements.\186\ We have considered our need for this information in
light of the exemptions Congress provided in the Dodd-Frank Act and the
regulatory role we expect to assume with respect to exempt reporting
advisers. We have not sought to apply most of the prophylactic rules we
have adopted for registered advisers,\187\ and we do not anticipate
that our staff will conduct compliance examinations of these advisers
on a regular basis.\188\ One commenter who urged us to collect a
broader set of information recommended that we apply additional
prophylactic rules to exempt reporting advisers, the consequence of
which would be to reduce the distinctions between these advisers and
registered advisers, which those urging us to collect less information
argued we should avoid.\189\ We believe that requiring advisers to
complete the items we proposed strikes an appropriate balance. As
discussed in more detail below, we have revised some of these items in
response to comments we received.
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    \186\ See Better Markets Letter; CII Letter. Part 2 of Form ADV,
which requires advisers to prepare a narrative, plain English client
brochure, contains 18 items including information on the adviser's
business practices, conflicts of interest, and background. Part 2
also requires advisers to prepare brochure supplements that include
information about advisory personnel on whom clients rely for
investment advice. See also AFL-CIO Letter (suggesting requiring
performance reporting).
    \187\ See, e.g., rule 206(4)-2 (the custody rule), which applies
to advisers registered or required to be registered with the
Commission. But see rule 206(4)-5 (the ``pay to play'' rule)
(applied to exempt reporting advisers that previously relied on the
private adviser exemption and continues to apply to exempt reporting
advisers that currently rely on exemptions from registration under
sections 203(l) and 203(m) of the Advisers Act). See infra section
II.D.1. (discussing amendments we are adopting today to the pay to
play rule to continue to apply the rule to exempt reporting advisers
and foreign private advisers).
    \188\ Our staff will conduct cause examinations where there are
indications of wrongdoing, e.g., those examinations prompted by
tips, complaints, and referrals. Under section 204(a) of the
Advisers Act, however, the Commission has the authority to examine
records, unless the adviser is ``specifically exempted'' from the
requirement to register pursuant to section 203(b) of the Advisers
Act. Investment advisers that are exempt from registration in
reliance on section 203(l) or 203(m) of the Advisers Act are not
``specifically exempted'' from the requirement to register pursuant
to section 203(b).
    \189\ Compare comment letter of Coalition of Private Investment
Companies (Jan. 28, 2011) (``CPIC Letter'') with AV Letter; AIMA
Letter; Shearman Letter; Village Ventures Letter. See Merkl
Implementing Letter (indicating that our proposal created a
meaningful distinction between registered advisers and exempt
reporting advisers by not subjecting exempt reporting advisers to
all of Form ADV, to compliance program requirements under rule
206(4)-7, to custody requirements under rule 206(4)-2, and to
regular examinations, consistent with a primary concern of Congress
in adopting the Dodd-Frank Act).
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3. Public Availability of Reports
    Several commenters urged that we not make public any information
filed by exempt reporting advisers.\190\ Other commenters, however,
supported public disclosure of information by these advisers and
suggested that such data would be useful, for example, for prospective
clients who were conducting ``due diligence'' reviews of advisers.\191\
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    \190\ See AV Letter; AIMA Letter; ABA Committees Letter; Avoca
Letter; Katten Foreign Advisers Letter; MFA Letter; NRS Letter;
comment letter of the National Venture Capital Association (Jan. 24,
2011) (``NVCA Letter''); Shearman Letter; Seward Letter.
    \191\ See 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).
See also 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); CII Letter (arguing that an
investor 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).
---------------------------------------------------------------------------

    Section 210(a) of the Advisers Act requires information contained
in reports filed with the Commission to be made available to the
public, unless we find that public disclosure is neither necessary nor
appropriate in the public interest or for the protection of investors.
Commenters did not persuade us that we could make such a finding.\192\
On the contrary, we believe

the public reporting requirements we are adopting will provide a level
of transparency that will help us to identify practices that may harm
investors,\193\ will aid investors in conducting their own due
diligence,\194\ and will deter advisers' fraud and facilitate earlier
discovery of potential misconduct.\195\ For instance, investors will be
able to compare Form ADV information to the information they have
received in offering documents and due diligence to identify potential
misrepresentations. For these reasons, we believe public availability
of these reports is in the public interest and will help to protect
investors. Suggestions by some that the Dodd-Frank Act compels us to
deny public access to these reports are misplaced.\196\ In the Dodd-
Frank Act, Congress sought to protect only certain proprietary and
similarly sensitive information submitted by advisers about their
private funds in reports for the assessment of systemic risk.\197\ In
light of section 210 of the Act, which presumes reports submitted to us
by advisers to be publicly available, together with the Freedom of
Information Act,\198\ which generally supports disclosure of such
documents, we believe at this time that the information should be
publicly available.\199\
---------------------------------------------------------------------------

    \192\ See AV Letter (claiming that the public disclosure of the
reports would be ``unnecessary and intrusive'' and would be done
``for no apparent reason''); MFA Letter (urging that, absent a
compelling policy reason for public disclosure, the reports should
not be publicly available because some of the information is
competitively sensitive); NVCA Letter (arguing that making public
the ownership or control persons of an exempt reporting adviser
would cause competition for scarce human resources among these
advisers and could reveal strategic relationships to competitors);
NRS Letter (claiming that because investors and prospective
investors receive voluminous offering documents, due diligence
questionnaires, and other materials, limited Form ADV Part 1A
information would be of little value and limited use); ABA
Committees Letter (indicating there would be no benefit in members
of the general public having access to this information because they
are not qualified to invest); Katten Foreign Advisers Letter
(claiming that private fund investors already receive an offering
document that should cover the items that would be included in the
reports). See also Katten Foreign Advisers Letter; NVCA Letter; AIMA
Letter (each conditioning its support for the scope of the reporting
requirement on making the reports non-public).
    \193\ For instance, census data about a private fund's
gatekeepers, including administrators and auditors, will be
available on Section 7.B.1. of Schedule D and will 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).
    \194\ See supra note 191.
    \195\ See In the Matter of John Hunting Whittier, Investment
Advisers Act Release No. 2637 (Aug. 21, 2007) (settled action
against hedge fund manager for, among other things, misrepresenting
to fund investors that a particular auditor audited certain hedge
funds, when in fact it did not).
    \196\ ABA Committees Letter; Avoca Letter; AV Letter; Seward
Letter; Shearman Letter.
    \197\ Compare section 404 of the Dodd-Frank Act, codified at
Advisers Act section 204(b), with sections 407 and 408 of the Dodd-
Frank Act, codified at Advisers Act sections 203(l) and 203(m). See
also Systemic Risk Reporting Release, supra note 71 (proposing
confidential reporting by advisers to private funds designed to
assist the Financial Stability Oversight Council (``FSOC'') in its
assessment of systemic risk in the U.S. financial system).
    \198\ 5 U.S.C. 552(a).
    \199\ Information on Form ADV is available to the public through
the Investment Adviser Public Disclosure System (``IAPD''), which
allows the public to access the most recent Form ADV filing made by
an investment adviser and is available at http://www.adviserinfo.sec.gov. In response to commenters' suggestions we
will, however, make it clear to the public viewing reports filed by
an exempt reporting adviser on IAPD that the adviser is not
registered with us. See Shearman Letter; Seward Letter (expressing
concerns that public access to reports by exempt reporting advisers
might cause confusion if an unregistered adviser's information comes
up in an IARD search, an investor's perception may be that the
adviser is registered).
---------------------------------------------------------------------------

    Some commenters expressed more narrow concerns that certain of the
information we proposed to require could require them to disclose
proprietary or competitively sensitive information.\200\ As discussed
below, we have responded to those concerns by revising certain of our
items in a manner that will affect the information that both registered
and exempt reporting advisers will provide to us.\201\
---------------------------------------------------------------------------

    \200\ See infra note 238. The NVCA also argued that requiring a
venture capital fund adviser to report information about the
adviser's control persons, as required by Item 10 of Part 1A of Form
ADV, could increase competition among these advisers for human
resources. While this information could result in competitive
effects among these advisers, the effects of this item are not
unique to these advisers, and they may result in benefits.
    \201\ See infra Section II.C.1.
---------------------------------------------------------------------------

4. Updating Requirements
    We are also amending rule 204-1 under the Advisers Act, which
requires advisers to update their Form ADV filings, to require exempt
reporting advisers to file updating amendments to reports filed on Form
ADV.\202\ 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 of 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.\203\
---------------------------------------------------------------------------

    \202\ Rule 204-1. We are also amending the title of the rule to
be ``Amendments to Form ADV,'' rather than ``Amendments to
application for registration,'' to reflect use of the form by exempt
reporting advisers.
    \203\ See amended Form ADV: General Instruction 4.
---------------------------------------------------------------------------

    Most of the 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.\204\ In order to permit us to receive timely
information from exempt reporting advisers, we are adopting the rule
amendments as proposed.
---------------------------------------------------------------------------

    \204\ NRS Letter; Merkl Implementing Letter; CII Letter; ABA
Committees Letter. Some of the commenters added 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. ABA Committees
Letter; Merkl Implementing Letter. But see NVCA Letter (indicating
that, because venture capital fund investments are long-term and
illiquid, there would be little, if any, benefit to investors,
regulators or the public to update the report more frequently).
---------------------------------------------------------------------------

5. Final Reports
    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.\205\ Final report filings
will allow us to distinguish such a filer from one that is failing to
meet its filing obligations.\206\ In some cases an exempt reporting
adviser will file a final report because it ceases to do business as an
investment adviser and thus is no longer subject to reporting under the
Act.\207\ In other cases an exempt reporting adviser will file a final
report in connection with becoming registered with the Commission, in
which case it will continue to periodically update its Form ADV, but as
a registered adviser.\208\
---------------------------------------------------------------------------

    \205\ New rule 204-4(f).
    \206\ Id. Advisers filing a final report are not required to pay
a filing fee. An adviser that failed to file a final report would
violate rule 204-4(f).
    \207\ Such an adviser must indicate that it is filing a final
report and update Item 1 (Identifying Information) of Part 1A of
Form ADV. Amended Form ADV: General Instruction 15.
    \208\ An exempt reporting adviser may be required to become
registered with the Commission if, for example, it is relying on the
exemption provided by section 203(l) of the Act and accepts a client
that is not a venture capital fund. See amended Form ADV: General
Instruction 15; Exemptions Adopting Release, supra note 4, at
Section II.A.
---------------------------------------------------------------------------

    Amended general instruction 15 to Form ADV provides guidance to
exempt reporting advisers transitioning to becoming registered with the
Commission. An exempt reporting adviser wishing to register with the
Commission can file a single amendment to its Form ADV that will serve
both as a final ``report'' as an exempt reporting adviser and an
application for registration under the Advisers Act.\209\ While an
application is pending, but before it is approved, an adviser may
continue to operate as an exempt reporting adviser in accordance with
the terms of the relevant exemption.\210\ In addition, General

Instruction 15 provides a safe harbor for certain exempt reporting
advisers relying on the ``private fund adviser'' exemption provided by
rule 203(m)-1. Such an adviser that has complied with all of its
reporting obligations as an exempt reporting adviser may continue
advising private fund clients for up to 90 days after filing an annual
updating amendment indicating that it has private fund assets of $150
million or more before filing its final report and application for
registration.\211\ This transition period is designed to accommodate
events that may be beyond the adviser's control, such as an increase in
the value of the adviser's assets under management, but it is not
available to an adviser that otherwise would not qualify for the
exemption provided by rule 203(m)-1. The transition period also is not
available to advisers relying on the ``venture capital adviser''
exemption in section 203(l) of the Act. Advisers seeking to rely on
that exemption may not accept a client that is not a venture capital
fund without first registering under the Adviser Act.\212\ Commenters
who addressed the proposal to require a final report endorsed the
Commission's approach.\213\
---------------------------------------------------------------------------

    \209\ See amended Form ADV: General Instruction 15.
    \210\ See amended Form ADV: General Instruction 15. For example,
an adviser transitioning from exempt reporting to registered would
violate the Advisers Act registration requirement if it provides
advisory services to a client that is not a private fund before the
Commission approves its application for registration.
    \211\ See amended Form ADV: General Instruction 15. This
condition reflects the importance of the Advisers Act reporting
requirements applicable to advisers relying on the exemption
provided by rule 203(m)-1. See also Exemptions Adopting Release,
supra note 4, at n.377. An adviser that meets or exceeds $150
million in assets under management in the United States must
indicate that change by checking the box in Item 2.B.(3) of Form ADV
in its annual updating amendment.
    \212\ See amended Form ADV: General Instruction 15.
    \213\ ABA Committees Letter; Merkl Implementing Letter.
---------------------------------------------------------------------------

C. Form ADV

    We are adopting today a number of amendments to Form ADV that will
improve our ability to oversee investment advisers. Data collected from
Form ADV is of critical importance to our regulatory program and our
ability to protect investors. We use information reported to us on Form
ADV for a number of purposes, such as to efficiently allocate our
examination resources based on the risks we discern, or to identify
common business activities, from information provided by advisers. The
information is used to create risk profiles of investment advisers and
permits our examiners to better prepare for, and more efficiently
conduct, their examinations. Moreover, the information in Form ADV
allows us to better understand the investment advisory industry and to
evaluate the implications of policy choices we must make in
administering the Advisers Act.
    As amended, Form ADV requires advisers to provide us with
additional information about three areas of their operations.\214\
First, we require advisers to provide additional information about
private funds they advise. Second, we expand the data advisers provide
us about their advisory business (including data about the types of
clients they have, their employees, and their advisory activities), as
well as about their business practices that may present significant
conflicts of interest (such as the use of affiliated brokers, soft
dollar arrangements, and compensation for client referrals). Third, we
require additional information about advisers' non-advisory activities
and their financial industry affiliations. Some additional changes to
the Form (described below) improve our ability to assess compliance
risks and also to identify advisers that are subject to the Dodd-Frank
Act's requirements concerning certain incentive-based compensation
arrangements.\215\
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    \214\ In addition, we are making several clarifying or technical
amendments in response to comments, frequently asked questions we
receive, and our experience administering the form. See infra
sections II.C.5. and 7.
    \215\ See section 956 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The commenters that addressed these proposed amendments to Form ADV
generally supported the amendments,\216\ although many expressed
concerns with or urged changes to the proposed private fund reporting
requirements contained in Item 7.B. and Section 7.B.(1) of Schedule
D.\217\ Two commenters argued that the new information requirements we
proposed to Part 1A of Form ADV overlap in some respects with the new
brochure requirements (Part 2 of Form ADV) and should not be
adopted.\218\ We acknowledge some overlap in the information required
to be reported, but note that overlap may be necessary as the two parts
of Form ADV serve very different purposes. Part 2 of Form ADV may
overlap Part 1 to ensure that investors are fully informed about a
particular practice or conflict, while the information we collect in
Part 1 permits us to collect data about that practice or conflict for
regulatory purposes.
---------------------------------------------------------------------------

    \216\ See, e.g., NASAA Letter; IAA General Letter (stating that
enhanced disclosure in Part 1 of Form ADV will improve the
Commission's ability to gather data about firms and to conduct
appropriate inquiries, inspections, and other activities based on
that data, and noting that certain additional information will allow
the Commission to focus its examination and enforcement resources on
those advisers that appear to present greater compliance risks);
CPIC Letter (noting that additional information that the revised
form will collect should be of assistance to the Commission in its
efforts to identify fund advisers, to verify the existence and
location of assets and to carry out general market surveillance, and
it should also be of use to investors as they conduct due diligence
and research the background of fund managers).
    \217\ See, e.g., ABA Committees Letter; AV Letter; AIMA Letter;
comment letter of CompliGlobe Ltd. (Jan. 24, 2011) (``CompliGlobe
Letter''); comment letter of Debevoise & Plimpton LLP (Jan. 24,
2011) (``Debevoise General Letter''); comment letter of DLA Piper
LLP (US) (on behalf of Emerging Growth and Venture Capital Group)
(Jan. 24, 2011)) (``DLA Piper VC Letter''); comment letter of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (Jan.
24, 2011) (``Gunderson Letter''); IAA General Letter; Katten Foreign
Advisers Letter; MFA Letter; NRS Letter; NVCA Letter; O'Melveny
Letter; Seward Letter; Shearman Letter.
    \218\ See NRS Letter (asserting that parts of the proposed
amendments to Items 5, 6, 7, 8, and 10 would result in duplicative
reporting); Seward Letter.
---------------------------------------------------------------------------

    We are adopting amendments to the form, with several substantive
and technical or clarifying revisions that respond to comments we
received.
1. Private Fund Reporting: Item 7.B.
    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 information will provide us with a more
complete understanding of private funds and permit us to enhance our
assessment of advisers for purposes of targeting our examinations. The
information will also improve our ability to identify practices that
could harm investors and help expose and deter fraud and other
misconduct.\219\ Both registered and exempt reporting advisers are
required to complete Item 7.B. and the related portions of Schedule D.
---------------------------------------------------------------------------

    \219\ See Implementing Proposing Release, supra note 7, at
nn.148-150 and accompanying text.
---------------------------------------------------------------------------

    Item 7.B. requires an adviser to complete a separate Section 7.B.
of Schedule D for each private fund that it advises. Part A of Section
7.B.(1) requires an adviser to provide basic information regarding the
size and organizational, operational, and investment characteristics of
each fund. Part B requires information about five types of private fund
service providers that perform important roles as ``gatekeepers.'' This
information will be publicly available, as is other information
reported on Form ADV. We are adopting these amendments with several
changes, discussed below, that respond to comments we received.
    Item 7.B. has required an adviser to complete section 7.B. of
Schedule D for each ``investment-related'' limited partnership or
limited liability company

that it or a related person advises.\220\ We are modifying, as
proposed, the scope of Item 7.B. by requiring an adviser to complete a
separate Schedule D for each ``private fund'' that the adviser (but not
a related person) manages. We use the new term ``private fund,''
defined in section 202(a)(29) of the Act,\221\ with the result that
advisers must report on pooled investment vehicles regardless of how
they are organized. In addition, as proposed, we are narrowing the
reporting requirement so that advisers are no longer required to report
on the funds of their related persons, which in most cases are now
required to be reported to us by a related person that is either
registered under the Act or is an exempt reporting adviser.\222\
---------------------------------------------------------------------------

    \220\ Section 7.B. of Schedule D previously required an adviser
to a private fund that is a limited partnership or limited liability
company to provide only the following information: (i) The name of
the fund; (ii) the name of the general partner or manager; (iii)
whether the adviser's clients are solicited to invest in the fund;
(iv) the approximate percentage of the adviser's clients that have
invested in the fund; (v) the minimum investment commitment; and
(vi) the current value of the total assets of the fund. As we
discussed in the Implementing Proposing Release, this information
provided us with little data about the operations of the many large
hedge funds and other private funds managed by a growing number of
advisers registered with the Commission.
    \221\ This section defines a ``private fund'' as an issuer that
would be an investment company, as defined in section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-3), but for section
3(c)(1) or 3(c)(7) of that Act.
    \222\ The Dodd-Frank Act repealed the private adviser exemption
effective July 21, 2011, so many private fund advisers that were
previously unregistered will now be required to register under the
Advisers Act. See supra at sections I. and II.B.
---------------------------------------------------------------------------

    We are also adopting several measures that will help to avoid
multiple reporting for each private fund and minimize the overall
burden of reporting private fund information. First, only one adviser
must report the full scope of information for each private fund, even
where there are other advisers to the same fund (e.g.,
subadvisers).\223\ Second, an adviser managing a master-feeder
arrangement may submit a single Section 7.B.(1) for the master fund and
all of the feeder funds if these funds would otherwise report
substantially identical information.\224\ Finally, an adviser with a
principal office and place of business outside the United States is not
required to complete Schedule D for any private fund that, during the
adviser's last fiscal year, was not a United States person, was not
offered in the United States and was not beneficially owned by any
United States person.\225\ Commenters did not address any of the issues
raised by these changes to Item 7.B., which we are adopting as
proposed.
---------------------------------------------------------------------------

    \223\ If an investment adviser completes section 7.B.(1) of
Schedule D for a private fund, other advisers to that fund do not
have to complete section 7.B.(1) for that private fund. See amended
Form ADV, Part 1A, Note to Item 7.B.; Section 7.B.(2) of Schedule D.
Section 7.B.(1) of Schedule D requires advisers to provide a private
fund identification number, which is a unique identification number
for each fund. Advisers must obtain an identification number for
each private fund by logging onto the IARD Web site and using the
private fund identification number generator. Once an adviser
obtains a private fund identification number for a private fund, all
advisers to the fund must use that same number on Sections 7.B.(1)
and 7.B.(2) for that fund and continue using that same number
whenever they amend either section of Schedule D. See amended Form
ADV: Instructions for Part 1A, instr. 6.b.
    \224\ See amended Form ADV: Instructions for Part 1A, instr.
6.d. The feeder funds need not have a direct relationship with the
master fund's prime broker or custodian to rely on this instruction.
In a master-feeder arrangement, one or more funds (``feeder funds'')
invest all or substantially all of their assets in a single fund
(``master fund'').
    \225\ See amended Form ADV: Instructions for Part 1A, instr.
6.a. This instruction is only necessary for those funds that fall
within the definition of ``private fund.'' A non-U.S. fund that has
never used U.S. jurisdictional means in the offering of the
securities it issues would not be a private fund. See Exemptions
Adopting Release, supra note 4, at n.285 and accompanying text. We
have modified this instruction from the proposal to more closely
follow the requirements of Regulation S; the instruction now looks
to whether the offering was made ``in the United States'' rather
than ``to * * * any United States person.'' See also amended Form
ADV: Glossary. ``United States person'' is defined by reference to
the definition in rule 203(m)-1, which tracks the definition of a
``U.S. person'' under Regulation S, except that it contains a
special rule for discretionary accounts maintained for the benefit
of United States persons. See Exemptions Adopting Release, supra
note 4, at section II.B.4.
---------------------------------------------------------------------------

    An adviser must file a separate Section 7.B.(1) (Parts A and B) for
each private fund it manages.\226\ Part A of Section 7.B.(1) requires
an adviser to provide the name of the fund and the state or country in
which the fund is organized and to identify other persons involved in
the management of the fund.\227\ Part A also requires the adviser to
report whether the fund is part of a master-feeder arrangement \228\ or
is a fund of funds \229\ and to provide information about the
regulatory status of the fund, such as the exclusion from the
Investment Company Act on which the fund relies, whether the fund is
subject to the jurisdiction of a foreign regulatory authority, and
whether the fund relies on an exemption from registration under the
Securities Act of 1933 (the ``Securities Act'') with respect to its
securities.\230\ An adviser must also identify, within seven broad
categories, the type of investment strategy the fund employs,\231\
report whether the fund invests in securities of registered investment
companies,\232\ and provide the gross asset value of the fund.\233\
Finally, an adviser must provide limited information regarding
investors in the fund, including: (i) The minimum amount that investors
are required to invest; \234\ (ii) the approximate number of beneficial
owners of the fund and the approximate percentage of the fund
beneficially owned by the adviser and

its related persons, funds of funds and non-United States persons;
\235\ and (iii) the extent to which clients of the adviser are
solicited to invest, and have invested, in the fund.\236\ We are
adopting Part A with several changes discussed below.\237\
---------------------------------------------------------------------------

    \226\ See amended Form ADV, Part 1A, Item 7.B.
    \227\ An adviser is required to report the names of the fund's
general partner, trustee and directors and persons occupying similar
positions as well as the name and SEC file number of any other
advisers to the fund. See amended Form ADV, Part 1A, Section
7.B.(1)A. of Schedule D, questions 1-3 and 17-18.
    \228\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, questions 6 and 7. As discussed above, an adviser
managing a master-feeder arrangement may submit a single Schedule D
for the relevant funds if the information provided would otherwise
be substantially identical. See supra note 224 and accompanying
text. We have added a note to question 6 to clarify that an adviser
must respond to that question regardless of whether it is filing a
single Schedule D, Section 7.B.(1) for the master-feeder arrangement
or reporting on the funds separately.
    \229\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 8. Clause (b) of this question also requires
the adviser to indicate whether the fund invests in funds managed by
the adviser or its related persons.
    \230\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, questions 4-5 and 21-22. Two commenters asserted that
requiring advisers to report whether the fund relies on an exemption
from registration under the Securities Act with respect to its
securities is unnecessarily duplicative because the information is
already reported on Form D. See Debevoise General Letter; NYSBA
Committee Letter. We are not persuaded that providing this
information will significantly increase the reporting burden, and
the information will assist both the Commission and the public in
quickly and accurately locating additional relevant information
regarding the fund.
    \231\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 10. The categories, which are defined in the
Instructions for Part 1A, include: (i) Hedge fund; (ii) liquidity
fund; (iii) private equity fund; (iv) real estate fund; (v)
securitized asset fund; (vi) venture capital fund; and (vii) other
private fund. See infra note 248 and accompanying text for a
discussion of changes to these definitions.
    \232\ This information relates to compliance with the provision
of the Investment Company Act that limits the ability of one
investment company to invest in shares of another. See section
12(d)(1) of the Investment Company Act (15 U.S.C. 80a-12(d)(1)) and
amended Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D, question
9. We have modified this question from the proposal to cross-
reference Instruction 6.e. of the Instructions for Part 1A, which
excludes from this question investments in money market funds made
in reliance on rule 12d1-1 under the Investment Company Act because
that rule exempts (subject to the conditions described in the rule)
investments in money market funds from the limitations contained in
section 12(d)(1) of the Investment Company Act. 17 CFR 270.12d1-1.
    \233\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 11.
    \234\ See amended Form ADV, Part 1A, Section 7.B.(1)A. of
Schedule D, question 12. We made one change in this item in response
to a comment, which pointed out that a private fund manager may have
discretion to lower the minimum amount, meaning that the minimum
investment may in practice be different from the amount set out in
the organizational documents of the fund. IAA General Letter. We
have added an instruction clarifying that the amount reported should
be the amount that is routinely required of investors who are not
related persons of the adviser.
    \235\ Id. questions 13-16. For purposes of these questions,
beneficial owners are persons who would be counted as beneficial
owners under section 3(c)(1) of the Investment Company Act or who
would be included in determining whether the owners of the fund are
qualified purchasers under section 3(c)(7) of that Act. (15 U.S.C.
80a-3(c)(1) or (7)). We added the word ``approximate'' to question
13 to make this question more consistent with questions 14-16 and
because we understand based on comments received that, in some
cases, the number of beneficial owners may change frequently, making
a precise number more difficult to provide and less meaningful. See
IAA General Letter.
    \236\ Id. questions 19-20. This information helps to identify
where a fund manager may have conflicts of interest with fund
investors of the sort that implicate the adviser's fiduciary
obligations to the fund and, in some cases, create risks for the
fund investors.
    \237\ See also infra notes 264 through 279 and accompanying text
for a general discussion of comments on Section 7.B.(1). Some of
these comments relate to all or portions of the proposed reporting
requirements in Part A.
---------------------------------------------------------------------------

    Several commenters argued that certain information we proposed to
include in Part A is competitively sensitive or proprietary and, as a
result, should not be disclosed publicly.\238\ These commenters focused
in particular on three of the proposed questions in Part A. The first
would have required an adviser to report both the gross and net asset
values of each private fund it manages.\239\ Commenters asserted that
public disclosure of this information could reveal a fund's leverage,
which may be competitively sensitive strategy information.\240\ In
addition, commenters expressed concerns regarding the competitive
effects of our proposal to require that advisers report the assets and
liabilities of each fund broken down by class and categorization in the
fair value hierarchy established under GAAP.\241\ Commenters explained
that this disclosure could harm an adviser's competitiveness and could,
for instance, be used to ascertain the values of private companies held
by venture capital funds that make only one or a few investments,
potentially harming the private company and the interests of the
private fund and its investors.\242\ Finally, our proposal would have
required that advisers report the approximate percentage of each fund
beneficially owned by certain types of investors.\243\ Commenters
argued that the public disclosure of these data could reveal
potentially sensitive information and, in particular, that they could
be used to reverse engineer investor identities where a fund is owned
by a few investors and that it could serve to deter certain
institutional clients from investing in private funds.\244\ We are
persuaded at this time that, with respect to these three questions, the
benefit of public disclosure would not outweigh the potential
competitive harm. Therefore, we are not adopting the amendments that
would have required an adviser: (i) to disclose each private fund's net
assets; \245\ (ii) to report private fund assets and liabilities by
class and categorization in the fair value hierarchy established under
GAAP; \246\ and (iii) to specify the percentage of each fund owned by
particular types of beneficial owners.\247\
---------------------------------------------------------------------------

    \238\ See IAA General Letter; MFA Letter; NVCA Letter; NYSBA
Committee Letter; O'Melveny Letter.
    \239\ See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D,
questions 11(a) and 11(b).
    \240\ See, e.g., MFA Letter. See also NYSBA Committee Letter.
    \241\ See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D,
question 12. See also FASB ASC 820-10-50-2b.
    \242\ See MFA Letter; NVCA Letter; O'Melveny Letter.
    \243\ See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)A. of Schedule D,
question 17. The investor types included individuals, broker-
dealers, insurance companies, registered investment companies,
private funds, non-profits, pension funds, banks and thrift
institutions, and state and municipal government entities.
    \244\ IAA General Letter. See also MFA Letter.
    \245\ We are, however, adopting question 11(a), concerning gross
assets, as proposed. This question retains the requirement, included
in Form ADV prior to today's amendments, that advisers report the
total (or gross) assets of their private funds on Section 7.B. of
Schedule D. Net asset values of individual funds may be important to
our investor protection mission and to FSOC's systemic risk
monitoring activities. See Systemic Risk Reporting Release, supra
note 71 (proposing non-public reporting of gross and net asset
values for private funds managed by registered investment advisers).
    \246\ The fair value breakdown for individual funds may be
important to our investor protection mission and to FSOC's systemic
risk monitoring activities, and we will consider whether to adopt it
as part of our Form PF proposal. See Systemic Risk Reporting
Release, supra note 71. Some commenters also expressed concern with
respect to the burden of reporting this information. See, e.g., ABA
Committees Letter; AIMA Letter; Dechert General Letter; DLA Piper VC
Letter; IAA General Letter; Katten Foreign Advisers Letter; Merkl
Implementing Letter; NVCA Letter. We will consider these comments in
connection with our consideration of other comments on proposed Form
PF.
    \247\ Beneficial ownership percentages of funds may be important
to our investor protection mission and to FSOC's systemic risk
monitoring activities, and we will consider whether to adopt it as
part of our Form PF proposal. See Systemic Risk Reporting Release,
supra note 71. Some commenters also expressed concern with respect
to the burden of reporting this information. See, e.g., Debevoise
General Letter; IAA General Letter; Shearman Letter. We will
consider these comments in connection with our consideration of
other comments on proposed Form PF.
---------------------------------------------------------------------------

    As noted above, Part A of Section 7.B.(1) requires an adviser to
classify each of its private funds by strategy, using definitions that
we proposed in the instructions to Form ADV.\248\ In the Systemic Risk
Reporting Release, we also proposed to use these definitions for
purposes of Form PF.\249\ Although we received no comments on these
definitions in this rulemaking, we received several comments on the
same definitions in response to Form PF.\250\ We have considered these
comments in the context of this rulemaking and have determined to make
several changes. We will also consider these comments in the context of
the Form PF release.
---------------------------------------------------------------------------

    \248\ The definitions appear in Instruction 6 of the
instructions to Part 1A of Form ADV. See supra at note 231 and
accompanying text.
    \249\ See Systemic Risk Reporting Release, supra note 71, at
section II.B.1. If adopted, registered advisers would use Form PF to
report information about the private funds they manage for use by
FSOC in its assessment of systemic risk in the U.S. financial
system.
    \250\ These comments were submitted in response to the Systemic
Risk Reporting Release, supra note 71, and are available on the
Commission's Web site at: http://www.sec.gov/comments/s7-05-11/s70511.shtml.
---------------------------------------------------------------------------

    The first of the changes we are making clarifies the definitions to
address concerns that a securitized asset fund may be classified as a
hedge fund because of its borrowings.\251\ We believe that the quality
and usefulness of the data reported depends in part on accurately
grouping funds and that securitized asset funds should not be
categorized as hedge funds based on their issuance of debt. To clarify
the definitions, we have excluded securitized asset funds from the
definition of ``hedge fund'' and modified ``securitized asset fund'' so
that it is no longer defined by reference to ``hedge fund.''
---------------------------------------------------------------------------

    \251\ See Comment letter of TCW Group, Inc. (Apr. 12, 2011)
(``TCW Systemic Risk Reporting Letter'').
---------------------------------------------------------------------------

    Second, we have modified clause (a) of the ``hedge fund''
definition, which classifies funds based on whether performance fees or
allocations are calculated by taking into account unrealized gains. One
commenter pointed out that even funds that do not allow for the payment
of such fees or allocations, such as private equity funds, may be
required to accrue or allocate these amounts in their financial
statements to comply with applicable accounting principles.\252\ We did
not intend for funds that accrue or allocate these fees or allocations
solely for financial reporting purposes to be classified as hedge
funds, so we have clarified that clause (a) relates only to

fees or allocations that may be paid to an investment adviser (or its
related persons).
---------------------------------------------------------------------------

    \252\ See TCW Systemic Risk Reporting Letter.
---------------------------------------------------------------------------

    Third, we have addressed another commenter's concern that clause
(a) could inadvertently capture certain private equity funds because,
although these funds typically calculate currently payable performance
fees and allocations based on realized amounts, they will sometimes
reduce these fees and allocations by taking into account ``unrealized
losses net of unrealized gains in the portfolio.'' \253\ We agree that
funds should not be classified as hedge funds based solely on this
practice and have clarified that clause (a) would not include
performance fees or allocations the calculation of which may take into
account unrealized gains solely for the purpose of reducing such fees
or allocations to reflect net unrealized losses.
---------------------------------------------------------------------------

    \253\ See comment letter of the Private Equity Growth Capital
Council (Apr. 12, 2011) (``PEGCC Systemic Risk Reporting Letter'').
---------------------------------------------------------------------------

    Finally, several commenters asserted that clause (c) of the ``hedge
fund'' definition, which looks to whether a fund may engage in short
selling, should include an exception for a de minimis amount of short
selling or exclude short selling intended to hedge the fund's
exposures.\254\ We continue to believe that short selling is a
potentially important distinguishing feature of hedge funds, many of
which may, as the name suggests, use short selling to hedge or manage
risk of various types. We are persuaded, however, that many funds
pursuing traditional investment strategies use short positions to hedge
foreign exchange risk and to manage the duration of interest rate
exposure, and we are concerned that including funds within the
definition of ``hedge fund'' solely because they use these particular
techniques would dilute the meaningfulness of the category. Therefore,
we have modified clause (c) to provide an exception for short selling
that hedges currency exposure or manages duration.\255\ We expect that
the changes to the private fund definitions discussed above will
provide for a more accurate classification of private funds and reduce
the number of funds categorized as hedge funds.
---------------------------------------------------------------------------

    \254\ See comment letter of the Investment Adviser Association
(Apr. 12, 2011) (``IAA Systemic Risk Reporting Letter''); PEGCC
Systemic Risk Reporting Letter; Comment letter of Securities
Industry and Financial Markets Association (Apr. 12, 2011) (``SIFMA
Systemic Risk Reporting Letter''); TCW Systemic Risk Reporting
Letter.
    \255\ We have also made a change to clause (c) to clarify that
this clause includes traditional short sales and any transaction
resulting in a short exposure to a security or other asset (such as
using a derivative instrument to take a short position). The purpose
of this definition is to appropriately categorize funds that engage
in certain types of market activity, and whether the definition
applies should not depend on the form in which the fund engages in
that activity. In addition, we note that several commenters
expressed concern that clauses (b) and (c) of the ``hedge fund''
definition are too broad because many funds have the capacity to
borrow or incur derivative exposures in excess of the specified
amounts or to engage in short selling but do not in fact engage, or
intend to engage, in these practices. See, e.g., comment letter of
the Alternative Investment Management Association (Apr. 12, 2011);
IAA Systemic Risk Reporting Letter; PEGCC Systemic Risk Reporting
Letter; SIFMA Systemic Risk Reporting Letter; TCW Systemic Risk
Reporting Letter. These commenters generally argued that clauses (b)
and (c) should focus on actual or contemplated use of these
practices rather than potential use. We have not made changes to the
``hedge fund'' definition in response to these comments because we
continue to believe that clauses (b) and (c) properly focus on a
fund's ability to engage in these practices. Even a fund for which
leverage or short selling is an important part of its strategy may
not engage in that practice during every reporting period. We would,
however, not regard a private fund to be a ``hedge fund'' solely
because its organizational documents fail to prohibit the fund from
borrowing or incurring derivative exposures in excess of the
specified amounts or from engaging in short selling so long as the
fund in fact does not engage in these practices (other than, in the
case of clause (c), short selling for the purpose of hedging
currency exposure or managing duration) and a reasonable investor
would understand, based on the fund's offering documents, that the
fund will not engage in these practices.
---------------------------------------------------------------------------

    Part B of Section 7.B.(1), as amended, requires advisers to report
information concerning five types of service providers that generally
perform important roles as ``gatekeepers'' for private funds--auditors,
prime brokers, custodians, administrators, and marketers.\256\ An
adviser must identify each of these service providers, report their
locations, and indicate which of them, if any, are related persons of
the adviser.\257\ In addition, for certain types of service providers,
an adviser would report information intended to help us and investors
understand the nature of the services provided. For instance, with
respect to each prime broker, an adviser must indicate whether the
prime broker has custody of fund assets.\258\
---------------------------------------------------------------------------

    \256\ See amended Form ADV, Part 1A, Section 7.B.(1)B. of
Schedule D.
    \257\ Id. questions 23-28.
    \258\ Id. question 24(e). See also id. questions 23(a), 23(g),
23(h), 26(e), 26(f), 28(f), and 28(g).
---------------------------------------------------------------------------

    We are adopting Part B with minor changes from the Implementing
Proposing Release that are designed to clarify instructions. Where we
ask for the percentage of the fund's assets valued by a third party, we
have revised the question and instructions to clarify that a person
should be viewed as valuing an asset for this purpose only if that
person carried out the valuation procedure for that asset (if any) and
that person's determination as to value was used for purposes of
subscriptions, redemptions, distributions and fee calculations.\259\ We
have decided not to require advisers to report the name and location of
the third parties performing these valuations because we recognize, as
commenters pointed out, that identifying the specific person carrying
out the valuation could be difficult where two or more third parties
are involved (such as where an unaffiliated administrator obtains a
quote from an electronic pricing service).\260\ In addition, we are
modifying question 23, which requires information about the relevant
private fund's auditing firm, so that advisers must indicate whether
the fund's auditor issued an unqualified opinion on the fund's
financial statements.\261\ By requiring this information in question
23, we are able to relieve advisers from the burden of reporting
similar information with respect to private funds in Section 9.C. of
Schedule D.\262\ Few commenters specifically addressed the proposed
reporting requirements in Part B.\263\
---------------------------------------------------------------------------

    \259\ Id. question 27. We are making this change in response to
commenter requests for clarification regarding ``what constitutes
assets `valued' by a third-party administrator.'' IAA General
Letter; see also ABA Committees Letter.
    \260\ See IAA General Letter and ABA Committees Letter, each
discussing the difficulty of identifying who is ``valuing'' an
asset. See the Implementing Proposing Release for the as proposed
version of Form ADV, Part 1A, Section 7.B.(1)B. of Schedule D,
question 28(f)(2) and (3).
    \261\ See amended Form ADV, Part 1A, Section 7.B.(1)B. of
Schedule D, question 23(h).
    \262\ See amended Form ADV, Part 1A, Item 9.C., which provides
that ``[i]f you checked Item 9.C.(2), you do not have to list
auditor information in Section 9.C. of Schedule D if you already
provided this information with respect to the private funds you
advise in Section 7.B.(1) of Schedule D.'' An adviser must still
complete Section 9.C. of Schedule D with respect to clients other
than private funds to the extent required by the instructions to
Item 9.C.
    \263\ See, e.g., Debevoise General Letter (contending that the
service provider information ``goes beyond what is necessary''
because it requests ``both the legal name of the custodian as well
as the custodian's primary business name'' (original emphasis));
Shearman Letter (arguing that a ``fund's investors will generally
already receive [information identifying the fund's service
providers] and it generally has little public interest''). With
respect to the comment in the Debevoise General Letter, we are not
persuaded that providing both a legal name and business name will
significantly increase the reporting burden, and the information
will assist both the Commission and the public in quickly and
accurately identifying the relevant custodian. With respect to the
comment in the Shearman Letter, see the discussion accompanying note
272 below regarding the value of public disclosure of Section
7.B.(1) information generally.
---------------------------------------------------------------------------

    Many commenters who addressed the private fund reporting
requirements did not comment on specific items but provided comments
more generally on the proposals. Several expressed strong support for
the proposal as a whole,\264\

and some agreed with our assessment that the new information will allow
us to identify harmful practices, to improve risk assessment, and to
more efficiently target examinations.\265\ A few recommended that we
expand the requirements to include reporting of performance
information.\266\ Many commenters offered more measured support,
generally agreeing with the Commission's proposal but expressing
reservations about the public availability of the information or
concerns about the difficulty of responding to specific reporting
items.\267\ Often citing these same concerns, some commenters disagreed
more generally with the Commission's proposal.\268\
---------------------------------------------------------------------------

    \264\ See, e.g., AFL-CIO Letter; AFR Letter; Better Markets
Letter; CII Letter; CPIC Letter; comment letter of U.S. Senator Carl
Levin (``Sen. Levin Letter'').
    \265\ See, e.g., CII Letter; CPIC Letter; NASAA Letter; Sen.
Levin Letter (also asserting that the data would assist FSOC in
monitoring systemic risk).
    \266\ See AFL-CIO Letter and AFR Letter, each favoring public
disclosure of 1-, 5- and 10-year performance numbers. We note that
performance data may be important to our investor protection mission
and to FSOC's systemic risk monitoring activities, and we will
consider these comments in connection with our consideration of
other comments on proposed Form PF. See Systemic Risk Reporting
Release, supra note 71.
    \267\ See, e.g., IAA General Letter (supporting the ``increased
oversight of private funds and increased information gathering'' but
arguing that ``the Commission should limit the public availability
of private fund information provided on Part 1 of Form ADV.''); MFA
Letter (``MFA strongly supports private fund managers reporting to
the Commission information about their businesses or the funds they
manage. We believe, however, that the Commission should carefully
consider whether the additional step of publicly disclosing
information it collects would enhance its oversight capabilities,
and whether any such benefits would outweigh the potentially
significant costs to managers in sharing sensitive business
information with market participants.''); Dechert General Letter
(stating that they ``generally agree with the information the
Revised Form ADV would be soliciting with respect to private funds
managed by registered or exempt reporting advisers'' but expressing
reservations regarding the requirement to report private fund assets
and liabilities by class and categorization in the fair value
hierarchy established under GAAP). See also DLA Piper VC Letter;
Merkl Implementing Letter; NVCA Letter.
    \268\ See, e.g., AIMA Letter; AV Letter; CompliGlobe Letter;
Debevoise General Letter; Katten Foreign Advisers Letter; NRS
Letter; NYSBA Committee Letter; Seward Letter; Shearman Letter; AV
Letter.
---------------------------------------------------------------------------

    Critics of the proposal most frequently focused on public
disclosure of the information required by Section 7.B., arguing that
all or part of the required private fund information is competitively
sensitive or proprietary.\269\ As discussed above, we have made several
changes to Part A of Section 7.B.(1) to address some of these concerns.
However, we continue to believe that, as a general matter, the
information we collect in response to Item 7.B. is important for
several reasons, including to inform prospective clients and other
investors.\270\ Moreover, and as we discussed in the Implementing
Proposing Release, the public availability of this information will
serve as a check on fund managers, helping to deter fraud and other
misconduct.\271\ We are not persuaded that public disclosure is
unnecessary simply because, as some commenters asserted, investors in
these pooled investment vehicles meet certain sophistication standards
or may otherwise receive similar information from advisers.\272\ To the
contrary, it is precisely the ability of these investors to compare
Form ADV information to the information they have received in offering
documents and due diligence that makes public disclosure valuable. We
also believe that public disclosure could reduce the likelihood of
advisers making false representations regarding fund service providers,
such as administrators and auditors, who could uncover false
representations by reviewing the information that advisers report to us
and comparing it to their own client lists.\273\ In addition, as
discussed above, the Advisers Act requires that information filed in a
report with the Commission be made available to the public unless the
Commission finds that public disclosure is neither necessary nor
appropriate in the public interest or for the protection of
investors.\274\ We are not convinced that withholding the private fund
information reported on Form ADV is in the public interest. Therefore,
as proposed, it will be available to the public.
---------------------------------------------------------------------------

    \269\ See, e.g., ABA Committees Letter; AIMA Letter; AV Letter;
CompliGlobe Letter; Debevoise Letter; DLA Piper VC Letter; Gunderson
Letter; IAA General Letter; Katten Foreign Advisers Letter; MFA
Letter; NRS Letter; NVCA Letter; NYSBA Committee Letter; O'Melveny
Letter; Seward Letter; Shearman Letter.
    \270\ Several commenters agreed. See, e.g., AFL-CIO Letter
(``This information will assist investors as they perform due
diligence before making investment decisions * * *''); AFR Letter
(``making clear and uniform information on private investment funds
available to the public will make it easier for investors to perform
due diligence * * *''); CII Letter; CPIC Letter (``The additional
information that the revised Form will collect * * * should also be
of use to investors as they conduct due diligence and research the
background of fund managers.'').
    \271\ See Implementing Proposing Release, supra note 7, at
nn.150 and 175 and accompanying text. See also CII Letter (agreeing
that ``the public availability of such basic information would aid
investors in their due diligence efforts and help investors and
other industry participants protect against fraud'').
    \272\ See, e.g., ABA Committees Letter; AV Letter; NRS Letter;
NYSBA Committee Letter; Shearman Letter.
    \273\ See, e.g., 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).
    \274\ Advisers Act section 210(a). See supra section II.B.3. for
discussion of public availability of exempt reporting adviser
filings.
---------------------------------------------------------------------------

    Commenters expressing disagreement with all or parts of our
proposal also pointed to what they viewed as an excessive reporting
burden, particularly where valuation or ownership information would be
required.\275\ As discussed above, we are adopting Part A of Section
7.B.(1) with several changes that reduce the amount of information
required in respect of private funds. We are not convinced that the
burden associated with Item 7.B. and Schedule D will be excessive, in
part because commenters confirmed that much of the required information
is readily available to private fund advisers.\276\ These commenters
also acknowledged that the required information is similar to, and at
times less extensive than, the information that investors in hedge
funds and other private funds commonly receive in response to due
diligence questionnaires or in offering documents.\277\ Moreover,
responses to many of the items are unlikely to change from year to
year.
---------------------------------------------------------------------------

    \275\ See, e.g., AIMA Letter; AV Letter; BCLBE Letter; Debevoise
General Letter; comment letter of Dechert LLP (on behalf of foreign
asset manager) (Jan. 24, 2011) (``Dechert Foreign Adviser Letter'');
Gunderson Letter; Katten Foreign Advisers Letter; NRS Letter; Seward
Letter; Shearman Letter; Village Ventures Letter.
    \276\ See, e.g., ABA Committees Letter (``We expect that most
ERAs will already have most of the information requested by Form ADV
Part 1 readily available.''); Katten Foreign Advisers Letter
(``Virtually all of the requested information would already have
been provided to investors in the fund through an offering document
or follow up status reports.''); NRS Letter (arguing that the
expanded private fund disclosures on Schedule D would ``replicate
the due diligence questionnaire information. * * *'').
    \277\ See, e.g., ABA Committees Letter; NRS Letter. See also
AIMA's Illustrative Questionnaire For Due Diligence of Hedge Fund
Managers, available at (registration required) http://www.aima.org/en/knowledge_centre/index.cfm.
---------------------------------------------------------------------------

    Finally, a few commenters expressed concern that an adviser's
required public disclosure on Section 7.B.(1) of Schedule D could call
into question a private fund's reliance on the non-public offering
exemption in the Securities Act.\278\ We believe public disclosure of
the information required by Section 7.B.(1) of Schedule D

through IAPD would not, in and of itself, jeopardize the fund's
reliance on that exemption (or the safe harbor for offshore offerings
provided by Regulation S under the Securities Act).\279\
---------------------------------------------------------------------------

    \278\ See IAA General Letter; MFA Letter. The non-public
offering exemption is found in Section 4(2) of the Securities Act.
Offers and sale of securities by an issuer that satisfy the
conditions of Rule 506 of Regulation D (17 CFR 230.501 et seq.) are
deemed to be non-public within the meaning of Section 4(2).
    \279\ We have previously taken a similar position with respect
to mandatory reporting in Part 2 of Form ADV. See Part 2 Release,
supra note 67, at n. 276 and accompanying text. Regulation S is
codified at 17 CFR 230.901 et seq.
---------------------------------------------------------------------------

2. Advisory Business Information: Employees, Clients and Advisory
Activities: Item 5
    Item 5 of Part 1A requires a registered adviser to provide basic
information regarding the business of the adviser that allows us to
identify the scope of the adviser's business, the types of services it
provides, and the types of clients to whom it provides those services.
The item also requires information from the adviser about the number of
its employees, the amount of assets it manages, and the number and
types of its clients.
    We are adopting the amendments that we proposed to Item 5.B., which
require an adviser to indicate how many of its employees are registered
as investment adviser representatives or are licensed insurance
agents.\280\ An adviser must also provide a single numerical
approximation (instead of a range) in response to these questions as
well as to the existing questions that ask about employees that perform
investment advisory functions or are registered representatives of a
broker-dealer, and firms that solicit advisory clients.\281\ Commenters
did not object to these new questions and revisions.
---------------------------------------------------------------------------

    \280\ Amended Form ADV, Part 1A, Items 5.B.(1)-(5).
    \281\ Amended Form ADV, Part 1A, Item 5.B.(6).
---------------------------------------------------------------------------

    We are adopting amendments to Items 5.C. and 5.D., which require
advisers to report the number and types of clients the adviser
services. Specifically, the amendments require each registered adviser
to: (i) provide an approximate number of clients it has if over 100;
\282\ (ii) report the approximate percentage of its clients that are
not United States persons; \283\ (iii) specify the types of clients
that it advises (adding categories for business development companies,
other investment advisers, and insurance companies) and the percentage
that each client type comprises of its total number of clients (adding
a box to check if 100% of an adviser's clients are a particular type);
\284\ and (iv) report in a new item the approximate percentage (in
broad ranges) of assets under management attributable to each client
type.\285\ These form amendments are designed to help us better
understand an adviser's business.
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    \282\ Amended Form ADV, Part 1A, Item 5.C.(1).
    \283\ Amended Form ADV, Part 1A, Item 5.C.(2). See supra note
225 (discussing the definition of ``United States person'').
    \284\ Amended Form ADV Part 1A, Item 5.D.(1).
    \285\ Amended Form ADV Part 1A, Item 5.D.(2).
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    Commenters did not address our proposed amendments to Item 5.C.,
which we are adopting as proposed. We are making one change to Item
5.D., as suggested by one commenter, so that advisers report
approximate percentages of assets under management by client type in
broad ranges (i.e., 25 percent segments).\286\ This change will
decrease the burden on advisers gathering the data necessary to respond
to this item while retaining the substance of the information we need
for our risk-assessment program. We are also, at the suggestion of a
commenter, adding a note to Items 5.D.(1) and (2) to clarify that an
adviser should check all applicable boxes.\287\
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    \286\ Advisers should not, however, include as clients the
investors in a private fund they advise unless they have a separate
advisory relationship with those investors. Amended Form ADV, Part
1A, Items 5.C., 5.D. and 5.H.
    \287\ See IAA General Letter. For example, an adviser to a state
pension plan should check boxes for both ``pension and profit
sharing plans'' and ``state or municipal government entities.'' We
also note that we are not adopting our proposal to divide the
category for pension and profit sharing plans into those subject to
ERISA and those that are not. See id. (noting that there could be
substantial confusion about what it means to be ``subject to'' ERISA
because some plans are subject to some, but not all, of ERISA's
provisions).
---------------------------------------------------------------------------

    We are adopting, as proposed, amendments to Item 5.G. that require
an adviser to select from a list set forth in the form the types of
advisory services that it provides, and that add two additional types
of services: (i) portfolio management for pooled investment vehicles,
other than registered investment companies; and (ii) educational
seminars or workshops.\288\ At the request of a commenter, we are
clarifying that educational seminars and workshops would not include
episodic meetings at which advisers educate existing clients about
issues related to the ongoing management of their accounts.\289\ In
addition, the revised item requires that if an adviser selects from
that list ``portfolio management for an investment company,'' the
adviser must provide the SEC file number for the registered investment
company, as well as business development companies that have made an
election pursuant to section 54 of the Investment Company Act of 1940,
in Section 5.G.(3) of Schedule D. This information will connect
information reported on Form ADV to information reported on forms filed
through our EDGAR system by investment companies managed by these
advisers. We have made a few technical changes to avoid potential
overlap of some of the listed types of advisory services.\290\
---------------------------------------------------------------------------

    \288\ Amended Form ADV, Part 1A, Item 5.G.
    \289\ See IAA General Letter (requesting clarification that such
episodic meetings would not be reportable educational seminars or
workshops). We also confirm this commenter's understanding that
educational seminars and workshops would not include events
sponsored by third parties that are merely attended by an adviser's
supervised persons.
    \290\ See amended Form ADV, Part 1A, Items 5.G.(4) and 5.G.(5).
---------------------------------------------------------------------------

    We are adopting new Item 5.J. to require advisers to indicate
whether they report, in response to Item 4.B. of Part 2A of Form ADV,
that they provide investment advice only with respect to limited types
of investments. We had proposed to require advisers to indicate the
types of investments they provided advice about during the previous
fiscal year. Commenters expressed skepticism about whether such an item
would provide us with much useful information because many advisers
would simply indicate all the items.\291\ We agree, and have revised
the item to provide us with information that will identify advisers
that disclose to their clients that they provide specialized advice,
which is the type of information we had intended to collect.
---------------------------------------------------------------------------

    \291\ IAA General Letter.
---------------------------------------------------------------------------

3. Other Business Activities and Financial Industry Affiliations: Items
6 and 7
    Items 6 and 7 of Part 1A require advisers, including exempt
reporting advisers, to report those financial services the adviser or a
related person is actively engaged in providing, from lists of
financial services set forth in the items. We are adopting amendments
to these items largely as proposed to provide us with a more complete
picture of the activities of an adviser and its related persons, which
would better enable us to assess the conflicts of interest and risks
that may be created by those relationships and to identify affiliated
financial service businesses.
    First, we are expanding the lists of types of financial service
businesses in both Items 6.A. and 7.A. As a result, an adviser must
also report whether it or a related person is a trust company,
registered municipal advisor, registered security-based swap dealer, or
major security-based swap participant, the latter three of which are or
will be new SEC-registrants under the Dodd-Frank Act's amendments to
the Exchange

Act.\292\ Second, to parallel Item 7.A. for related persons, an adviser
must also report if it is an accountant (or accounting firm) or lawyer
(or law firm). Last, amendments to Item 7.A. require an adviser to
report if a related person is a sponsor, general partner or managing
member of a pooled investment vehicle,\293\ and add an instruction to
clarify that advisers' responses must include related persons that are
foreign affiliates, regardless of whether they are registered or
required to be registered in the United States. One commenter expressed
support for the additions we proposed to make to the lists in Items
6.A. and 7.A., which we are adopting as proposed.\294\ In response to
commenters, we are clarifying that for responses to Item 7.A. relating
to natural persons (e.g., accountant, lawyer), the adviser should
respond affirmatively only for such persons that have a separate
business in that field rather than for those persons that the adviser
may employ as accountants or lawyers.\295\
---------------------------------------------------------------------------

    \292\ Amended Form ADV, Part 1A, Items 6.A. and 7.A. Section 975
of the Dodd-Frank Act amends the Exchange Act to require ``municipal
advisors'' to register with the Commission; Section 761 of that Act
amends the Exchange Act to define the terms ``security-based swap
dealer'' and ``major security-based swap participant''; and section
764 amends the Exchange Act to require these entities to register
with the Commission.
    \293\ This serves to retain information about related persons
that would otherwise not be required as a result of amendments we
are adopting to Item 7.B. Amended Item 7.B. and section 7.B.(1) of
Schedule D require advisers to report private fund information only
about funds they advise, not funds advised by a related person. See
supra section II.C.1. We have also deleted ``investment company''
from the list in Item 7 as duplicative of information we obtain in
another category of Item 7.A., as well as Item 5. See, e.g., amended
Form ADV, Part 1A, Items 5.D., 5.G., Section 5.G.(3) of Schedule D,
and Item 7.A.(2).
    \294\ NRS Letter.
    \295\ NEA Letter; IAA General Letter. Many of the questions in
Item 5.B. elicit information about an adviser's employees acting in
the scope of employment. We note that because Item 6 asks questions
about the advisory firm, responses should not relate to natural
persons, unless the adviser is operating as a sole proprietor.
---------------------------------------------------------------------------

    We also are amending Schedule D, which contains expanded reporting
requirements that correspond to Items 6 and 7. Section 6.A. of Schedule
D requires an adviser that checks the box in Item 6.A. to indicate that
it is engaged in another financial service business under a different
name, to list that other business name, and to identify the other lines
of business in which the adviser engages using that name.\296\ Sections
6.B.(2) and 6.B.(3) of Schedule D similarly require advisers that are
primarily engaged in another business or that sell products or provide
services other than investment advice to advisory clients to describe
that business and provide the name under which it conducts that
business, if different. One commenter, an association comprised of
state regulators, expressed particular support for the Schedule D
reporting requirement we are adopting with respect to 6.B.(3).\297\
---------------------------------------------------------------------------

    \296\ For example, an adviser registered with us under the name
``Adam Bob Charlie Advisers LLC'' that is also actively engaged in
business as an insurance agent under the name ``ABC Insurance LLC''
would put the name ``ABC Insurance LLC'' in Section 6.A. of Schedule
D and would check the box for ``Insurance broker or agent.''
    \297\ NASAA Letter. We note, ``6.B.(3)'' was inadvertently
renumbered in Part 1A of Form ADV as ``6.C.'' in our proposal.
---------------------------------------------------------------------------

    Section 7.A. of Schedule D, requires advisers to provide certain
identifying information for any type of related person listed in Item
7.A. as well as to provide more details about the relationship between
the adviser and the related person, including whether the related
person is registered with a foreign financial regulatory authority,
whether they share employees or the same physical location, and, if the
adviser is reporting a related person investment adviser, whether the
related person is exempt from registration.\298\ Responses to these
questions will allow us to link disparate pieces of information to
which we have access concerning an adviser and its affiliates as well
as to identify whether the adviser controls the affiliate or vice
versa. It will also provide us with a tool to identify where there may
be advisory activities by unregistered affiliates.
---------------------------------------------------------------------------

    \298\ The questions we are adopting in Section 7.A. of Schedule
D contain a few minor modifications from the proposal to renumber
the questions and to clarify wording (e.g., questions 11 and 12).
---------------------------------------------------------------------------

    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.\299\ 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. 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.\300\ In particular, an adviser need not complete
Section 7.A. of Schedule D for any related person if: (1) The adviser
has no business dealings with the related person in connection with
advisory services it provides to its clients; (2) the adviser does not
conduct shared operations with the related person; (3) the adviser does
not refer clients or business to the related person, and the related
person does not refer prospective clients or business to the adviser;
(4) the adviser does not share supervised persons or premises with the
related person; and (5) the adviser has no reason to believe that its
relationship with the related person otherwise creates a conflict of
interest with its clients.\301\ These criteria are designed so that
advisers need not report about affiliates who are likely to present
little, if any, potential for conflicts of interest. Under these
criteria, an adviser may omit, for example, an offshore adviser that
has no business dealings with the adviser, a bank that merely provides
payroll services to the adviser, an accounting firm that prepares the
adviser's annual tax return filings, or a real estate broker that
represents the adviser in securing office space. However, an adviser
may not omit an affiliated adviser with whom the adviser shares
information technology infrastructure, for example, as the advisers
would be considered to share operations.
---------------------------------------------------------------------------

    \299\ See, e.g., Shearman Letter.
    \300\ See IAA General Letter (suggesting we adopt a standard for
omitting a related person based on factors established several years
ago by our staff in Frequently Asked Questions on Form ADV and
IARD).
    \301\ Amended Form ADV, Part 1A, Item 7.A.
---------------------------------------------------------------------------

    Finally, we have moved to this item a question that had been in
Item 9 that requires advisers to report whether a related person
foreign financial institution acts as a qualified custodian for client
assets under the adviser custody rule, to centralize reporting of
related qualified custodians in a single item.\302\
---------------------------------------------------------------------------

    \302\ Amended Form ADV, Part 1A, Section 7.A. of Schedule D,
question 8. At the suggestion of commenters, we have also modified
this question to include the remainder of the questions in what had
been Section 9.D. of the previous version of Form ADV Part 1A, which
we inadvertently failed to include when we relocated this question
in Proposed Form ADV Part 1A. Consequently, we have also eliminated
Section 9.D. See IAA General Letter; Schnase Letter.
---------------------------------------------------------------------------

4. Participation in Client Transactions: Item 8
    Item 8 requires a registered adviser to report information about
its transactions, if any, with clients, including whether the adviser
or a related person (including a foreign related person) engages in
transactions with clients as a principal, otherwise sells securities to
clients, or has discretionary authority over client assets. We are
adopting three amendments to this item. First, an adviser that
indicates it has discretionary authority to determine the brokers or
dealers for client transactions or that it recommends brokers or
dealers

to clients \303\ must additionally report whether any of such brokers
or dealers are related persons of the adviser.\304\ Second, an adviser
that indicates that it receives ``soft dollar benefits'' must also
report whether all those benefits qualify for the safe harbor under
section 28(e) of the Exchange Act for eligible research or brokerage
services.\305\ Third, an adviser must report whether it or its related
person receives direct or indirect compensation for client
referrals.\306\ These amendments, which we are adopting as proposed,
are designed to enhance our ability to identify additional conflicts of
interest that advisers may face that we have identified through our
experience administering the Advisers Act.
---------------------------------------------------------------------------

    \303\ Amended Form ADV, Part 1A, Items 8.C.3. and 8.E.
    \304\ Amended Form ADV, Part 1A, Items 8.D. and 8.F.
    \305\ Amended Form ADV, Part 1A, Item 8.G.(2). See also
Commission Guidance Regarding Client Commission Practices Under
Section 28(e) of the Securities Exchange Act of 1934, Exchange Act
Release No. 54165 (July 18, 2006) [71 FR 41978 (July 24, 2006)]
(``28(e) Release'').
    \306\ Amended Form ADV, Part 1A, Items 8.H. and 8.I.
---------------------------------------------------------------------------

    Comments on these amendments were limited to the question about
soft dollars, which commenters supported, but these commenters urged us
to permit advisers to answer based on an adviser's reasonable belief
that the benefits received are eligible research and brokerage services
under the safe harbor provided by section 28(e) of the Exchange
Act.\307\ We are not making this change as the safe harbor itself does
not include a ``reasonable belief'' standard and the Form ADV item is
intended to track the language of the statute. We also remind advisers
that we have issued interpretive guidance on section 28(e) of the
Exchange Act and direct advisers to it if relying on this safe
harbor.\308\
---------------------------------------------------------------------------

    \307\ See ICI Letter; IAA General Letter.
    \308\ See 28(e) Release, supra note 305, at Sections II.B. and
III.
---------------------------------------------------------------------------

5. Custody: Item 9
    We are amending Item 9 to require each registered adviser to
indicate the total number of persons that act as qualified custodians
for the adviser's clients in connection with advisory services the
adviser provides to its clients.\309\ In 2009, we amended certain items
of Form ADV in connection with amendments we made to Advisers Act rule
206(4)-2 (the ``2009 Custody Amendments''). At that time, we modified
Item 9 to elicit information about the adviser or its related person(s)
acting as qualified custodian.\310\ We did not, however, request
information about other qualified custodians. This additional data will
provide us with a more complete picture of an adviser's custodial
practices.\311\ Commenters suggested that advisers be permitted to
provide an approximate number of qualified custodians in response to
this item.\312\ We have not made such a change. An adviser with custody
of client funds or securities must maintain those assets with a
qualified custodian,\313\ and must therefore know the identity (and
therefore number) of qualified custodians that maintain its clients'
assets.
---------------------------------------------------------------------------

    \309\ Amended Form ADV, Part 1A, Item 9.F. We have also made a
minor modification from the proposal to make clear that an adviser
need only respond if it has custody of client funds or securities,
including if it has custody because a related person has custody in
connection with advisory services the adviser provides to its
clients.
    \310\ See Custody of Funds or Securities of Clients by
Investment Advisers, Investment Advisers Act Release No. 2968 (Dec.
30, 2009) [75 FR 1456 (Jan. 11, 2010)] (``2009 Custody Release'').
    \311\ Consistent with the updating requirements for Items
9.A.(2), 9.B.(2), and 9.E., advisers are required to update new Item
9.F. only annually. See amended Form ADV: General Instruction 4.
    \312\ IAA General Letter; NRS Letter. But see NRS Letter
(indicating that many advisers have only one or two qualified
custodians).
    \313\ Rule 206(4)-2(a)(1) (defining ``qualified custodian'').
---------------------------------------------------------------------------

    We are also adopting several clarifications urged by commenters,
and to make certain technical changes.\314\ The first of these changes
clarifies that Item 9 asks whether the adviser or a related person has
custody of funds and securities of clients that are not registered
investment companies. The questions in Item 9 relate to various
provisions of rule 206(4)-2 (the custody rule), and advisers are not
required to comply with rule 206(4)-2 with respect to the account of an
investment company registered under the Investment Company Act.\315\
Second, we are amending the notes within Item 9.A. to correct a
drafting error.\316\ The amended note within Item 9.A. requires an
adviser to exclude from 9.A. and to report in 9.B. only client assets
for which custody is attributed to the adviser as a result of related
person custody.\317\ Third, we are also clarifying in Items 9.B. and
9.C. that advisers' responses must include funds and securities of
which a related person has custody in connection with advisory services
the adviser provides to clients.\318\ This clarification aligns the
reporting requirements of these items with the amended definition of
custody adopted in the 2009 Custody Amendments.\319\ Finally, amended
question (6) within Section 9.C. of Schedule D enables an adviser to
check a box to indicate that it has not yet received a report prepared
by an independent accountant that audited a pooled investment vehicle
or that examined internal controls.\320\ Under the previous version of
this question, an adviser who had not yet received the independent
public accountant's report by the time the adviser submitted its Form
ADV filing could not accurately respond. The updating requirements of
Item 9.C. and Section 9.C. of Schedule D, however, require advisers to
promptly file an amendment to update their response when the
accountant's report is available.\321\
---------------------------------------------------------------------------

    \314\ Investment advisers registered with us were required to
begin completing revised Item 9 in connection with amendments we
made to rule 206(4)-2 (the custody rule) as of their first annual
updating amendment after January 1, 2011. See 2009 Custody Release,
supra note 310 at n.161 and accompanying text. 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).
    \315\ Rule 206(4)-2(b)(5). These advisers must instead comply
with custody requirements under the Investment Company Act.
    \316\ See IAA General Letter; Pickard Letter; Schnase Letter
(each urging us to correct this drafting error).
    \317\ When we adopted the 2009 Custody Amendments we explained
that Items 9.A. and 9.B. require a registered adviser to report to
us whether the adviser or a related person has custody of client
funds or securities, and if so, both the total U.S. dollar amount of
those assets as well as the number of clients for whose accounts the
adviser or its related person has custody. See 2009 Custody Release,
supra note 310 at n.145 and accompanying text. Item 9.A., which was
intended to limit reporting of assets the adviser has custody of
other than through a related person, inadvertently required the
adviser to include assets attributable to it in certain
circumstances where a related person had custody of the assets.
    We also are making a technical revision to the note within Item
9.A. to remind advisers that their responses should not include
assets of which they have custody solely because they deduct
advisory fees from client accounts.
    \318\ See IAA General Letter.
    \319\ We amended the definition of ``custody'' to include
circumstances under which a related person ``holds, directly or
indirectly, client funds or securities, or has any authority to
obtain possession of them, in connection with advisory services [an
adviser] provide[s] to clients.'' See rule 206(4)-2(d)(2).
    \320\ Question 6 does not require a response about reports
related to an independent verification (or ``surprise examination'')
of client assets because the independent public accountant that
conducts the surprise examination separately files a certificate on
Form ADV-E. See rule 206(4)-2(a)(4).
    \321\ See amended Form ADV: General Instruction 4.

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6. Reporting $1 Billion in Assets: Item 1.O.
    We are adopting, as proposed, Item 1.O. and related instructions to
require each adviser to indicate whether it had $1 billion or more in
total assets shown on the adviser's balance sheet as of the last day of
the most recent fiscal year,\322\ which we will use to identify those
advisers that could be subject to rules regarding certain excessive
incentive-based compensation arrangements required by section 956 of
the Dodd-Frank Act.\323\ Two commenters supported the proposal,\324\
while another suggested that we allow an adviser to exclude certain
assets from the calculation so that certain advisers would not be
covered by any future rule regarding section 956.\325\ Although we
retain certain flexibility to adopt a different standard for purposes
of the incentive-based compensation rule,\326\ we believe, as noted
above, that this new item will assist us in identifying the advisers
that may be subject to such future rule.\327\
---------------------------------------------------------------------------

    \322\ See amended Form ADV, Part 1A, Item 1.O. (adviser must
mark ``yes'' or ``no'' to indicate whether it has $1 billion or more
in assets). For purposes of this reporting requirement only, the
amount of assets will be determined in the same manner as the amount
of ``total assets'' is determined on the adviser's balance sheet for
its most recent fiscal year end, using the same accounting method
used to prepare the balance sheet. See amended Form ADV:
Instructions for Part 1A, instr. 1.b. We are not requiring advisers
to use GAAP or another accounting method.
    \323\ The Commission and other Federal regulators proposed a
joint rule that addresses certain excessive incentive-based
compensation arrangements, including those of investment advisers
with $1 billion or more in assets, pursuant to section 956 of the
Dodd-Frank Act. See Incentive-Based Compensation Arrangements,
Release No. 34-64140 (Mar. 29, 2011) [76 FR 21170 (Apr. 14, 2011)]
(``Incentive Compensation Proposing Release''). We construe section
956 as specifying, and thus define ``assets'' to mean, the total
assets of the advisory firm rather than the total ``assets under
management,'' i.e., assets managed on behalf of clients. See
Implementing Proposing Release, supra note 7, at n.196; Incentive
Compensation Proposing Release, at section III.
    \324\ See IAA Letter; ICI Letter. One commenter argued that Form
ADV is not the correct reporting mechanism for this information, but
did not recommend an alternative way to identify these advisers. NRS
Letter.
    \325\ MFA Letter.
    \326\ In the Incentive Compensation Proposing Release, we
invited comments on whether the determination of total balance sheet
assets should be further tailored for certain types of advisers. See
Incentive Compensation Proposing Release, supra note 323, at section
III.
    \327\ We also note that almost all of the other covered
financial institutions under section 956 already report the amount
of their total assets to their Federal regulator. See Incentive
Compensation Proposing Release, supra note 323, at section III.
(proposing to calculate ``total consolidated assets'' based on
reports filed with each Federal regulator).
---------------------------------------------------------------------------

7. Other Amendments to Form ADV
    The amendments we are adopting today also include a number of
additional changes unrelated to the Dodd-Frank Act that are intended to
improve our ability to assess compliance risks. To improve certain
identifying information we obtain from other items of Part 1A of Form
ADV, we are amending Item 1.J. to require an adviser to provide contact
information for its chief compliance officer to give us direct access
to the person designated to be in charge of its compliance
program.\328\ An adviser also has the option, in Item 1.K., to provide
an additional regulatory contact for Form ADV.\329\ Neither Items 1.K.
nor 1.J. will be viewable by the public on our Web site.\330\ One
commenter expressed its support for this change to the form.\331\ We
are also amending Item 1 to require an adviser to indicate whether it
or any of its control persons is a public reporting company under the
Exchange Act.\332\ An affirmative response to this item will provide a
signal, not only to us, but to investors and to prospective investors,
that additional public information is available about the adviser and/
or its control persons. New Item 1.P. requires an adviser to provide a
``legal entity identifier'' if it has one.\333\ In addition, we are
adding ``Limited Partnership'' as another choice advisers may select to
indicate how their organization is legally formed.\334\ Other than the
addition of Item 1.P., we are adopting amended Item 1 as proposed.
---------------------------------------------------------------------------

    \328\ Amended Form ADV, Part 1A, Item 1.J. An adviser is also
required to provide the name of its chief compliance officer on
Schedule A of Form ADV. See also 17 CFR 275.206(4)-7; Compliance
Programs of Investment Companies and Investment Advisers, Investment
Advisers Act Release No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24,
2003)] (adopting rule 206(4)-7 requiring registered investment
advisers to designate a chief compliance officer). An exempt
reporting adviser that does not have a chief compliance officer must
instead provide a designated person's contact information in Item
1.K. Likewise, an exempt reporting adviser need not provide the name
of a chief compliance officer on Schedule A of Form ADV.
    \329\ Amended Form ADV, Part 1A, Item 1.K.
    \330\ We note that clients will be provided with a supervisory
contact in brochure supplements. See Part 2 Release, supra note 67.
    \331\ See NRS Letter.
    \332\ Amended Form ADV, Part 1A, Items 1.N. and 10.B., and
Section 10.B. of Schedule D.
    \333\ Amended Form ADV, Part 1A, Item 1.P. See also Amended Form
ADV: Glossary (defining ``Legal Entity Identifier''). A legal entity
identifier is a unique number that companies use to identify each
other in the financial marketplace. It is a number assigned by or on
behalf of an internationally recognized standards setting body and
it is required for reporting purposes by the U.S. Department of the
Treasury's Office of Financial Research or a financial regulator.
The legal entity identifier standard is still in development, and an
adviser may not have one. An adviser is required to respond to Item
1.P. only if it has a legal entity identifier.
    \334\ Amended Form ADV, Part 1A, Item 3.A.
---------------------------------------------------------------------------

    We are also adopting three technical changes with respect to the
reporting of disciplinary events. First, with commenters' support, we
are adding a box to Item 11, as proposed, for advisers to check if any
disciplinary information reported in that item and the corresponding
disclosure reporting pages is being reported about the adviser or any
of its supervised persons.\335\ Second, we are adding a third reason to
each disclosure reporting page (``DRP'') that permits an adviser to
remove the DRP from its filing by adding a box an adviser could check
if it was filed in error. One commenter supported this aspect of the
proposal.\336\ Third, we are amending Item 3.D. of Part 2B, the
brochure supplement, to correct a drafting error regarding when a
brochure supplement would need to include disclosure regarding the
revocation or suspension of a professional attainment, designation, or
license. Advisers are required to include in brochure supplements
disclosure regarding hearings or formal adjudications relating to the
revocation or suspension of a professional attainment, designation, or
license of the supervised person by the designating authority.\337\
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    \335\ Amended Form ADV, Part 1A, Item 11. See IAA General
Letter; Pickard Letter.
    \336\ See NRS Letter.
    \337\ As originally adopted, this item stated ``Any other
proceeding in which a professional attainment, designation, or
license of the supervised person was revoked or suspended because of
a violation of rules relating to professional conduct. If the
supervised person resigned (or otherwise relinquished his
attainment, designation, or license) in anticipation of such a
proceeding (and the adviser knows, or should have known, of such
resignation or relinquishment), disclose the event.'' (emphasis
added).
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    Finally, we had requested comment in the Implementing Proposing
Release on whether we should accelerate the deadline for filing an
annual updating amendment to an adviser's Form ADV filing from 90 to 60
days after the adviser's fiscal year end.\338\ All of the commenters
who responded to the question opposed it.\339\ We are not adopting a
requirement to accelerate the

annual updating amendment deadline at this time.
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    \338\ See Implementing Proposing Release, supra note 7, at
nn.207 and 208 and accompanying text.
    \339\ Pickard Letter (citing additional burdens it would place
on advisory firm personnel and resources); IAA General Letter
(stating that many advisers need the full 90 days to ensure accurate
and complete disclosures); ICI Letter (urging the Commission to at
least give advisers time to become acclimated with all of the new
filing requirements before imposing an accelerated deadline); NRS
Letter (claiming it will add little benefit and will impose a
substantial burden); Schnase Letter.
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D. Other Amendments

1. Amendments to ``Pay to Play'' Rule
    We are adopting amendments to rule 206(4)-5, the ``pay to play''
rule, to address certain consequences arising from the Dodd-Frank Act's
amendments to the Advisers Act and the Exchange Act.\340\ First, we are
amending the scope of the rule, as proposed, so that it applies both to
exempt reporting advisers and foreign private advisers.\341\ The rule
currently applies to advisers either registered with the Commission or
unregistered in reliance on the ``private adviser'' exemption under
section 203(b)(3) of the Advisers Act.\342\ The amendment prevents the
unintended narrowing of the application of the rule resulting from the
repeal of the ``private adviser'' exemption.\343\
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    \340\ See amended rule 206(4)-5. We are not, however, adopting
an amendment we proposed to specify that a legal entity, not just a
natural person, that is a general partner or managing member of an
investment adviser would meet the definition of ``covered
associate'' in the rule. Upon reflection, it would broaden the
application of the rule more than we intended. For example, because
political action committees (``PACs'') controlled by a covered
associate are themselves treated as covered associates, were we to
make this amendment, contributions by an adviser's parent company's
PAC could trigger the two-year time out. However, as we noted in the
release adopting the pay to play rule, depending on facts and
circumstances, there may be instances in which a supervisor of an
adviser's covered associate (who, for example, engages in
solicitation of government entity clients for the adviser) formally
resides at a parent company, but whose contributions should trigger
the two-year time out because they raise the same conflict of
interest issues that we are concerned about, irrespective of that
person's location or title. See Political Contributions by Certain
Investment Advisers, Investment Advisers Act Release No. 3043, n.
179 (Jul. 1, 2010) [75 FR 41018 (Jul. 15, 2010)] (``Pay to Play
Release'').
    \341\ See amended rule 206(4)-5(a)(1); Implementing Proposing
Release, supra note 7, at section II.D.1. See also sections 403, 407
and 408 of the Dodd-Frank Act (replacing the ``private adviser''
exemption at section 203(b)(3) of the Advisers Act with an exemption
for ``foreign private advisers'' and adding exemptions for exempt
reporting advisers at sections 203(l) and 203(m) of the Advisers
Act).
    \342\ See rule 206(4)-5(a).
    \343\ Section 203(b)(3) was revised by the Dodd-Frank Act to
create a new exemption for foreign private advisers. See supra note
4.
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    Commenters generally favored the amendment,\344\ although one
commenter opposed applying the rule to foreign private advisers and
foreign exempt reporting advisers, contending that the costs of doing
so would outweigh the benefits.\345\ However, many advisers that will
qualify for the foreign private adviser exemption are currently subject
to the pay to play rule, either because they are currently registered
with us or exempt under the ``private adviser'' exemption. We continue
to believe that the pay to play rule is necessary and appropriate to
prevent these advisers and others from engaging in fraudulent pay to
play practices in the U.S.
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    \344\ See, e.g., Better Markets Letter; NRS Letter; NYSBA
Committee Letter; Schnase Letter.
    \345\ See Dechert General Letter.
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    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.\346\ To qualify as a
``municipal advisor'' (and thereby a ``regulated person''), a solicitor
must be registered under section 15B of the Exchange Act and subject to
pay to play rules adopted by the Municipal Securities Rulemaking Board
(``MSRB'').\347\ 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.\348\
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    \346\ 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 the Financial Industry Regulatory Authority
(``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).
    \347\ See amended rule 206(4)-5(f)(9)(iii).
    \348\ See amended rule 206(4)-5(f)(9)(iii)(B). The MSRB issued a
draft pay to play rule for municipal advisors and request for
comment on January 14, 2011. See MSRB, Request for Comment on Pay to
Play Rule for Municipal Advisors, MSRB Notice 2011-04 (Jan. 14,
2011) available at http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2011/2011-04.aspx?n=1. The Commission's authority
to consider rules proposed by a self-regulatory organization is
governed by section 19(b) of the Exchange Act [15 U.S.C. 78s(b)]
(``No proposed rule change shall take effect unless approved by the
Commission or otherwise permitted in accordance with the provisions
of this subsection.'').
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    We had proposed to limit the exception to the third-party
solicitation ban to registered municipal advisors.\349\ But commenters
urged us to preserve the existing ``regulated person'' exception as
well.\350\ Commenters explained that affiliated broker-dealers or
investment advisers--which would not meet the statutory definition of a
``municipal advisor'' under section 15B(e)(4) of the Exchange Act if
they solicit government entities only on behalf of affiliates \351\--
are often paid by investment advisers to solicit on their behalf.\352\
While commenters recognized that adviser-affiliated solicitors may be
permitted to voluntarily register as municipal advisors, they argued
that voluntary registration of these solicitors would subject them to
regulatory requirements unrelated to pay to play practices and thus
impose significant additional costs, which they argued are unnecessary,
particularly when they already are subject to a comprehensive
regulatory regime as broker-dealers or advisers.\353\
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    \349\ See Implementing Proposing Release, supra note 7, at
sections II.D.1.
    \350\ See Comment letter of Debevoise & Plimpton LLP (Feb. 22,
2011) (``Debevoise Pay to Play Letter''); Dechert General Letter;
comment letter of Investment Adviser Association (by Monique S.
Botkin) (Jan. 24, 2011) (``IAA Pay to Play Letter''); ICI Letter;
comment letter of Securities Industry and Financial Markets
Association (Jan. 24, 2011) (``SIFMA Letter''); comment letter of T.
Rowe Price Associates, Inc. (Jan. 24, 2011) (``T. Rowe Letter'').
But see NRS Letter (supporting the proposal).
    \351\ See section 15B(e)(4) of the Exchange Act (defining
``municipal advisor'' to include ``a person (who is not a municipal
entity or an employee of a municipal entity) that * * * undertakes a
solicitation of a municipal entity''); section 15B(e)(9) of the
Exchange Act (defining ``solicitation of a municipal entity or
obligated person'' to mean ``a direct or indirect communication with
a municipal entity or obligated person made by a person, for direct
or indirect compensation, on behalf of * * * [an] investment adviser
* * * that does not control, is not controlled by, or is not under
common control with the person undertaking such solicitation for the
purpose of obtaining or retaining an engagement by a municipal
entity or obligated person * * * of an investment adviser to provide
investment advisory services to or on behalf of a municipal entity''
(emphasis added)). In recognition of this limitation, we separately
proposed to allow adviser-affiliated solicitors to register
voluntarily as municipal advisors. See Registration of Municipal
Advisors, Exchange Act Release No. 63576, at nn. 102-104 and
accompanying text (Dec. 20, 2010) [76 FR 824, (Jan. 6, 2011)]
(``Municipal Advisors Registration Release'').
    \352\ See, e.g., IAA Pay to Play Letter; SIFMA Letter.
    \353\ See Municipal Advisor Registration Release, supra note
351, at 831 (stating that solicitors acting on behalf of affiliates
may voluntarily register as municipal advisors).
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    The amended rule retains the approach of the current rule by
permitting advisers to compensate persons that are ``regulated
persons'' for soliciting government entities if they are subject to
restrictions at least as stringent as the pay to play rule. We have
expanded ``regulated persons'' to include registered municipal
advisors. Accordingly, the pay to play rule continues to impose
critical restrictions on third-party solicitors and their personnel
designed to minimize the potential for their engaging in pay to play on
behalf of investment advisers. Advisers may only compensate third-party
solicitors that are subject to the Commission's regulatory oversight
and examination and to a regulatory regime that the Commission has
determined is

equally or more stringent than the pay to play rule.\354\
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    \354\ Several commenters further urged the Commission to amend
the pay to play rule also to permit an adviser to pay any affiliate
and/or its employees to solicit clients on the adviser's behalf so
long as the adviser treats such solicitors as its own ``covered
associates.'' See Debevoise Pay to Play Letter; IAA Pay to Play
Letter; ICI Letter; NYSBA Committee Letter; comment letter of
Skadden, Arps, Slate, Meagher & Flom LLP (Mar. 8, 2011) (``Skadden
Letter''); T. Rowe Letter. In light of the approach we are adopting
(discussed above), we believe that such an amendment is unnecessary.
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    Finally, we are extending the date by which advisers must comply
with the ban on third-party solicitation from September 13, 2011 to
June 13, 2012 due to the fact that we are modifying our proposal and
expanding the definition of ``regulated persons.'' \355\ This extension
will provide time for the MSRB and FINRA to adopt pay to play rules if
they choose to do so and give third-party solicitors additional time to
come into compliance with such rules.\356\
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    \355\ See comment letter of American Council of Life Insurers
(Jan. 24, 2011) (``ACLI Pay to Play Letter''); IAA Pay to Play
Letter; ICI Letter (suggesting that the Commission extend the
compliance date for the third-party solicitation ban). See also
SIFMA Letter (suggesting that the Commission delay adoption of
amendments to the pay to play rule until it completes its municipal
advisor registration rulemaking).
    \356\ The extension applies only to the third-party solicitation
ban and not to any other provisions in the pay to play rule. See
supra note 348 (referencing the MSRB's issuance of a draft pay to
play rule for municipal advisors).
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2. Technical and Conforming Amendments
a. Rules 203(b)(3)-1 and 203(b)(3)-2
    We are rescinding rules 203(b)(3)-1 \357\ and 203(b)(3)-2 \358\
under the Advisers Act. These rules specify how advisers ``count
clients'' for purposes of determining whether the adviser is eligible
for the private adviser exemption of section 203(b)(3) of the Advisers
Act (which, as discussed above, Congress repealed in section 403 of the
Dodd-Frank Act). In the Exemptions Adopting Release, we are adopting a
new client counting rule, rule 202(a)(30)-1, for purposes of the new
foreign private adviser exemption.\359\
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    \357\ Rule 203(b)(3)-1.
    \358\ Rule 203(b)(3)-2. We adopted rule 203(b)(3)-2 in 2004 in
order to require certain hedge fund advisers to register under the
Act. See Registration under the Advisers Act of Certain Hedge Fund
Advisers, Investment Advisers Act Release No. 2333 (Dec. 2, 2004)
[69 FR 72054 (Dec. 10, 2004)]. That rule, and certain amendments to
rule 203(b)(3)-1 and other rules, were vacated by a Federal appeals,
but have remained in the CFR. See Goldstein v. SEC, 451 F.3d 873 (DC
Cir. June 23, 2006) (``Goldstein'').
    \359\ See Exemptions Adopting Release, supra note 4, at section
II.C.1.
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b. Rule 204-2
    We are adopting amendments to rule 204-2 under the Advisers Act,
the ``books and records'' rule. The first amendment updates the rule's
``grandfathering provision'' for investment advisers that are currently
exempt from registration under the ``private adviser'' exemption, but
will be required to register after the exemption is eliminated on July
21, 2011.\360\ Upon registration, these advisers will become subject to
the recordkeeping requirements of the Act, including the requirement to
keep certain records relating to performance.\361\ The amendment
clarifies that these advisers are not obligated to keep certain
performance-related records for any period when they were not
registered with the Commission; however, to the extent that these
advisers preserved these performance-related records even though they
were not required to keep them, they must continue to preserve
them.\362\ As discussed in section III, we are providing these advisers
with additional time to register and establish compliance with rules
under the Advisers Act to which they will become subject as registered
advisers, including rule 204-2.\363\ The second amendment modifies rule
204-2(e)(3)(ii) to cross-reference the new definition of ``private
fund'' added by the Dodd-Frank Act.\364\ The third amendment rescinds
rule 204-2(l) \365\ because it was vacated by the federal appeals court
in Goldstein and because the Dodd-Frank Act's addition of section
204(b)(2) to the Advisers Act codifies this approach in the Advisers
Act itself.\366\
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    \360\ See amended rule 204-2(e)(3)(ii); Implementing Proposing
Release, supra note 7, at section III.D.2.b. Our proposal would have
applied the grandfathering provision only to those periods prior to
the date that the Dodd-Frank Act removes the ``private adviser''
exemption in section 203(b)(3)--July 21, 2011. However, as discussed
in section III of this Release, we are providing a transition period
for advisers relying on the ``private adviser'' exemption, requiring
that they register by March 30, 2012 and comply with all Advisers
Act provisions and rules by that date. To reflect this transition
period in the grandfathering provision in rule 204-2, we are
adopting a modification from our proposal to provide that the
grandfathering period applies to any period prior to such adviser's
registration.
    \361\ See rule 204-2(a)(16).
    \362\ See amended rule 204-2(e)(3)(ii) (stating, ``[i]f you are
an investment adviser that was, prior to July 21, 2011, exempt from
registration under section 203(b)(3) of the Act (15 U.S.C. 80b-
3(b)(3)), as in effect on July 20, 2011, [this rule] does not
require you to maintain or preserve books and records that would
otherwise be required to be maintained or preserved under [certain
sections of this rule] to the extent those books and records pertain
to the performance or rate of return of such private fund (as
defined in section 202(a)(29) of the Act (15 U.S.C. 80b-2(a)(29)),
or other account you advise for any period ended prior to your
registration, provided that that you continue to preserve any books
and records in your possession that pertain to the performance or
rate of return of such private fund or other account for such
period.'' Advisers to private funds that registered with the
Commission based on adoption of rule 203(b)(3)-2 in the Hedge Fund
Adviser Registration Release and then withdrew their registration
based upon the decision by the U.S. Court of Appeals for the
District of Columbia Circuit in Goldstein are permitted to rely on
the grandfathering provision for periods during which they were
unregistered.
    \363\ An adviser that must register with the Commission because
of the Dodd-Frank Act's elimination of the ``private adviser''
exemption and that files an application for registration on or
before the transition deadline of March 30, 2012, may rely on the
grandfathering provision for any period prior to registering, but
must begin keeping performance-related records in accordance with
the rule upon registering.
    \364\ See rule 204-2(e)(3)(ii) (using the term ``private fund''
without reference to a definition). We are adding a parenthetical
noting that the term is defined in section 202(a)(29) of the
Advisers Act.
    \365\ Rule 204-2(l) states that books and records of a private
fund are, under certain circumstances, treated as books and records
of its adviser.
    \366\ Section 404 of the Dodd-Frank Act (adding section
204(b)(2) to the Advisers Act, which states that ``[t]he records and
reports of any private fund to which an investment adviser
registered under this title provides investment advice shall be
deemed to be the records and reports of the investment adviser.'').
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    We received three comment letters in favor of the proposed
amendment to apply the grandfathering provision to advisers that will
be required to register due to the Dodd-Frank Act's elimination of the
``private adviser'' exemption.\367\
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    \367\ See MFA Letter; NYSBA Committee Letter; Seward Letter.
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c. Rule 0-7
    We are adopting, as proposed, an amendment to rule 0-7(a)(1) \368\
under the Advisers Act to update a cross reference to section
203A(a)(2) of the Advisers Act, which has been renumbered as section
203A(a)(3) by the Dodd-Frank Act.\369\