filing Section 7.B.1. of Schedule D for a private fund, an adviser
would acquire a unique identification number to the fund. The
adviser would be required to continue to use the same identification
number whenever it amends Section 7.B.1. for that fund. Any adviser
that files a Section 7.B.1. for a private fund for which an
identification number has already been acquired by another adviser
would not be permitted to acquire a new identification number, but
would be required to instead utilize the existing number. See
proposed Form ADV: Instructions for Part 1A, instr. 6.b.
    \154\ See proposed Form ADV: Instructions for Part 1A, instr. 6.
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''). Advisers would report on a single Schedule D if
their responses to certain questions of Section 7.B.1. of Schedule D
would be identical for each master and feeder fund. Our staff
estimates that most master-feeder arrangements involving private
funds would meet this condition. An adviser filing a single Schedule
D for a master-feeder arrangement would complete its Schedule D
under the name of the master fund, following our proposed
instructions for Section 7.B.
    \155\ Id. See also proposed Form ADV: Glossary. We propose to
define ``United States person'' by reference to the definition in
proposed rule 203(m)-1(e)(8), 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 Release at section II.B.4.
As discussed in the Exemptions Release, our proposed use of the
Regulation S definition for various purposes under the Advisers Act
would lessen the burden imposed on advisers, which are familiar with
the definition because they apply it for other purposes under the
securities laws.
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    We request comment on the scope of the Schedule D filing
requirements about private funds. Should we, as proposed, require
exempt reporting advisers to file Section 7.B. of Schedule D? Would the
disclosure of private fund information by exempt reporting advisers
impact or influence business or other decisions by these advisers, such
as whether to form additional private funds or discourage entry into
management of private funds all together?
    Should we require advisers to report information also about other
pooled investment vehicles they may advise, such as foreign funds not
offered to U.S. persons? Specifically, are there sufficient investor
protection or other concerns that the Commission should seek to require
this information? Is information about these funds important to
understand conduct that directly

involves U.S. investors? Are the instructions eliminating multiple
filing of Section 7.B. by advisers helpful? Are there different
approaches we might take to achieve our intended goals? We request that
commenters review our proposed instructions and identify any
ambiguities that we should address.
    We propose to amend Section 7.B. of Schedule D, which currently
requires very limited information about limited partnerships
established by an adviser, and which provides us with little data about
the operations of the many large hedge funds and other types of private
funds advised by a growing number of advisers registered with the
Commission.\156\ New Section 7.B.1. would expand on the identifying
information currently required to be reported in order to provide us
with basic organizational, operational and investment characteristics
of the fund; the amount of assets held by the fund; the nature of the
investors in the fund; and the fund's service providers.\157\ Although
we are proposing several new items of information that would be
reported to us, much of the information should be readily available to
private fund advisers (e.g., the amount of fund assets) and the
responses to many of the items are unlikely to change from year to year
(e.g., on which exclusion from the Investment Company Act the fund
relies) and thus the additional reporting should not involve a
significant reporting burden. As discussed in more detail below, the
information will help us identify potential compliance risks and inform
our regulatory activities.
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    \156\ Today, Section 7.B. of Schedule D requires an adviser to a
private fund that is a limited partnership or limited liability
company to identify: (1) The name of the fund; (2) the name of the
general partner or manager; (3) whether the adviser's clients are
solicited to invest in the fund; (4) the approximate percentage of
the adviser's clients that have invested in the fund; (5) the
minimum investment commitment; and (6) the current value of the
total assets of the fund.
    \157\ We have considered the potential application of section
210(c) of the Advisers Act (which precludes us from requiring
advisers to disclose to us the ``identity, investments, or affairs''
of any of its clients) to the information about private fund clients
of advisers and have concluded that the Dodd-Frank Act permits us to
require this information in Form ADV. See, e.g., section 404(2) of
the Dodd-Frank Act, adding Advisers Act section 204(b)(1)(A)
(authorizing the Commission to require any investment adviser
registered under the Act ``to maintain such records of, and file
with the Commission such reports regarding, private funds advised by
the investment adviser, as necessary and appropriate in the public
interest and for the protection of investors * * *'').
---------------------------------------------------------------------------

    Part A of the Section would require identifying information,
including the name of the private fund. We propose to add an
instruction to the item to permit an adviser that seeks to preserve the
anonymity of a private fund client by maintaining its identity in code
in its records to identify the private fund in Schedule D using the
same code.\158\ We request comment on this new instruction.
---------------------------------------------------------------------------

    \158\ Rule 204-2(d) permits any books and records required to be
maintained by the rule ``in such manner that the identity of any
client to whom such investment adviser renders investment
supervisory services is indicated by numerical or alphabetical code
or some similar designation.'' We included the provision in the rule
in 1961 to reconcile our then new examination authority (the
exercise of which has required us to examine client records) with
section 210(c) of the Act. See Notice of Proposed Rule to Require
Investment Advisers to Maintain Specified Books and Records Under
the Investment Advisers Act of 1940, Investment Advisers Act Release
No. 111 (Jan. 25, 1961) [26 FR 987 (Feb. 1, 1961)]. We are proposing
to add the instruction to permit the few advisers that in our
experience have sought to encode the identity of their clients to do
so.
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    We also propose to revise Part A to require an adviser to identify
the State or country where the private fund is organized, and the name
of its general partner, directors, trustees or persons occupying
similar positions.\159\ The item would ask information about the
organization of the fund, including whether it is a master or a feeder
fund, and some information about the regulatory status of the fund and
its adviser, including the exclusion from the Investment Company Act on
which it relies, whether the adviser is subject to a foreign regulatory
authority, and whether the fund relies on an exemption from
registration of its securities under the Securities Act of 1933.\160\
The Item also would contain questions regarding whether the adviser is
a subadviser to the private fund and would require the adviser to
identify by name and SEC file number any other advisers to the
fund.\161\ We are proposing several questions to help us better
understand the private fund's investment activities and other areas of
potential investor protection concerns. For example, we would ask about
the size of the fund, including both its gross and net assets, from
which we could better understand the scope of its operations and the
extent of leverage it employs.\162\ We would ask the adviser to
identify within seven broad categories (which the applicable
instruction would define) the type of investment strategy employed by
the adviser,\163\ and to break down the assets and liabilities held by
the fund by class and categorization in the fair value hierarchy
established under U.S. generally accepted accounting principles
(GAAP).\164\ Many private funds managed by investment advisers that
would be reporting to us prepare financial statements in accordance
with GAAP.\165\ Others may use international accounting standards
requiring substantially similar information. Their adviser, therefore,
should have access to this information from such financial statements.
We would ask about both the number and the types of investors in the
fund, as well as the minimum amounts required to be invested by fund
investors to get a better idea of the types of investors the fund is
intended to serve and to get a sense of the extent to which investors
may themselves be in a position to exercise oversight of the
adviser.\166\ Finally, some items would ask information about
characteristics of the fund that may present the fund manager with
conflicts of interest with fund investors of the sort that may
implicate the adviser's fiduciary obligations to the fund and, in some
cases, create risks for the fund investors. Thus we would continue to
ask whether clients of the adviser are solicited to invest in the fund
and what percentage of the other clients has invested in the fund.\167\
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    \159\ See proposed Form ADV, Part 1A, Section 7.B.1.A. of
Schedule D, questions 2-3.
    \160\ Id. questions 4-7 and questions 23-24 (asking whether the
fund relies on Regulation D and what is the fund's Form D file
number, if any).
    \161\ Id. questions 19-20.
    \162\ Id. question 11.
    \163\ Id. question 10. The categories 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.
    \164\ Id. question 12. See FASB ASC 820-10-50-2b. We also
propose to ask whether the fund invests in securities of registered
investment companies, which is relevant to evaluating compliance
with the fund of funds provision of the Investment Company Act,
section 12(d)(1). See section 12(d)(1) of the Investment Company
Act; proposed Form ADV, Part 1A, Section 7.B.1.A. of Schedule D,
question 9.
    \165\ See supra note 56. In addition, advisers to private funds
that prepare and distribute financial statements prepared in
accordance with GAAP may be deemed to satisfy certain requirements
of our custody rule. See Advisers Act rule 206(4)-2(b)(4).
    \166\ See proposed Form ADV, Part 1A, Section 7.B.1.A. of
Schedule D, questions 13-18.
    \167\ Id. questions 21-22.
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    In Part B of the Section, we propose to require advisers to report
information concerning five types of service providers that generally
perform important roles as ``gatekeepers'' for private funds (i.e.,
auditors, prime brokers, custodians, administrators and
marketers).\168\ We would require that an adviser identify them,
provide their location, and State whether they are related persons. For
each of these service providers, we would also require specific
information that would clarify the services they provide and include
certain identifying information such as

registration status. This information includes the following for each
service provider. For the auditors, whether they are independent,
registered with the Public Company Accounting Oversight Board (PCAOB)
and subject to its regular inspection, and whether audited statements
are distributed to fund investors.\169\ For the prime broker, whether
it is SEC-registered and whether it acts as custodian for the private
fund.\170\ For the custodian, whether it is a related person of the
adviser.\171\ For the administrator, whether it prepares and sends to
investors account statements and what percentage of the fund's assets
are valued by the administrator or another person that is not a related
person of the adviser.\172\ Finally, for marketers, whether they are
related persons of the adviser, their SEC file number (if any), and the
address of any Web site they use to market the fund.\173\ The questions
in Part B are generally designed to improve our ability to assess
conflicts and potential risks, identify funds with service provider
arrangements that raise a ``red flag,'' and identify firms for
examination. For instance, it would be relevant to us to know that a
private fund is using a service provider that we are separately
investigating for alleged misconduct.
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    \168\ See proposed Form ADV, Part 1A, Section 7.B.1.B. of
Schedule D.
    \169\ See proposed Form ADV, Part 1A, Section 7.B.1.B. of
Schedule D, question 25. We are also proposing amendments to the
instructions contained in Item 9 to avoid having advisers reporting
overlapping information (relevant to compliance with rule 206(4)-2,
the ``custody rule'') under Section 9 and Section 7.B. of Schedule
D.
    \170\ See id. question 26.
    \171\ See id. question 27. ``Related Person'' is defined in Form
ADV: Glossary.
    \172\ See id. question 28.
    \173\ See id. question 29. For purposes of this question,
marketers include placement agents, consultants, finders,
introducers, municipal advisors or other solicitors, or similar
persons.
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    The information we propose to require advisers to report on private
funds is similar to (although less extensive than) the information that
we understand investors in hedge funds and other private funds commonly
seek in their due diligence questionnaires.\174\ Professional investors
use information acquired as part of their vetting process before they
invest. We likewise are seeking to acquire the information to help us
identify private fund advisers that present investors with greater
compliance or other risks. Each particular item of information may not
itself indicate an elevated risk of a compliance failure, but could
serve as an input to the risk metrics by which our staff identifies
potential risk and allocates examination resources. The staff conducts
similar analyses today, but have limited inputs, which constrains their
effectiveness.
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    \174\ See, e.g., AIMA's Illustrative Questionnaire For Due
Diligence of Hedge Fund Managers, available at (registration
required) http://www.aima.org/en/knowledge_centre/index.cfm.
---------------------------------------------------------------------------

    The information would be publicly available as is other information
on Form ADV, and we expect it would be used by investors to supplement
their due diligence efforts. We expect the use of these data could
further help investors and other industry participants protect against
fraud. For example, using the IARD data, auditors would be able to
compare their list of funds they audit with those whose advisers report
them as auditor in order to uncover false representations.\175\
Investors (and their consultants) would be able to compare
representations made on Schedule D with those made in private offering
documents or other material provided to prospective investors.
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    \175\ 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.)
---------------------------------------------------------------------------

    We request comment on our proposed amendments to Section 7.B. of
Schedule D. Should we modify our requests for information? Is there
information requested in due diligence questionnaires that would yield
additional or more relevant risk information and that we should
require? For instance, should we require advisers to report information
regarding their legal counsel? If so, what information? Is the
information we request readily available to fund managers, and in
particular to sub-advisers? If not, is there information that is
readily available that could serve the same purpose?
    In crafting these new disclosure items, we have sought to avoid
requiring disclosure of proprietary information that could harm the
interests of the fund or fund investors. Have we succeeded? Commenters
asserting that information not be reported should identify the specific
harm asserted. Do commenters agree with our belief that reporting and
disclosure of private fund information will be beneficial to investors
(although they may currently receive some or all of this information)
as well as prospective investors and other market participants?
    Will it be burdensome for registered or exempt reporting advisers
to use for purposes of Question 12 the valuation hierarchy established
under GAAP with respect to those funds that do not have financial
statements prepared in accordance with GAAP? If we require all advisers
to fair value their private fund assets under management as
proposed,\176\ would advisers be able to rely on such a valuation for
purposes of Question 12? Should we require that the information
provided in response to Question 12 be part of audited financial
statements or be subject to review by auditors or another independent
third party? Are there additions, deletions, or changes to the
definitions of the seven categories of private fund we would require
advisers to use to identify a private fund that we should consider?
Should some of the items apply only to certain types of private funds
(e.g., hedge funds)? If so, which items and why?
---------------------------------------------------------------------------

    \176\ See supra section II.A.3.
---------------------------------------------------------------------------

2. Advisory Business Information: Employees, Clients and Advisory
Activities: Item 5
    Item 5 of Part 1A requires an 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
requires information from the adviser about the number of its
employees, the amount of assets it manages, the number and types of its
clients, and the types of advisory services provided. The modifications
we are proposing today, which primarily refine or expand existing
questions, would help us better understand the operations of advisers.
    First, we propose to seek additional information about the
adviser's employees. Currently, Item 5 asks for the number of employees
that are registered representatives of a broker-dealer, which we would
expand to ask for the number of employees that are registered as
investment adviser representatives or insurance agents.\177\ In order
to obtain more precise data, we also propose that advisers provide a
single numerical approximate response to the questions about employees,
instead of checking a box corresponding to a range of numbers, as is
currently required.\178\ This additional employee data would, for
instance, permit us to develop ratios (e.g., number of employees to
assets under management of clients) that we can use to identify

advisers to inform our risk-based examination program.
---------------------------------------------------------------------------

    \177\ Proposed Form ADV, Part 1A, Items 5.B.(3) and (5).
    \178\ For instance, proposed Item 5.B.(1) asks how many of an
adviser's employees perform advisory functions. Under the current
Form, an adviser with seven such employees would check a box for
``6-10.'' We propose the adviser simply fill in a blank with the
number ``7.''
---------------------------------------------------------------------------

    Second, we propose to add some questions to help us better
understand an adviser's business by reference to the types of clients
the adviser services. Items 5.C. and D. currently require an adviser to
report how many clients it has (in ranges) and to indicate the types of
clients, e.g. high net worth individuals, investment companies. We
propose to expand the list of types of clients provided in Item 5.D.,
to include business development companies, insurance companies, and
other investment advisers, as well as to distinguish pension and
profit-sharing plans subject to ERISA \179\ from those that are not. As
amended, this Item also would require an adviser to indicate the
approximate amount of its regulatory assets under management
attributable to each client type.\180\ We also propose to ask
approximately what percentage of the adviser's clients are not United
States persons.\181\ This additional information would allow us to
better understand the focus of an adviser's business.
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    \179\ Employee Retirement Income Security Act of 1974 (29 U.S.C.
18).
    \180\ Proposed Form ADV, Part 1A, Item 5.D. We are also
proposing amendments to the calculation of an adviser's regulatory
assets under management. See supra section II.A.3. of this Release.
    \181\ Proposed Form ADV, Part 1A, Item 5.C.(2). See supra note
155 (discussing the definition of ``United States person''). We also
propose to add an instruction to Item 5.C., 5.D. and 5.H. to clarify
that advisers should not count as clients the investors in a private
fund they advise unless they have a separate advisory relationship
with them.
---------------------------------------------------------------------------

    Third, we are proposing two amendments related to the advisory
activities that are reported in Item 5. Item 5.G. requires an adviser
to select from a list the advisory services that it provides, such as
financial planning or portfolio management. We propose to expand the
list of advisory activities to include portfolio management for pooled
investment vehicles, other than registered investment companies, and
educational seminars or workshops.\182\ We would also require advisers
to provide the SEC file number for a registered investment company if
they check the box for portfolio management for an investment company,
which would permit our examination staff to link information reported
on Form ADV to information reported on forms filed through our EDGAR
system by investment companies managed by these advisers.\183\ We are
proposing new Item 5.J. that would require advisers to select from a
list the types of investments about which they provided advice during
the fiscal year for which they are reporting.\184\ These changes would
provide us with more details regarding the services an adviser
provides, allowing us to better identify candidates if, for instance,
we choose to do a risk-targeted examination of advisers based on the
nature of the advice they provide.
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    \182\ Proposed Form ADV, Part 1A, Item 5.G.
    \183\ Proposed Form ADV, Part 1A, Schedule D, Section 5.G.(3).
    \184\ Advisers would also be required to indicate the types of
investments, such as various types of swaps and variable life
insurance, about which they provided advice. Proposed Form ADV, Part
1A, Item 5.J.
---------------------------------------------------------------------------

    We request comment on our proposed amendments to Item 5. Would
advisers readily have access to the additional data we request? Does
the switch from ranges to a single approximate number of employees in
Items 5.A. and 5.B. pose any significant problems or burdens for
advisers? If so, would providing an instruction to permit an adviser to
round its responses up or down help? Are there additional types of
clients, advisory activities, and investments we should add to our
proposed lists in Items 5.D., 5.G., and 5.J., respectively?
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 proposing several changes to
these Items that would provide us with a more complete picture of the
activities of an adviser and its related persons, which would better
allow us to assess the conflicts of interest and risks that may be
created by those relationships and to identify affiliated financial
service businesses. We propose to expand the lists in both Items 6 and
7 to include business as a trust company, registered municipal advisor,
registered security-based swap dealer, and major security-based swap
participant, the latter three of which are new SEC-registrants under
the Dodd-Frank Act's amendments to the Exchange Act.\185\ We also
propose to add accountants (or accounting firms) and lawyers (or law
firms) to the list in Item 6, to parallel current Item 7. We are also
proposing to move from Item 7.B. to Item 7.A. the question that asks
whether a related person is a sponsor or the general partner or
managing member of a pooled investment vehicle.\186\ Finally, we would
clarify in the instruction to Item 7 that advisers are to include
related persons that are foreign affiliates.
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    \185\ Proposed 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.
    \186\ The question we propose to ask in Item 7.A. would,
therefore, retain information about related persons that would
otherwise not be required as a result of our proposed changes to
Item 7.B. As discussed above, we are proposing to require advisers
to report in Item 7.B. and section 7.B.1. of Schedule D private fund
information only about funds they advise, not funds advised by a
related person. See supra section II.C.1. of this Release. We would
also delete ``investment company'' from the list in Item 7 as
duplicative of information we obtain in Item 5. See, e.g., Form ADV,
Part 1A, Items 5.D., 5.G., and proposed Form ADV, Part 1A, Section
5.G.(3) of Schedule D. See also supra note 183 and accompanying
text.
---------------------------------------------------------------------------

    We are also proposing to require additional reporting in the
corresponding sections of Schedule D for Items 6 and 7. First, we
propose a new Section 6.A. of Schedule D that would require an adviser
that checks the box that it is engaged in another business under a
different name to list those other business names and the other lines
of business in which the adviser engages using that name.\187\ Second,
we propose a similar modification to Item 6.B. to require advisers
primarily engaged in another business under a different name to also
provide that name in Section 6.B. of Schedule D. Third, we propose to
amend Section 7.A. of Schedule D, which currently requires that
advisers provide identifying information for related persons that are
investment advisers or broker-dealers. We propose to require advisers
to provide this same information with respect to any type of related
person listed in Item 7.A. We also propose to expand the information we
collect regarding these related persons to include more details about
the relationship between the adviser and the related person, whether
the related person is registered with a foreign financial regulatory
authority, and how they share personnel and confidential
information.\188\ This additional information on related persons would
allow us to link disparate pieces of information that we have access to
concerning an adviser and its affiliates as well as identifying whether
the adviser controls the related

person or vice versa. It would also provide us with a tool to identify
where there may be advisory activities by unregistered affiliates.
Finally, we propose to relocate to this section a question currently
under Section 9 that requires reporting of whether a related person
bank or futures commission merchant is a qualified custodian for client
assets under the adviser custody rule, and to ask, if the adviser is
reporting a related person investment adviser, whether the related
person is exempt from registration.\189\
---------------------------------------------------------------------------

    \187\ 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.''
    \188\ Proposed Form ADV, Part 1A, Section 7.A., questions 1, 2,
5 and 6.
    \189\ Proposed Form ADV, Part 1A, Section 7.A., questions 3 and
4. We are also proposing a technical change to remove the same
question in section 9.D. of Schedule D.
---------------------------------------------------------------------------

    We request comment on these proposed amendments. Should we request
additional information about advisers' and their related persons' other
business? Should we request less information? Are there other types of
financial services providers we should include in the lists contained
in Items 6 and 7? Are there other questions in Section 7.A. that we
should ask to determine additional conflicts of interest advisers face
through related persons? Is the information advisers need to complete
the proposed additional questions contained in Section 7.A. readily
available?
4. Participation in Client Transactions: Item 8
    Item 8 requires an adviser to report information about its
transactions, if any, with clients, including whether the adviser or a
related person engages in transactions with clients as a principal,
sells securities to clients, or has discretionary authority over client
assets. This item also currently requires an adviser to indicate if it
has discretionary authority to determine the brokers or dealers for
client transactions and if it recommends brokers or dealers to
clients.\190\ We propose to further ask whether any of the brokers or
dealers are related persons of the adviser.\191\ An adviser that
indicates that it receives ``soft dollar benefits'' would 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.\192\ Finally, we would add a new question requiring an
adviser to indicate whether it or its related person receives direct or
indirect compensation for client referrals to complement the existing
question concerning whether the adviser compensates any person for
client referrals.\193\ The amendments we are proposing would enhance
our ability to identify additional conflicts of interest that advisers
may face that we have identified through our experience administering
the Advisers Act.
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    \190\ Form ADV, Part 1A, Items 8.C.3. and 8.E.
    \191\ Proposed Form ADV, Part 1A, Items 8.F.
    \192\ Proposed Form ADV, Part 1A, Item 8.G.(2). 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)].
    \193\ Proposed Form ADV, Part 1A, Item 8.I.
---------------------------------------------------------------------------

    We request comment on our proposed amendments. Should we request
additional information about advisers' receipt of soft dollar benefits,
such as requiring advisers to quantify the benefits they receive or
disclose the names of the brokers or dealers from whom the adviser
receives soft dollar benefits? Is there other information that would
assist us in identifying conflicts of interest?
5. Reporting $1 Billion in Assets: Item 1
    Section 956 of the Dodd-Frank Act requires us, jointly with certain
other Federal regulators, to adopt rules or guidelines addressing
certain excessive incentive-based compensation arrangements, including
those of investment advisers with $1 billion or more in assets.\194\ To
enable us to identify those advisers that would be subject to section
956, we propose to require each adviser to indicate in Item 1 whether
or not the adviser had $1 billion or more in assets as of the last day
of the adviser's most recent fiscal year.\195\ We propose that for
purposes of this reporting requirement, the amount of assets would be
the adviser's total assets 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.\196\ We request comment on whether
Form ADV generally, and the proposed requirement in particular, is the
appropriate method to identify these investment advisers. Should we
identify these advisers by other means, and if so, what other means? We
also request comment on the proposed method that advisers must use to
determine the amount of their assets.
---------------------------------------------------------------------------

    \194\ See sections 956(a)-(c), (e)(2)(D), (f) of the Dodd-Frank
Act. The other Federal regulators include the Board of Governors of
the Federal Reserve System, the Office of the Comptroller of the
Currency, the Board of Directors of the Federal Deposit Insurance
Corporation, the Director of the Office of Thrift Supervision, the
National Credit Union Administration Board, and the Federal Housing
Finance Agency.
    \195\ See proposed Form ADV, Part 1A, Item 1.O. (adviser would
mark ``yes'' or ``no'' to indicate whether it had $1 billion or more
in assets).
    \196\ See proposed Form ADV: Instructions for Part 1A, instr.
1.b. We construe section 956 as specifying, and thus propose to
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.
---------------------------------------------------------------------------

6. Other Amendments to Form ADV
    The proposed amendments also include a number of additional changes
unrelated to the Dodd-Frank Act that are intended to improve our
ability to assess compliance risks. First, we propose changes to
improve certain identifying information we obtain from other items of
Part 1A of Form ADV. Item 1 currently requires an adviser to provide
contact information for an employee designated to handle inquiries
regarding the adviser's Form ADV. We propose instead 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.\197\ Advisers would have the option, in Item
1.K., to provide an additional regulatory contact for Form ADV, neither
of which would be viewable by the public on our Web site.\198\ We also
propose to amend 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.\199\ This would 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.
In addition, we propose to add ``Limited Partnership'' as another
choice advisers may select to indicate how their organization is
legally formed.\200\
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    \197\ Proposed Form ADV, Part 1A, Item 1.J. An adviser is
currently required to provide the name of its chief compliance
officer on Schedule A of Form ADV, but not other identifying
information. 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 would instead provide
a designated person's contact information in Item 1.K. Proposed Form
ADV, Part 1A, Item 1.K. Likewise, we would not require an exempt
reporting adviser to provide the name of a chief compliance officer
on Schedule A of Form ADV.
    \198\ Proposed Form ADV, Part 1A, Item 1.K. We note that clients
will be provided with a supervisory contact in brochure supplements.
See Part 2 Release, supra note 46.
    \199\ Proposed Form ADV, Part 1A, Items 1.N., 10.B., and Section
10.B. of Schedule D.
    \200\ Proposed Form ADV, Part 1A, Item 3.A.
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    We are also proposing to add an additional custody question to Item
9 to require advisers 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.\201\ We recently
modified Item 9 to elicit

information about the adviser or its related person(s) acting as
qualified custodian.\202\ We did not, however, request information
about other qualified custodians. We expect this discrete piece of
additional data to provide us with a more complete picture of an
adviser's custodial practices.\203\
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    \201\ Proposed Form ADV, Part 1A, Item 9.F.
    \202\ 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)].
    \203\ Consistent with the updating requirements for Items
9.A.(2), 9.B.(2), and 9.E., we propose requiring new Item 9.F. to be
updated only annually. See proposed General Instruction 4.
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    Finally, we are proposing three technical changes with respect to
the reporting of disciplinary events. First, we propose to add a box to
Item 11 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.\204\ This
would enable us to easily determine if an adviser is only reporting
disciplinary events for its affiliates, and would facilitate our
ability to focus examination and enforcement resources on those
advisers that appear to present the greatest compliance risks. Second,
we propose to add 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. Third, we
propose to amend 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. The amendment would
replace ``proceeding'' in that item with ``hearing or formal
adjudication.'' \205\ By using the term ``proceeding,'' which is
defined in the Form ADV Glossary, this item limits the required
disclosure to actions initiated by a government agency, self-regulatory
organization or foreign financial regulatory authority. The item was
intended to require disclosure of actions taken by the designating
authority to revoke or suspend the use of the attainment, designation,
or license that it administers, and not actions taken by regulatory
authorities who are unlikely to bring an action to revoke or suspend a
professional designation.
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    \204\ Proposed Form ADV, Part 1A, Item 11.
    \205\ If adopted, the revised item would State ``[A]ny other
hearing or formal adjudication 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 the attainment, designation, or license) in
anticipation of such a hearing or formal adjudication (and the
adviser knows, or should have known, of such resignation or
relinquishment), disclose the event.''
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    We request comment on these proposed changes. Are there additional
items we should consider amending, and why? We are considering whether
to add an additional reporting requirement to Item 1 that would require
advisers to provide a unique identification code to provide additional
uses for the data that we collect. For example, the Office of Financial
Research (OFR) is required to publish a financial company reference
database as part of its role in assisting the Financial Stability
Oversight Council (FSOC) under the Dodd-Frank Act.\206\ Would a unique
identification code assigned by, on behalf of, or otherwise used by
FSOC or OFR that is reported on Form ADV permit cross-referencing of
the data we collect with this future database? Is there a reason why we
should not require an adviser to report such an identifier on Form ADV
if one is provided?
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    \206\ See sections 154(b)(2)(A) and 201(a)(11) of the Dodd Frank
Act.
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    Should we consider accelerating any of the updating requirements
for Form ADV to improve the usefulness of the form to the Commission
and to investors? For instance, while we have accelerated filing
deadlines in for other types of reports,\207\ since 1979, advisers have
had 90 days from their fiscal year ends to provide an annual update to
Form ADV.\208\ To provide more timely information to us and the public,
should advisers be required to file their annual amendments to Form ADV
within 60 days of the end of the adviser's fiscal year or some other
shorter time period?
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    \207\ See, e.g.,Acceleration of Periodic Report Filing Dates and
Disclosure Concerning Web site Access to Reports, Exchange Act
Release No. 46464 (Sept. 5, 2002) [67 FR 58480 (Sept. 16, 2002)], at
nn. 22-24 and accompanying text (noting that the deadline to file
Form 10-K within 90 days after a company's fiscal year end had not
been changed in 32 years and accelerating it to 60 days for ``large
accelerated filers'' and 75 days for ``accelerated filers,'' each as
defined in rule 12b-2 under the Exchange Act, in order to modernize
the periodic reporting system and improve the usefulness of periodic
reports to investors).
    \208\ See Investment Adviser Requirements Concerning Disclosure,
Recordkeeping, Applications for Registration and Annual Filings,
Investment Advisers Act Release No. 664 (Jan. 30, 1979) [44 FR 7870
(Feb. 7, 1979)] (adopting rule 204-1).
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D. Other Amendments

1. Amendments to ``Pay to Play'' Rule
    Adopted last July, rule 206(4)-5, generally prohibits registered
and certain unregistered advisers from engaging directly or indirectly
in pay to play practices identified in the rule.\209\ We are proposing
three amendments to the rule that we believe are needed as a result of
the enactment of the Dodd-Frank Act.
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    \209\ Political Contributions by Certain Investment Advisers,
Investment Advisers Act Release No. 3043 (July 1, 2010) [75 FR
41018, 41024 (July 14, 2010)] (``Pay to Play Release''). The rule
prohibits covered advisers from (i) providing advisory services for
compensation to a government client for two years after the adviser
or certain of its executives or employees makes certain political
contributions; (ii) paying any third party to solicit advisory
business from any government entity unless the person is a
``regulated person,'' subject to similar pay to play restrictions;
and (iii) soliciting others, or coordinating, contributions to
certain elected officials or candidates or payments to political
parties where the adviser is providing or seeking government
business. See id.
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    First, we propose to amend the scope of the rule to make it apply
to exempt reporting advisers and foreign private advisers.\210\ Rule
206(4)-5 currently applies to advisers that are either registered with
the Commission, or unregistered in reliance on the exemption under
section 203(b)(3) of the Advisers Act.\211\ As a consequence of the
repeal of the private adviser exemption in section 203(b)(3), many
unregistered advisers will register under the Act and will be subject
to rule 206(4)-5 (albeit pursuant to a different clause of the
rule).\212\ In addition, the Dodd-Frank Act has added an exemption for
``foreign private advisers'' in section 203(b)(3) of the Act, which
will result in these advisers being subject to the pay to play
rule.\213\ However, some unregistered advisers to which the rule
currently applies because of section 203(b)(3) will remain exempt from
registration because of the new exemptions for exempt reporting
advisers, which we did not contemplate when we adopted rule 206(4)-5,
and will no longer be subject to the rule. To prevent unintended
narrowing of the application of the rule as a result of the amendments
to the Advisers Act, we are

proposing to extend the rule to apply it to exempt reporting advisers,
as well as foreign private advisers.
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    \210\ Proposed rule 206(4)-5(a).
    \211\ See rule 206(4)-5(a)(1) and (2).
    \212\ Instead of being subject to the rule as advisers
``unregistered in reliance on the exemption available under section
203(b)(3) of the Advisers Act,'' they will be subject to the rule as
advisers ``registered (or required to be registered)'' under the
Act. Rule 206(4)-5(a)(1) and (2).
    \213\ See section 402 of the Dodd-Frank Act (defining ``foreign
private adviser''); section 403 of the Dodd-Frank Act (amending
section 203(b)(3) of the Advisers Act to strike the current language
exempting certain ``private advisers'' from registration and
inserting language exempting ``foreign private advisers'' from
registration).
    Applying rule 206(4)-5 to foreign private advisers, unlike
exempt reporting advisers, does not require any amendment of the
rule specifically regarding these advisers because the rule
currently cross-references section 203(b)(3) of the Advisers Act.
---------------------------------------------------------------------------

    We request comment on our proposal to make rule 206(4)-5 applicable
to exempt reporting advisers and foreign private advisers. Should
either of these types of unregistered advisers be excluded from the
rule? If so, what protections should apply instead? We are not
proposing to require advisers that will become subject to State
registration as a result of the Dodd-Frank Act to comply with the pay
to play rule.\214\ Should we?
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    \214\ For a discussion of the Dodd-Frank Act's reallocation of
responsibility for regulation of investment advisers between the
Commission and the states, see supra section II.A. of this Release.
---------------------------------------------------------------------------

    Second, we propose to amend the provision of rule 206(4)-5 that
prohibits advisers from paying persons (e.g., ``solicitors'' or
``placement agents'') to solicit government entities unless such
persons are ``regulated persons'' (i.e., registered investment advisers
or broker-dealers subject to rules of a registered national securities
association, such as the Financial Industry Regulatory Authority
(``FINRA''), that restricts its members from engaging in pay to play
activities).\215\ Instead, we would permit an adviser to pay any
``regulated municipal advisor'' to solicit government entities on its
behalf. A regulated municipal advisor under the proposed rule would be
a person that is registered under section 15B of the Securities
Exchange Act and subject to pay to play rules adopted by the MSRB.\216\
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    \215\ Rule 206(4)-5(a)(2)(i). FINRA is currently the only
national securities association registered under section 19(a) of
the Exchange Act (15 U.S.C. 78s(a)).
    \216\ Proposed rule 206(4)-5(a)(2), (f)(9). As provided in the
proposed rule, these pay to play rules must prohibit municipal
advisors from engaging in distribution or solicitation activities if
certain political contributions have been made. In addition, the
Commission must find that they both impose substantially equivalent
or more stringent restrictions on municipal advisors than rule
206(4)-5 imposes on investment advisers and that they are consistent
with the objectives of rule 206(4)-5.
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    The Dodd-Frank Act creates a new category of person known as a
``municipal advisor,'' which it defines to include persons that
undertake ``a solicitation of a municipal entity.'' \217\ These persons
include, among others, any third-party solicitor, including registered
investment advisers and broker-dealers, seeking business on behalf of
an investment adviser from a municipal entity, including a pension
fund.\218\ These municipal advisors are subject to MSRB rules, and we
understand that the MSRB intends to consider subjecting municipal
advisors to pay to play rules similar to its rules governing municipal
securities dealers.\219\ Broker-dealers acting as placement agents or
solicitors and investment advisers acting as solicitors of municipal
entities and obligated persons generally meet the statutory definition
of a municipal advisor and thus would be subject to MSRB rules.\220\
Our proposed amendment would, like the current rule, permit advisers to
pay persons to solicit government entities on their behalf only if such
third parties are registered with us and subject to pay to play
rules.\221\ Given the new regulatory regime applicable to municipal
advisors, including solicitors of government entities that meet the
definition of ``regulated person'' under rule 206(4)-5,\222\ broker-
dealer solicitors are expected to be subject to MSRB's pay to play
rules, rendering it unnecessary at this time for FINRA to adopt a pay
to play rule that would satisfy rule 206(4)-5(f)(9)(ii). We are
proposing, therefore, to replace references in rule 206(4)-5 to FINRA's
pay to play rules with references to MSRB rules that we find are
consistent with the objectives of rule 206(4)-5 and impose
substantially equivalent or more stringent pay to play restrictions.
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    \217\ Section 975 of the Dodd-Frank Act. In creating this new
municipal advisor category, Congress expressed its intent that
municipal advisors be permitted to solicit government clients. See
Senate Committee Report, supra note 11, at 148 (``The SEC recently
proposed new rules under the Investment Advisers Act of 1940
relating to the provision by registered investment advisers of
investment advisory services to municipal entities in which, among
other things, the SEC proposed prohibiting investment advisers from
making payments to unrelated persons for solicitation of municipal
entities for investment advisory services on behalf of investment
advisers. Rather than effectively prohibiting such third-party
solicitation for investment advisory services, [section 975] would
provide that activities of a municipal advisor, broker, dealer or
municipal securities dealer to solicit a municipal entity to engage
an unrelated investment adviser to provide investment advisory
services to a municipal entity or to engage to undertake
underwriting, financial advisory or other activities for a municipal
entity in connection with the issuance of municipal securities would
be subject to regulation by the MSRB * * *'').
    \218\ See Section 975(e) of the Dodd-Frank Act (defining: (i)
``Municipal advisor,'' in relevant part, as ``a person * * * that *
* * undertakes a solicitation of a municipal entity;'' (ii)
``municipal entity,'' in relevant part, as ``any State, political
subdivision of a State, or municipal corporate instrumentality of a
State, including * * * any plan, program, or pool of assets
sponsored or established by the State, political subdivision * * *
or any agency, authority or instrumentality thereof. * * *;'' and
(iii) ``solicitation of a municipal entity or obligated person,'' in
relevant part, as ``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 (as
defined in section 202 of the Investment Advisers Act of 1940) 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.'').
    \219\ See MSRB, Municipal Securities Rulemaking Board Issues
Statement on Financial Reform Legislation, Press Release, July 15,
2010, available at http://www.msrb.org/News-and-Events/Press-Releases/2010/MSRB-Issues-Statement-on-Financial-Reform-Legislation.aspx (``The transition [to a majority public governing
board] will be coordinated with a rulemaking program designed to
ensure careful but prompt development of rules fulfilling the MSRB's
expanded mission. The MSRB will develop rules in the areas of fair
practice and fiduciary duties, pay to play and other conflicts of
interest, gifts, disclosures, professional qualifications,
continuing education and other areas identified by the new governing
board.''); MSRB rule G-37. MSRB rule G-37 is available on the MSRB's
Web site at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-37.aspx.
    \220\ See supra note 218. While section 15B(e)(4)(C) of the
Exchange Act excludes from the definition of municipal advisor ``a
broker, dealer, or municipal securities dealer serving as an
underwriter (as defined in section 2(a)(11) of the Securities Act of
1933),'' we interpret this exclusion to apply solely to a broker,
dealer, or municipal securities dealer serving as an underwriter on
behalf of a municipal issuer in connection with the issuance of
municipal securities. Congress enacted section 975 of the Dodd-Frank
Act, which added the definition of ``municipal advisor'' to Section
15B of the Exchange Act, to subject the relationship between a
municipal advisor and a municipal entity to regulation by the MSRB.
See Senate Committee Report, supra note 11, at 148 (noting the need
to subject activities such as solicitation of a municipal entity to
engage an investment adviser to MSRB regulation). The Commission
expects to consider a proposal for a permanent municipal advisor
registration program, including requirements for the registration of
municipal advisors. See Temporary Registration of Municipal
Advisors, Exchange Act Release No. 62824 (Sept. 1, 2010) [75 FR
54465 (Sept. 8, 2010)].
    \221\ See Pay to Play Release at section II.B.2.(b). We note
that a person that solicits investors to invest in investment
interests that are securities also may need to consider whether that
person is acting as a broker. See Pay to Play Release at n. 326.
    \222\ See rule 206(4)-5(f)(9)(ii) (defining ``regulated person''
to include a broker-dealer that is registered with the Commission
and is a member of a national securities association registered
under section 15A of the Exchange Act (currently limited to FINRA)).
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    We are not proposing to amend the compliance date of rule 206(4)-
5's limitation on payments to third-party solicitors, which is
September 13, 2011. MSRB staff has informed our staff that the pay to
play rules it expects to consider would likely be in effect by that
date.\223\ If rule 206(4)-5 is amended as proposed, an investment
adviser subject to the rule would be prohibited from paying any third
party to solicit government entities on its behalf that is not
registered with us under Section 15B of the Securities Exchange Act and
thus not subject to the MSRB's pay to play rules.
---------------------------------------------------------------------------

    \223\ If it appears that the MSRB will not be able to adopt pay
to play rules for municipal advisors by September 13, 2011 that
would meet the requirements of rule 206(4)-5, we will consider
whether to take alternative action.

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

    We request comment on our proposal to permit investment advisers to
hire registered municipal advisors to solicit government entities on
their behalf, if those registered municipal advisors are subject to pay
to play restrictions under MSRB rules. Could our proposal result in
rule 206(4)-5's solicitation limitations applying to certain solicitors
affiliated with an investment adviser? \224\ Should we amend rule
206(4)-5 expressly to allow advisers to pay these investment adviser-
affiliated solicitors? Should we amend rule 206(4)-5 to provide that
any person that controls, is controlled by, or is under common control
with an investment adviser (and, if that person is an entity, its
personnel) would be deemed to be a ``covered associate'' of the
investment adviser if the investment adviser pays or agrees to pay such
person (or such personnel) to solicit a government entity on its
behalf?
---------------------------------------------------------------------------

    \224\ 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)).
---------------------------------------------------------------------------

    Finally, we are proposing a minor amendment to rule 206(4)-5's
definition of a ``covered associate'' \225\ of an investment adviser to
clarify 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. Under the rule as adopted, ``covered associate''
includes any owner and personnel of an adviser and political action
committees the owner, personnel, or adviser control for purposes of the
rule's restrictions. Currently, the owners of an adviser included in
the definition of ``covered associate'' are: ``[a]ny general partner,
managing member * * * or other individual with a similar status or
function.'' \226\ We are proposing to replace the word ``individual''
with the word ``person.'' Unlike the other proposed amendments to rule
206(4)-5, this proposed amendment is not related to the Dodd-Frank Act,
but instead is meant to clarify the rule and the Commission's original
intent that ``covered associate'' include legal entities as well as
natural persons, and to respond to interpretive questions our staff has
received.
---------------------------------------------------------------------------

    \225\ See rule 206(4)-5(f)(2) (defining a ``covered associate''
of an investment adviser as: ``(i) Any general partner, managing
member or executive officer, or other individual with a similar
status or function; (ii) Any employee who solicits a government
entity for the investment adviser and any person who supervises,
directly or indirectly, such employee; and (iii) Any political
action committee controlled by the investment adviser or by [any
other covered associate].'').
    \226\ See id.
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2. Technical and Conforming Amendments
a. Rules 203(b)(3)-1 and 203(b)(3)-2
    We intend, at the adoption of rule and form amendments to implement
provisions of the Dodd-Frank Act, to rescind rules 203(b)(3)-1 \227\
and 203(b)(3)-2,\228\ which 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 Release, we are proposing a new client counting
rule, rule 202(a)(30)-1, for purposes of the new foreign private
adviser exemption.\229\
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    \227\ Rule 203(b)(3)-1.
    \228\ 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 Hedge Fund Adviser Registration Release. That rule, and
certain amendments to rule 203(b)(3)-1 and other rules, were vacated
by a Federal appeals court in Goldstein, but have remained in the
Code of Federal Regulations.
    \229\ See Exemptions Release at section II.C.1.
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b. Rule 204-2
    We are proposing to amend rule 204-2 under the Advisers Act, the
``books and records'' rule, to update 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 when the Dodd-Frank Act's elimination of the
``private adviser'' exemption becomes effective on July 21, 2011. At
that time, these advisers would become subject to the recordkeeping
requirements of the Act, including the requirement to keep certain
records relating to performance.\230\ We propose that these advisers
would not be obligated to keep certain performance-related records so
long as they did not actually register when they were eligible for the
``private adviser'' exemption; however, to the extent that these
advisers preserved these performance-related records without being
required to do so by current rule 204-2, the proposed grandfathering
provision would require them to continue to preserve them.\231\ In
addition, we are proposing to amend rule 204-2(e)(3)(ii) to cross-
reference the new definition of ``private fund'' added to the Dodd-
Frank Act.\232\ Finally, we expect to rescind rule 204-2(l) \233\
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 concept in the statute itself.\234\
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    \230\ See rule 204-2(a)(16).
    \231\ See proposed amendment to 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
July 21, 2011, provided that you were not registered with the
Commission as an investment adviser during such period, and provided
further 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.'' (emphasis added)).
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 Goldstein decision would be permitted to rely on the proposed
grandfathering provision.
    \232\ See rule 204-2(e)(3)(ii) (using the term private fund
without reference to a definition). We are proposing to add a
parenthetical noting that the term is defined in section 202(a)(29)
of the Advisers Act.
    \233\ 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.
    \234\ Section 404 of the Dodd-Frank Act (adding section
204(b)(2) to the Advisers Act, which states, ``The 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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c. Rule 0-7
    Rule 0-7(a)(1) under the Advisers Act, which defines ``small
entities'' under the Advisers Act for purposes of the Regulatory
Flexibility Act, cross-references section 203A(a)(2) of the Advisers
Act.\235\ The Dodd-Frank Act has renumbered section 203A(a)(2) of the
Advisers Act to 203A(a)(3)), and thus we are proposing to amend rule 0-
7(a)(1) to cross-reference section 203A(a)(3) rather than section
203A(a)(2).\236\
---------------------------------------------------------------------------

    \235\ Rule 0-7(a)(1) (stating that the term ``small business''
or ``small organization'' for purposes of the Advisers Act means an
investment advisers that: ``Has assets under management, as defined
under Section 203(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)) and
reported on its annual updating amendment to Form ADV [17 CFR
279.1], of less than $25 million, or such higher amount as the
Commission may by rule deem appropriate * * *.'').
    \236\ Proposed amendment to rule 0-7(a)(1).

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d. Rule 222-1
    We are proposing to replace the term ``principal place of
business'' in rule 222-1(b) \237\ under the Advisers Act, which
contains definitions relevant to section 222 of the Advisers Act's
provisions regarding State regulation of investment advisers, with the
term ``principal office and place of business'' to conform to the Dodd-
Frank Act's amendments to that section.\238\ We are not proposing to
modify the definition.
---------------------------------------------------------------------------

    \237\ Rule 222-1(b) (defining ``principal place of business'' of
an investment adviser as ``the executive office of the investment
adviser from which the officers, partners, or managers of the
investment adviser direct, control, and coordinate the activities of
the investment adviser.'').
    \238\ See section 985 of the Dodd-Frank Act (replacing the term
``principal place of business'' each time it appears--i.e., six
times--with the term ``principal office and place of business'' in
section 222 of the Advisers Act).
---------------------------------------------------------------------------

e. Rule 222-2
    We are proposing technical amendments to rule 222-2 to define
``client'' for purposes of the national de minimis standard by cross-
referencing the definition of ``client'' in proposed rule 202(a)(30)-1
rather than the definition in rule 203(b)(3)-1 because we expect to
rescind rule 203(b)(3)-1.\239\ We also propose to change a cross-
reference to paragraph (b)(6) of existing rule 203(b)(3)-1 to paragraph
(b)(4) of proposed rule 202(a)(30)-1 to account for the changed
location of that particular provision. Finally, because proposed rule
202(a)(30)-1, unlike rule 203(b)(3)-1, does not include a ``special
rule'' specifying that an adviser is not required to count as a client
any person for whom the adviser provides investment advisory services
without compensation, we are proposing to include this instruction in
rule 222-2. We request comment on our proposed amendments to rule 222-
2. Should we preserve the instruction that an adviser is not required
to count as a client any person for whom the adviser provides
investment advisory services without compensation for purposes of the
national de minimis standard?
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    \239\ See supra section II.D.2.a. of this Release (discussing
rescinding rule 203(b)(3)-1); Exemptions Release at section II.C.1.
(discussing the definition of ``client'' in proposed rule
202(a)(30)-1).
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f. Rule 202(a)(11)-1
    We intend, at the adoption of rule and form amendments to implement
the Dodd-Frank Act, to rescind rule 202(a)(11)-1.\240\ Although the
rule was vacated by a Federal appeals court (and is therefore not in
effect),\241\ it has remained in the CFR.
---------------------------------------------------------------------------

    \240\ Rule 202(a)(11)-1.
    \241\ Financial Planning Association v. SEC, 482 F.3d 481 (D.C.
Cir. 2007).
---------------------------------------------------------------------------

III. General Request for Comment

    The Commission requests comment on the rules, and rule and form
amendments proposed in this Release, suggestions for additional changes
to the existing rules and comment on other matters that might have an
effect on the proposals contained in this Release. Commenters should
provide empirical data to support their views.

IV. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits of its rules.
The new rules and rule and form amendments we are proposing would give
effect to provisions in Title IV of the Dodd-Frank Act that: (i)
Reallocate responsibility for oversight of investment advisers by
delegating generally to the states responsibility over certain mid-
sized advisers; (ii) repeal the ``private adviser exemption'' contained
in section 203(b)(3) of the Advisers Act; and (iii) provide for
reporting by advisers to certain types of private funds that are exempt
from registration. As part of these amendments, we are also proposing
amendments to the Advisers Act pay to play rule, rule 206(4)-5.
Additionally, we propose to identify the advisers that are subject to
the Dodd-Frank Act's requirements concerning certain incentive-based
compensation arrangements. Because many of our proposals would
implement or clarify provisions of the Dodd-Frank Act, they would not
create benefits and costs separate from the benefits and costs
considered by Congress in passing the Dodd-Frank Act.\242\ However,
certain of our proposals, if adopted, would generate costs and benefits
independent of those generated by the Dodd-Frank Act itself. These
costs and benefits are discussed below.
---------------------------------------------------------------------------

    \242\ See Dodd-Frank Act, supra note 2; Conference Committee
Report, supra note 67; Senate Committee Report, supra note 11; supra
section I. of this Release. Proposals not generating costs and
benefits independent of those generated by the Dodd-Frank Act
include the proposed amendments to rules 0-7, 204-2, 222-1, 222-2
and our proposal to rescind rule 203(b)(3)-1.
---------------------------------------------------------------------------

A. Benefits

1. Eligibility To Register With the Commission: Section 410
    Section 410 of the Dodd-Frank Act amends section 203A of the
Advisers Act to create a new group of ``mid-sized advisers'' and shifts
primary responsibility for their regulatory oversight to the State
securities authorities.\243\ It does this by prohibiting from
registering with the Commission an investment adviser that is required
to be registered and subject to examination as an investment adviser in
the State in which it maintains its principal office and place of
business and that has assets under management between $25 million and
$100 million.\244\ We are proposing rules and rule amendments that
would provide us a means of identifying advisers that must transition
to State regulation, clarify the application of new statutory
provisions, and modify certain of the exemptions we have adopted under
section 203A of the Act.
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    \243\ See supra section II.A.7. of this Release.
    \244\ See supra notes 11-12 and accompanying text (discussing
section 410 of the Dodd-Frank Act, which amends Section 203A of the
Advisers Act to increase the threshold above which all investment
advisers must register with the Commission from $25 million to $100
million).
---------------------------------------------------------------------------

Transition to State Registration
    We are proposing a new rule, rule 203A-5, which would require each
investment adviser registered with us on July 21, 2011 to file an
amendment to its Form ADV no later than August 20, 2011 (30 days after
the July 21, 2011 effective date of the amendments to section 203A),
and withdraw from Commission registration by October 19, 2011 (60 days
after the required filing of Form ADV), if no longer eligible.\245\ As
a consequence of section 410 of the Dodd-Frank Act, we estimate that
approximately 4,100 advisers currently registered with the Commission
will be required to withdraw their registration and register with one
or more State securities authorities.\246\ Given this significant re-
alignment of regulatory authority over numerous advisers, our proposed
rule would allow us to easily and efficiently identify the advisers
that are subject to our regulatory authority after the Dodd-Frank Act's
amendment to section 203A becomes effective, and which advisers have
switched to State registration due to the amendment to section 203A.
The proposed rule would confer this same benefit on State securities
authorities. This would promptly implement the Congressional mandate,
and accommodate the IARD processing of renewals and fees for State
registration and licensing, while allowing for an orderly transition.
It would also help minimize any potential uncertainty about the effects
of the Dodd-Frank Act on the registration status of a particular
adviser among investors and other market participants by providing a
simple, efficient means

of determining the adviser's post-Dodd-Frank registration status
through the IARD system as of a specific date. To the extent that rule
203A-5 would minimize uncertainty among investors and other market
participants, it could help minimize any disruption in advisory
business that such uncertainty could provoke, and investors would know
clearly whether an adviser that advises them is subject to State or
Commission registration and regulation.
---------------------------------------------------------------------------

    \245\ Proposed rule 203A-5(a), (b). See supra section II.A.1. of
this Release.
    \246\ See supra note 15 and accompanying text.
---------------------------------------------------------------------------

Switching Between State and Commission Registration
    Rule 203A-1 currently contains two means of preventing an adviser
from having to switch frequently between State and Commission
registration as a result of changes in its assets under management or
the departure of one or more clients.\247\ We propose to amend rule
203A-1 to eliminate the $5 million buffer that permits an investment
adviser having between $25 million and $30 million of assets under
management to remain registered with the states and that does not
subject the adviser to cancellation of its Commission registration
until its assets under management fall below $25 million.\248\ We are
proposing to eliminate the current $5 million buffer because it seems
unnecessary in light of Congress's determination generally to require
most advisers having between $30 million and $100 million of assets
under management to be registered with the states.\249\ Elimination of
this portion of the rule also promotes efficiency and competition by
making the registration requirements for advisers with assets under
management between $25 million and $30 million consistent with the
requirements for advisers with assets under management between $30
million and $100 million. Moreover, we are proposing to retain the 180-
day grace period from the adviser's fiscal year end to address concerns
about advisers frequently having to register and then de-register with
the Commission as a result of changes in their eligibility to
register.\250\
---------------------------------------------------------------------------

    \247\ See supra note 62-65 and accompanying text.
    \248\ See supra note 66.
    \249\ See supra note 67.
    \250\ See proposed rule 203A-1(b); supra notes 66-68 and
accompanying text.
---------------------------------------------------------------------------

Exemptions From the Prohibition on Registration With the Commission
    We are proposing amendments to three exemptions from the
prohibition on registration in rule 203A-2 to reflect developments
since their initial adoption, including the enactment of the Dodd-Frank
Act.\251\ First, we are proposing to eliminate the exemption in rule
203A-2(a) from the prohibition on Commission registration for
NRSROs.\252\ Since we adopted this exemption, Congress amended the Act
to exclude NRSROs from the Act and provided for a separate regulatory
regime for NRSROs under the Exchange Act.\253\ Only one NRSRO remains
registered as an investment adviser under the Act and reports that it
has more than $100 million of assets under management and thus would
not need to rely on the exemption.\254\ Given that NRSROs do not
currently rely on the exemption and that Congress has excluded NRSROs
from the Act, we do not believe that our proposed amendment would
generate any benefits or costs and would not impact efficiency,
competition or capital formation, separate from the benefit of
simplifying our rules by eliminating an unused exemption.
---------------------------------------------------------------------------

    \251\ See proposed rule 203A-2; supra section II.A.5. of this
Release. We would also make conforming amendments to renumber rule
203A-2(b) through (f).
    \252\ See supra section II.A.5.a. of this Release.
    \253\ See supra notes 73-74.
    \254\ Based on IARD data as of September 1, 2010.
---------------------------------------------------------------------------

    Second, we are proposing to amend the exemption available to
pension consultants in rule 203A-2(b) to increase the minimum value of
plan assets from $50 million to $200 million.\255\ We had set the
threshold at $50 million of plan assets for these advisers to ensure
that a pension consultant's activities are significant enough to have
an effect on national markets.\256\ We propose to increase this
threshold to $200 million in light of Congress's determination to
increase from $25 million to $100 million the amount of ``assets under
management'' that requires advisers to register with the Commission
without regard to State regulatory requirements.\257\ This amendment
would maintain the same ratio of plan assets to the statutory assets
under management requirements currently in place, and would provide the
regulatory benefit of allowing the Commission to focus its resources on
oversight of those pension consultants that are more likely to have an
effect on national markets.
---------------------------------------------------------------------------

    \255\ See proposed rule 203A-2(a); supra section II.A.5.b. of
this Release.
    \256\ See supra note 78.
    \257\ See supra note 79.
---------------------------------------------------------------------------

    Finally, we propose to amend the multi-State adviser exemption in
rule 203A-2(e) to align the rule with the multi-State exemption
Congress built into the mid-sized adviser provision under section 410
of the Dodd-Frank Act.\258\ Under rule 203A-2(e), the prohibition on
registration with the Commission does not apply to an investment
adviser that is required to register in 30 or more states. Once
registered with the Commission, the adviser remains eligible for
Commission registration as long as it would be obligated, absent the
exemption, to register in at least 25 states.\259\ We propose to amend
rule 203A-2(e) to permit all investment advisers required to register
as an investment adviser with 15 or more states to register with the
Commission.\260\ We believe this reflects a Congressional view on the
number of states with which an adviser must be required to be
registered before the regulatory burdens associated with such
regulation warrants registration with the Commission and application of
the preemption provision.\261\ This amendment reduces the regulatory
burdens on advisers required to be registered with at least 15 states,
but less than 30, by allowing them to register with a single securities
regulator--the Commission. Additionally, the amendment promotes
efficiency and reduces the effect on competition between small and mid-
sized investment advisers by imposing a consistent multi-State
exemption standard. We also propose to eliminate the provision in the
rule that permits advisers to remain registered until the number of
states in which they must register falls below 25 states, and we are
not proposing a similar cushion for the 15-State threshold.\262\ We do
not see any significant benefit of retaining the buffer and believe it
is unnecessary as a result of our proposal to lower the number of
states from 30 to 15 and because advisers elect to rely on the
exemption.
---------------------------------------------------------------------------

    \258\ See proposed rule 203A-2(d); supra section II.A.5.c. of
this Release.
    \259\ See supra note 82.
    \260\ See proposed rule 203A-1(d)(1).
    \261\ See supra note 84.
    \262\ See supra note 85-86.
---------------------------------------------------------------------------

Elimination of Safe Harbor
    We are proposing to eliminate the safe harbor in rule 203A-4 from
Commission registration for an investment adviser that is registered
with a State securities authority of the State in which it has its
principal office and place of business, based on a reasonable belief
that it is prohibited from registering with the Commission because it
does not have sufficient assets under management.\263\ Advisers have
not, in our experience, asserted the availability of this safe harbor
as a defense, which protects only

against enforcement actions by us and not any private actions, and we
view it as unlikely that an adviser would be reasonably unaware that it
has more than $100 million of regulatory assets under management when
it is required to report its regulatory assets under management on Form
ADV.\264\ We do not believe that rescinding the safe harbor would
generate any significant benefits, other than simplifying our rules in
general and thereby marginally reducing costs of compliance, and we
believe it would have little, if any, other effect on efficiency,
competition or capital formation.
---------------------------------------------------------------------------

    \263\ Rule 203A-4. See supra section II.A.6. of this Release.
    \264\ See supra notes 91-92 and accompanying text.
---------------------------------------------------------------------------

Mid-Sized Advisers
    The Dodd-Frank Act does not explain how to determine whether a mid-
sized adviser is ``required to be registered'' or is ``subject to
examination'' by a particular State securities authority for purposes
of section 203A(a)(2)'s prohibition on mid-sized advisers registering
with the Commission.\265\ We propose to incorporate into Form ADV an
explanation of how we construe these provisions.\266\ Our instructions
are intended to clarify the meaning of these provisions, which would
benefit advisers by promoting efficiency and competition. For example,
as a result of our proposal to identify to advisers filing on IARD the
states that do not subject advisers to examination, a mid-sized adviser
would not be required to determine whether it is subject to examination
in a particular State. Simplifying the process for mid-sized advisers
to determine whether they are required to register with us would
decrease any competitive disadvantages compared to smaller advisers.
Our proposed changes to IARD also would ensure that only mid-sized
advisers with a principal office and place of business in those states
(or mid-sized advisers that are not registered with the states where
they maintain a principal office and place of business) will register
with the Commission, which would also make the registration process
more efficient.
---------------------------------------------------------------------------

    \265\ See supra note 94.
    \266\ See proposed Form ADV: Instructions for Part 1A, instr.
2.b. See also supra section II.A.7. of this Release (discussing
these instructions in detail).
---------------------------------------------------------------------------

2. Exempt Reporting Advisers: Sections 407 and 408
    Congress gave us broad authority to require exempt reporting
advisers to file reports as necessary or appropriate in the public
interest or for the protection of investors.\267\ We have sought
information that we believe would be useful to us to be able to
identify the advisers, their owners, and their business models and, in
addition, whether they might present sufficient concerns as to warrant
our further attention in order to protect their clients and fulfill our
regulatory responsibilities. We have also considered the broader public
interest in making this information generally available and believe
there may be benefits of providing information about their activities
to the public. We acknowledge that there may be costs associated with
providing this information to us, and that the adviser may provide some
or all of this information to private fund investors or prospective
investors, however, we believe these investors would benefit from the
proposed reporting requirements.
---------------------------------------------------------------------------

    \267\ See sections 407 and 408 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    To meet the Dodd-Frank Act's reporting provisions for ``exempt
reporting advisers,'' we are proposing a new rule, rule 204-4, to
require exempt reporting advisers to file reports with the Commission
electronically on Form ADV.\268\ We are also proposing amendments to
Form ADV so that it could serve the dual purpose of both an SEC
reporting form for exempt advisers and, as it is used today, a
registration form for both State and SEC-registered firms.\269\ In
addition to requiring that exempt reporting advisers use Form ADV,
proposed rule 204-4 would require these advisers to submit reports
through the IARD and to pay a filing fee.\270\
---------------------------------------------------------------------------

    \268\ Proposed rule 204-4(a). See supra section II.B. of this
Release.
    \269\ See supra section II.B.1. of this Release.
    \270\ Proposed rule 204-4(b), (d).
---------------------------------------------------------------------------

    We believe that using Form ADV and IARD for exempt reporting
adviser reports would yield several benefits. For instance, using Form
ADV and IARD would create efficiencies that benefit both us and filers
by taking advantage of an established and proven adviser filing system,
while avoiding the expense and delay of developing a new form and
filing system. Additionally, the IARD contains many time-saving
features, like the ability to pre-populate prior responses and drop-
down boxes for common responses. In addition, because exempt reporting
advisers may be required to register on Form ADV with one or more State
securities authorities, use of the existing form and filing system
(which is shared with the states) should reduce regulatory burdens for
them because they can satisfy multiple filing obligations through a
uniform form.\271\ Similarly, regulatory burdens would be diminished
for an exempt reporting adviser that later finds it can no longer rely
on an exemption and would be required to register with us because the
adviser would simply file an amendment to its current Form ADV to apply
for Commission registration.\272\ Finally, certain items in Form ADV
Part 1 are also linked to Form BD, which would create efficiencies if
the exempt reporting adviser ever applies for broker-dealer
registration.
---------------------------------------------------------------------------

    \271\ See supra note 126-127 and accompanying text.
    \272\ See proposed General Instruction 14 (providing procedural
guidance to advisers that no longer meet the definition of exempt
reporting adviser). See also supra note 128.
---------------------------------------------------------------------------

    Requiring that exempt reporting advisers file their reports through
the IARD would also benefit clients, prospective clients, and members
of the public who could readily access the information, without cost,
through the Commission's Web site on the Investment Adviser Public
Disclosure (IAPD) system. Investors would have access to some
information that may have been previously unavailable or not easily
attainable, such as whether a prospective exempt reporting adviser has
certain disciplinary events and whether its affiliates present
conflicts of interest or broader access to other financial services. As
a result, investors would be in a better position to make informed
decisions. As a secondary benefit, the easy availability of information
about these advisers and their advisory affiliates may discourage
advisers from engaging in certain practices (such as maintaining client
assets with a related person custodian) or hiring certain persons (such
as those with disciplinary history). Investors' access to information
may also facilitate greater competition among advisers, which may in
turn benefit clients.
    Electronic reporting by exempt reporting advisers of certain Items
within Form ADV would give us better access to information about these
advisers to administer our regulatory programs and to identify advisers
whose activities suggest a need for closer scrutiny. We can easily use
the IARD to generate reports on the industry, its characteristics and
trends. These reports would help us anticipate regulatory problems,
allocate and reallocate our resources, and more fully evaluate and
anticipate the implications of various regulatory actions we may
consider taking, which should increase both the efficiency and
effectiveness of our programs and thus increase investor protection. In
addition, requiring

exempt reporting advisers to complete Section 7.B of Schedule D for
each private fund they manage should result in many of the same
benefits that this information produces with respect to registered
advisers that we address in the discussion of the proposed amendments
to Form ADV below.
    We are also proposing to amend rule 204-1 under the Advisers Act,
which addresses when and how advisers must amend their Form ADV, to
require that exempt reporting advisers file updating amendments to
reports filed on Form ADV.\273\ Proposed rule 204-1(a) would require an
exempt reporting adviser, like a registered adviser, to amend its
reports on Form ADV: (i) At least annually, within 90 days of the end
of the adviser's fiscal year; and (ii) more frequently, if required by
the instructions to Form ADV. Consequently, we are proposing to amend
General Instruction 4 to Form ADV to require an exempt reporting
adviser to update Items 1 (identification information), 3 (Form of
Organization), or 11 (disciplinary information) promptly if they become
inaccurate in any way, and to update Item 10 (Control Persons) if it
becomes materially inaccurate.\274\
---------------------------------------------------------------------------

    \273\ Proposed rule 204-1. See supra section II.B.3. of this
Release.
    \274\ Registered advisers are subject to the same updating
requirements with respect to these Items. See General Instruction 4
to Form ADV.
---------------------------------------------------------------------------

    Requiring advisers to amend their reports on Form ADV at least
annually, and more frequently if identification or disciplinary
information becomes inaccurate in any way, would assure that we have
access to updated information such as knowing when an exempt reporting
adviser has added or no longer has a private fund client, which will
provide us with the information necessary to assess whether they might
present sufficient concerns to warrant our further inquiry. Updated
information would also benefit clients, prospective clients, and other
members of the public that could use this information in evaluating,
for example, whether to make an investment in a venture capital fund
managed by an exempt reporting adviser.
    To accommodate their use by exempt reporting advisers, we also are
proposing technical amendments to Form ADV-H, the form advisers use to
request a hardship exemption from electronic filing,\275\ and Form ADV-
NR, used to appoint the Secretary of the Commission as an agent for
service of process for certain non-resident advisers.\276\ Proposed
rule 204-4(e) and the proposed amendments to Form ADV-H would benefit
exempt reporting advisers by allowing them to avoid non-compliance with
reporting requirements based purely on unanticipated technical
difficulties. The proposed amendments to Form ADV-NR would benefit
investors by allowing us to obtain appropriate consent to permit the
Commission and other parties to bring actions against non-resident
partners or agents for violations of the Federal securities laws.
---------------------------------------------------------------------------

    \275\ Proposed rule 204-4(e) would allow exempt reporting
advisers having unanticipated technical difficulties that prevent
submission of a filing to the IARD systems to request a temporary
hardship exemption from electronic filing requirements.
    \276\ See proposed amended Form ADV-H, proposed amended Form
ADV-NR, and proposed General Instruction 18. The amendments to Form
ADV-H and Form ADV-NR would reflect that exempt reporting advisers
use the forms in the same way and for the same purpose as they are
currently used by registered investment advisers.
---------------------------------------------------------------------------

3. Form ADV Amendments
    As discussed above, we are proposing to require advisers to provide
us on Form ADV additional information about (1) private funds they
advise, (2) their advisory business and conflicts of interest, and (3)
their non-advisory activities and financial industry affiliations.\277\
We are also proposing certain additional changes intended to improve
our ability to assess compliance risks and to identify the advisers
that are covered by section 956 of the Dodd-Frank Act addressing
certain incentive-based compensation arrangements.
---------------------------------------------------------------------------

    \277\ See supra section II.C. of this Release.
---------------------------------------------------------------------------

Private Fund Reporting Requirements
    The private fund reporting requirements we are proposing would
provide us with information designed to help us better understand
private fund investment activities and the scope and potential impact
of those activities on investors and our markets. The information would
assist us in identifying particular practices that may harm investors
and would allow us to conduct targeted examinations of private fund
advisers based on these practices or other criteria. In addition the
proposed items are designed to improve our ability to assess risk,
identify funds with service provider arrangements that raise a ``red
flag,'' identify firms for examination, and allow us to more
efficiently conduct examinations. For instance, it would be relevant to
us to know that a private fund is using a service provider that we are
separately investigating for alleged misconduct. We propose to ask
about both the number and the types of investors in the fund to get a
better idea of the investors the fund is intended to serve and to get a
sense of the extent to which investors may themselves be in a position
to evaluate the adviser. We would ask about the size of the fund,
including both its gross and net assets, to better understand the scope
of its operations and the extent of leverage it employs. Responses to
the service provider questions would, for example, allow us to identify
those funds that do not make use of independent service providers,
which may indicate a higher level of risk, and provide other key
information regarding the identity and role of these private fund
gatekeepers. Each particular item of information may not itself
indicate an elevated risk of a compliance failure, but is designed to
serve as an input to the risk metrics by which our staff identifies
potential risk and allocates examination resources. The staff conducts
similar analyses today, but with fewer inputs.
    Form ADV information that private fund advisers would report to us
also would benefit private fund investors in evaluating potential
managers. As amended, Form ADV would require private fund advisers to
disclose information about their business, affiliates and owners,
gatekeepers, and disciplinary history. This would create a publicly
accessible foundation of basic information that could aid investors, to
the extent they were not otherwise timely given the information, in
conducting due diligence and could further help investors and other
industry participants protect against fraud. For example, using the
IARD data, auditors would be able to compare their list of funds they
audit with those whose advisers report them as auditor. Investors (and
their consultants) would be able to compare representations made on
Schedule D with those made in private offering documents or other
material provided to prospective investors.
    Private fund reporting would benefit investors and market
participants by providing us and other policy makers with better data.
Better data would enhance our ability to form and frame regulatory
policies regarding the private fund industry and its advisers, and to
evaluate the effect of our policies and programs on this sector,
including for the protection of private fund investors. Today we
frequently have to rely on data from other sources, when available.
Private fund reporting would provide us with important information
about this rapidly growing segment of the U.S. financial system.

Other Proposed Amendments to Form ADV
    Other amendments we are proposing today to Form ADV would refine or
expand existing questions, which would give us a more complete picture
of an adviser's practices, help us better understand each adviser's
operations, business and services, and provide us with more information
to determine advisers' risk profiles and prepare for examinations. The
amendments would provide us with critical information to identify
practices that may harm clients, which would assist us in identifying
candidates for risk-targeted examinations, detecting data or patterns
that suggest further inquiry may be warranted about a particular issue,
and distinguishing additional conflicts of interest that advisers may
face. For example, the additional information we propose to require
about related persons would allow us to link disparate pieces of
information that we have access to concerning an adviser and its
affiliates to identify whether those relationships present conflicts of
interest that create higher risks for advisory clients. Another example
is the proposed switch from ranges to approximate numbers of employees
and assets by client type. Although these changes would refine data we
already receive, it would provide significant benefits in developing
risk-based profiles of advisers. Our proposal to expand the list of the
types of advisory activities an adviser might engage in and to include
a list of the types of investments about which they provide advice
would help us better understand the operations of advisers.
Additionally, our proposal to require advisers to report whether they
have $1 billion or more in assets would help us to identify the
advisers that are covered by section 956 of the Dodd-Frank Act
addressing certain incentive-based compensation arrangements. Overall,
the information proposed to be collected on Form ADV is designed to
improve our risk-assessment capabilities and help us best allocate our
examination resources.
    Further, advisory clients and prospective clients would also
benefit from these proposed amendments. The additional information that
registered advisers would report to us would be publicly available,
which would aid investors in evaluating potential managers and
understanding their practices. For example, requiring an adviser to
indicate whether it or any of its control persons is a public reporting
company under the Exchange Act would provide a signal, not only to us,
but to clients and to prospective clients, that additional public
information is available about the adviser and/or its control persons.
Requiring an adviser to report whether it has $1 billion or more of
assets would help inform the adviser, its clients and the public
whether or not the adviser is subject to section 956 of the Dodd-Frank
Act and any rules or guidelines thereunder. The additional information
about the adviser's related persons would assist clients to compare
business practices, strategies, and conflicts of a number of advisers,
which may help them to select the most appropriate adviser for them.
Clients may also benefit indirectly because advisers may be
incentivized to implement stronger controls and practices, particularly
related to any conflicts of interest or business practices that may
result in additional risks because of enhanced client awareness. Third
parties would also be able to access the new information reported in
filings of the amended form, which would allow academics, businesses,
and others to access additional information about registered investment
advisers and exempt reporting advisers, which they can use to study the
industry.
    We anticipate that the proposed amendments to the Form ADV
instructions would assist investment advisers in determining their
regulatory assets under management and whether they are eligible to
register with us, which may result in cost savings for some advisers
because they may more readily be able to make this determination.\278\
Eliminating the choices we have given advisers in the Form ADV
instructions for calculating assets under management would, for
example, provide for a uniform method of determining assets under
management for purposes of the form and the new exemptions from
registration under the Advisers Act, which we expect would promote
competition, would result in advisers' greater certainty in choosing to
rely on an exemption from registration, and would result in consistent
reporting across the industry.\279\ Our proposed amendments to the
instructions relating to calculation of assets under management would
also clarify how an adviser would determine the amount of private fund
assets it has under management, as there are currently no specific
instructions on this point. We expect this may provide advisers with
greater certainty in their calculation of regulatory assets under
management and would provide greater certainty in determining their
eligibility for the exemptions from registration available to certain
private fund advisers.\280\
---------------------------------------------------------------------------

    \278\ See section II.A.3.
    \279\ See id. See also Exemptions Release at section II.C.
(discussing exemption for foreign private advisers).
    \280\ See Exemptions Release at sections II.B.2. and II.C.5.
---------------------------------------------------------------------------

4. Amendments to Pay to Play Rule
    We are proposing two amendments to rule 206(4)-5 that we believe
are appropriate as a result of the enactment of the Dodd-Frank Act, and
one minor amendment to clarify the rule.\281\ First, we propose to
amend the rule to make it continue to apply to all private advisers,
including exempt reporting advisers and foreign private advisers.\282\
We are proposing this amendment to prevent the narrowing of the
application of the rule as a result of the amendments to the Act made
by the Dodd-Frank Act.\283\ We do not believe that this amendment would
create any benefits (or costs) beyond those created by the rule as
originally adopted,\284\ but rather would merely assure that the rule
continues to apply to the same advisers as we intended when we adopted
the rule.\285\
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    \281\ See supra section II.D.1. of this Release.
    \282\ Proposed rule 206(4)-5(a). See supra section II.B. of this
Release (discussing the definitions of exempt reporting advisers and
foreign private advisers).
    \283\ See supra section II.D.1. of this Release.
    \284\ See section IV of the Pay to Play Release.
    \285\ Rule 206(4)-5 currently applies to ``private advisers''
exempt from registration with the Commission under section 203(b)(3)
of the Advisers Act. As discussed in section II.B. of this Release,
the Dodd-Frank Act has eliminated the ``private adviser'' exemption
from registration with the Commission in section 203(b)(3), but has
created new exemptions for exempt reporting advisers and foreign
private advisers. Advisers that qualify for these new exemptions
generally are subsets of the advisers that qualify for the existing
section 203(b)(3) ``private adviser'' exemption.
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    Second, we propose to amend the provision of rule 206(4)-5 that
prohibits advisers from paying persons (e.g., ``solicitors'' or
``placement agents'') to solicit government entities unless such
persons are ``regulated persons'' (i.e., registered investment advisers
or broker-dealers subject to rules of a registered national securities
association, such as FINRA, that restrict its members from engaging in
pay to play activities).\286\ Instead, the proposed amendments would
permit an adviser to pay any ``regulated municipal advisor'' to solicit
government entities on its behalf. A regulated municipal advisor under
the proposed rule would be a municipal advisor that is registered under
section 15B of the Exchange Act and subject to pay to play rules
adopted

by the MSRB.\287\ We understand that the MSRB intends to consider
subjecting municipal advisors to pay to play rules similar to its rules
governing municipal securities dealers. Broker-dealers acting as
placement agents or solicitors and investment advisers acting as
solicitors of government entities meet the statutory definition of a
municipal advisor and thus would be subject to MSRB rules. Our proposed
amendment would, like the current rule, permit advisers to pay persons
to solicit government entities on their behalf only if such third
parties are registered with us and subject to pay to play rules of
their own.\288\ Given the new regulatory regime applicable to municipal
advisors, including solicitors of municipal entities that meet the
definition of ``regulated person'' under rule 206(4)-5, broker-dealer
solicitors are expected to be subject to MSRB's pay to play rules,
rendering it unnecessary at this time for FINRA to adopt a pay to play
rule that would satisfy rule 206(4)-5(f)(9)(ii). We are proposing,
therefore, to replace references in rule 206(4)-5 to FINRA's pay to
play rules with references to MSRB rules that we find are consistent
with the objectives of rule 206(4)-5 and impose substantially
equivalent or more stringent pay to play restrictions. To the extent
that our proposed amendment would eliminate the need to subject certain
solicitors to multiple pay to play rules, it would reduce the
regulatory burdens on such placement agents.
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    \286\ Rule 206(4)-5(a)(2)(i). FINRA is currently the only
national securities association registered under section 19(a) of
the Exchange Act (15 U.S.C. 78s(b)).
    \287\ Proposed rule 206(4)-5(a)(2), (f)(9). These pay to play
rules must prohibit municipal advisors from engaging in distribution
or solicitation activities if certain political contributions have
been made. In addition, the Commission must find that they both
impose substantially equivalent or more stringent restrictions on
municipal advisors than rule 206(4)-5 imposes on investment advisers
and that they are consistent with the objectives of rule 206(4)-5.
    \288\ Pay To Play Release at section II.B.2.(b).
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    In addition, due to the fact that the definition of a municipal
advisor includes certain registered investment advisers and broker
dealers--the two categories of regulated persons that an adviser may
currently use as placement agents under rule 206(4)-5--our amendment
may increase the number of placement agents that an adviser potentially
could hire.\289\ This could benefit advisers by increasing competition
in the market for placement agent services and reducing the cost of
such services. It could also benefit those placement agents that are
not ``regulated persons'' under rule 206(4)-5, but may meet the
municipal advisor definition, by allowing advisers to hire them.
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    \289\ Our current ``regulated person'' definition does not
include, for example, advisers prohibited from registering with the
Commission under section 203A of the Advisers Act (15 U.S.C. 80b-
3A), such as State-registered advisers, or advisers unregistered in
reliance on an exemption other than section 203(b)(3) of the Act.
(15 U.S.C. 80b-3(b)(3)). The definition of ``municipal advisor''
does not exclude these advisers. See section 975 of the Dodd-Frank
Act.
    We adopted the third-party solicitor ban to prevent advisers
from circumventing the rule through third parties. See section
II.B.2.(b) of the Pay To Play Release. Given the Dodd-Frank Act's
creation of the ``municipal advisor'' category, and given that it
requires these persons to register with the Commission and subjects
them to MSRB rulemaking authority, we believe that expanding the
current ``regulated person'' exception to the third party solicitor
ban to include registered municipal advisors subject to pay to play
rules would not undermine the ban's purpose. By potentially allowing
advisers to choose from a broader set of potential third-party
solicitors, we believe our proposed amendments may promote
efficiency and competition in the market for advisory services to
the extent third-party solicitors that are not regulated persons
participate.
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    Finally, we are proposing a minor amendment to rule 206(4)-5's
definition of a ``covered associate'' \290\ of an investment adviser 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.\291\ Because the minor amendment would not change the
meaning of the rule, we do not believe that it would generate any
additional benefits (or costs).
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    \290\ See rule 206(4)-5(f)(2) (defining a ``covered associate''
of an investment adviser as: ``(i) Any general partner, managing
member or executive officer, or other individual with a similar
status or function; (ii) Any employee who solicits a government
entity for the investment adviser and any person who supervises,
directly or indirectly, such employee; and (iii) Any political
action committee controlled by the investment adviser or by [any
other covered associate].'').
    \291\ See proposed rule 206(4)-5(f)(2); supra section II.D.1. of
this Release.
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B. Costs

1. Eligibility To Register With the Commission: Section 410
Transition to State Registration
    Proposed Rule 203A-5 would impose one-time costs on investment
advisers registered with us by requiring them to file an amendment to
Form ADV, and on advisers that are no longer eligible to remain
registered with us by requiring them to file Form ADV-W to withdraw
from Commission registration.\292\ According to IARD data,
approximately 11,850 investment advisers are registered with us and
would be required to file an amended Form ADV,\293\ and we estimate
that approximately 4,100 of those advisers will be required to withdraw
their registration and register with one or more State securities
authorities.\294\ We believe that the proposed rule would have little
impact on competition among advisers registered with us because they
would all be subject to these requirements, but the rule could have a
limited impact on competition between SEC-registered advisers who are
subject to the rule and State-registered advisers who are not. We also
believe that the rule would have little, if any, effect on capital
formation.
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    \292\ See proposed rule 203A-5; supra section II.A.1. of this
Release.
    \293\ Based on IARD data as of September 1, 2010, 11,867
investment advisers are registered with the Commission. We have
rounded this number to 11,850 for purposes of our analysis.
    \294\ According to data from the IARD as of September 1, 2010,
4,136 Commission-registered advisers, which we are rounding to 4,100
for our analysis, either: (i) Had assets under management of between
$25 million and $100 million and did not indicate on Form ADV Part
1A that they are relying on an exemption from the prohibition on
Commission registration; or (ii) were permitted to register with us
because they rely on the registration of an SEC-registered affiliate
that has assets under management between $25 million and $100
million and are not relying on an exemption.
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    For purposes of calculating the currently approved Paperwork
Reduction Act (``PRA'') burden for Form ADV, we estimated that an
annual updating amendment would take each adviser approximately 6 hours
per amendment,\295\ and we estimate the one-time transition amendment
would have similar burden. In addition, for purposes of the increased
PRA burden for Form ADV, we estimate that the proposed amendments to
Part 1A of Form ADV would take each adviser approximately 4.5 hours, on
average, to complete.\296\ As a result, we estimate a total average
time burden of 10.5 hours for each respondent completing the amendment
to Form ADV required by proposed rule 203A-5 (excluding private fund
information which is addressed below).\297\ We estimate that each
adviser would incur average costs of approximately $2,646,\298\ for a
total aggregate of $31,355,100.\299\ In addition, of these 11,850
registered advisers, we estimate that 3,500 advise one or more private
funds and would have to complete the private fund reporting

requirements we are proposing today.\300\ We expect this would take
33,350 hours,\301\ in the aggregate, for a total cost of
$8,404,200.\302\ As a result, the total estimated costs associated with
filing amended Form ADV as required by proposed rule 203A-5 would be
$39,759,300.\303\
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    \295\ See infra section V.B.2.a.3. of this Release.
    \296\ See infra sections V.B.1.a. and V.B.2.a.3. of this
Release.
    \297\ 6 hours (Form ADV amendment) + 4.5 hours (new Form ADV
items) = 10.5 hours.
    \298\ We expect that the performance of this function would most
likely be equally allocated between a senior compliance examiner and
a compliance manager. Data from the Securities Industry Financial
Markets Association's Management & Professional Earnings in the
Securities Industry 2009 (``SIFMA Management and Earnings Report''),
modified to account for an 1,800-hour work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead, suggest that costs for a senior compliance examiner and a
compliance manager are $210 and $294 per hour, respectively. [5.25
hours x $210 = $1,102.50] + [5.25 hours x $294 = $1,543.50] =
$2,646.
    \299\ 11,850 advisers x $2,646 = $31,355,100.
    \300\ See infra note 400.
    \301\ See infra note 403.
    \302\ [16,675 hours x $210 = $3,501,750] + [16,675 hours x $294
= $4,902,450] = $8,404,200. As noted above, we expect that the
performance of this function will most likely be equally allocated
between a senior compliance examiner and a compliance manager. See
supra note 298.
    \303\ $31,355,100 + $8,404,200 = $39,759,300.
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    For the estimated 4,100 advisers that will be required to withdraw
their registrations, we estimate that the average burden for each
respondent is 0.25 hours for filing a partial withdrawal on Form ADV-
W.\304\ An adviser would likely use compliance clerks to prepare the
filings and review the prepared Form ADV-W.\305\ We estimate that each
adviser would incur average costs of approximately $14.75 \306\ to
comply with the Form ADV-W filing requirements, for a total one-time
cost of $60,475.\307\ As a result, proposed rule 203A-5 would result in
a total one-time cost of $39,819,775.\308\
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    \304\ Form ADV-W is designed to accommodate the different types
of withdrawals an investment adviser may file. An investment adviser
ceasing operations would complete the entire form to withdraw from
all jurisdictions in which it is registered (full withdrawal), while
an adviser withdrawing from some, but not all, of the jurisdictions
in which it is registered would omit certain items that we do not
need from an adviser continuing in business as a State-registered
adviser. We expect that advisers that would be required to file Form
ADV-W if proposed rule 203A-5 is adopted would file only a partial
withdrawal because switching to State registration only requires a
partial withdrawal. Compliance with the requirement to complete Form
ADV-W imposes an average burden of 0.25 hours for an adviser filing
for partial withdrawal.
    \305\ We have assumed for purposes of the current approved PRA
burden for rule 203-2 and Form ADV-W that advisers would use
clerical staff to file for a partial withdrawal. Data from the
Securities Industry Financial Markets Association's Office Salaries
in the Securities Industry 2009 (``SIFMA Office Salaries Report'')
modified to account for an 1,800-hour work-year and multiplied by
2.93 to account for bonuses, firm size, employee benefits and
overhead, suggest that the hourly rate for a compliance clerk is
$59.
    \306\ 0.25 hours x $59 (hourly wage for clerk) = $14.75 (total
cost for Form ADV-W filing).
    \307\ $14.75 x 4,100 = $60,475.
    \308\ $39,759,300 (total cost for Form ADV filing) + $60,475
(total cost for Form ADV-W filing) = $39,819,775 (total cost for
proposed rule 203A-5).
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Switching Between State and Commission Registration
    The proposed amendment to rule 203A-1 may impose costs on advisers
by eliminating the $5 million buffer in current rule 203A-1(a), which
permits but does not require an adviser to register with the Commission
if the adviser has between $25 million and $30 million of assets under
management.\309\ Specifically, the proposed amendment may require
advisers with between $25 million and $30 million in assets under
management that are still eligible for registration with the Commission
despite the Dodd-Frank Act's amendments to section 203A of the Advisers
Act to switch their registration between the Commission and the states
when they otherwise would not do so if the rule continued to include
the buffer.\310\ As of September 1, 2010, approximately 530 advisers
registered with the Commission had between $25 million and $30 million
of assets under management.\311\ Because the Dodd-Frank Act has amended
section 203A to prohibit most of these advisers from registering with
the Commission,\312\ we believe that all of these advisers could see
increased costs as a result of our proposed amendment.\313\ These costs
include those associated with withdrawing their registration with the
Commission and registering with the states, including filing a notice
of withdrawal on Form ADV-W in accordance with rule 203-2 under the
Advisers Act. We have estimated for purposes of our current approved
hour burden under the PRA for rule 203-2 and Form ADV that a partial
withdrawal imposes an average burden of approximately 0.25 hours for an
adviser, and the filing (and costs associated with the filing) by these
530 advisers are included in our discussion above of the Form ADV-W
filing requirement under rule 203A-5.\314\ These advisers also would
incur the costs of State registration and of compliance with State laws
and regulations, which we expect would vary widely depending on the
number of, and which, states with which each adviser is required to
register. For example, individual State registration fees range from
approximately $60 to $400 annually and some states require advisers to
submit documentation in addition to Form ADV.\315\ We believe these
amendments would have little, if any, effect on capital formation.
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    \309\ See proposed rule 203A-1; supra section II.A.4. of this
Release.
    \310\ See supra section II.A.4. of this Release. Under the Dodd-
Frank Act, a mid-sized adviser is not prohibited from registering
with the Commission if: (i) The adviser is not required to be
registered as an investment adviser with the securities commissioner
(or any agency or office performing like functions) of the State in
which it maintains its principal office and place of business; (ii)
if registered, the adviser would not be subject to examination as an
investment adviser by that securities commissioner; or (iii) the
adviser is required to register in 15 or more states. See section
410 of the Dodd-Frank Act; supra section II.A. of this Release.
    \311\ Based on IARD data as of September 1, 2010.
    \312\ See supra section II.A. of this Release (discussing new
section 203A(a)(2) of the Advisers Act, which prohibits certain mid-
sized advisers from registering with the Commission).
    \313\ For purposes of this analysis, we assume that all of these
advisers would not remain eligible to register with the Commission
because they would be required to be registered and subject to
examination by securities authorities in the states where they
maintain their respective principal offices and places of business.
See Section 203A(a)(2); supra section II.A.7.b. of this Release
(discussing the fact that we are writing a letter to each State
securities commissioner (or official with similar authority) to
request that each advise us whether investment advisers registered
in the State would be subject to examination as an investment
adviser by that State's securities commissioner (or agency or office
with similar authority)). See also NASAA Report at 7.
    \314\ See supra notes 304-308 and accompanying text addressing
the costs of filing Form ADV-W for advisers that will be required to