Date: 06/13/2000 8:18 PM Subject: S7-10-00 June 13, 2000 Jonathan G. Katz, Secretary Securities and Exchange Commission Office of Investor Education and Assistance 450 Fifth Street, NW Washington D.C. 20549 Re: Proposed Rule: Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV. File No. S7-10-00 Dear Jonathan G. Katz: The Personal Financial Planning Executive Committee of the American Institute of Certified Public Accountants (AICPA) appreciates the opportunity to comment upon the Securities and Exchange Commission's ("SEC") proposed rules which would create a an Internet-based system of electronic filing for a substantially revised Form ADV for Investment Advisers. As a preliminary matter, we applaud you and your staff for helping the investing public and investment advisers move to the Internet in making filings with the SEC and state securities authorities. However, the AICPA believes some of the proposals should be modified. The modifications we suggest, and the reasons for our suggestions, are set forth below. The comments set forth in this letter address a number of the issues raised in the Proposed Rule that are of particular interest to our members. The AICPA appreciates the opportunity to comment on this very important matter and requests that the SEC consider our comments when revising the Proposed Rule for final adoption. Background The proposed rule will create a system to be called the Investment Adviser Registration Depository (the IARD), will permit investment advisers to satisfy filing obligations under state and federal laws by making a single electronic filing. Information contained in filings made through the IARD will be stored in a database that the public will be able to access free of charge through the Internet. The proposed amendments to the rules will require advisers to make filings through the IARD after the system begins to operate. In addition the SEC is proposing substantial amendments to the application, repotting and disclosure for investment advisers. We also understand that participation by all states will probably not begin immediately since some state securities regulators lack statutory authority to require advisers that are registered or notice filed with them to file through the IARD and would postpone full participating in the system until necessary legislation is enacted. We recognize that the IARD is being built and operated by the NASD Regulation, Inc, (NASDR) under contract with the SEC and the North American Securities Administrators Association (NASAA). We would like the NASDR's role to be limited and not further expanded as the IARD become operational. Implementation Filing fees -- AICPA does not favor the proposed system of establishing an account and maintaining funds in the account. AICPA members would prefer to be billed by SEC, or, better, to receive a bill from each state. This provides a record for the payer, and also allows the payer to audit of the accuracy of the charge imposed. AICPA advocates placing an interactive calculator on the site to enable users to verify the amount(s) they owe to each agency. Continuing hardship exemption -- AICPA is in favor of a continuing hardship exemption for SEC-registered advisers. The SEC's proposed transition process, and advisors' readiness to submit -- AICPA believes that, instead of using the process proposed by SEC, the first filing should be when advisers would normally do their annual filing (or electronic submission). And there should be provision for test filing between January and March. Also, the first year all advisers should be eligible for the hardship exemption. That is, for the first year electronic filing should, in effect, be optional. Also, in the first year that an adviser files electronically, the fee(s) should be waived. This would encourage electronic filing while not placing a hardship on small firms that are not yet ready to file electronically. This also provides adequate time for the SEC to smoothly transition this change. Comments on Part 1B, for state-registered advisers for NASAA's consideration by the state securities authorities -- The AICPA would like to see more conformity across states on issues like disclosure, de minimus rules, holding-out rules, and bonding rules. Currently a significant proportion of our members are subject to reporting in more than one state, and thus are subject to more than one rule on these points (among others). In the future, the increase of Internet-based business will doubtless increase the burdens of compliance with varying standards. Also, the AICPA would like to see increased conformity between states' requirements and federal requirements, so as to ease record-keeping and reporting burdens as a practitioner crosses the $25MM threshold from state to federal reporting. Part 2A ? The firm brochure's proposed delivery requirements: AICPA believes that the changed Form ADV delivery requirement which is whenever information in the brochure become materially inaccurate should contain a list of examples of types of materially inaccurate information requiring an adviser to revise and deliver the new brochure. The AICPA has concern that there might be advisers who are uncertain about what types of material changes would trigger the delivery requirement. As an example, would changes in an adviser's structure, fees, location, business practices, and services be material changes? In addition, the SEC proposes to allow advisors a 30-day transition period to provide new brochures and supplements to existing advisory clients. AICPA recommends a 60-day window. Proposed Item 5 of Part 2A -- AICPA favors also requiring an advisor to discuss its conflict of interest in charging performance or other incentive fees with its client in addition to having the requirement to disclose it when the type of fee structure presents a material conflict. Proposed Item 8 of Part 2A: Should disciplinary information should appear in a separate document accompanying the brochure itself, in order to highlight its importance to advisory clients? No. AICPA recommends that this information appear in Part 2, not in a separate document. Situations on widening disclosure of complaints against an adviser -- AICPA recommends disclosure of awards against an adviser, but recommends against disclosure of complaints or potential civil actions against an adviser. We believe that judgements of criminal behavior should be disclosed. Proposed Item 10 of Part 2A: Disclosure where an advisor has a material financial interest in an issuer of securities it recommends to clients, and/or where the adviser has a material financial interest and recommends that clients buy into a company's public offering (an IPO) -- The AICPA believes that additional guidance would be helpful to advisors. In addition, AICPA believes that in both of these situations the adviser should be required to disclose the adviser's interest. Proposed Item 18 of Part 2A: disclosures concerning bankruptcies -- AICPA recommends that the disclosure rules not be widened, i.e., that disclosure should be required only as to the persons that the disclosure rules affect now. Thus, the bankruptcy of an owner or other control person (e.g., executive management) would be disclosed. AICPA does not believe it is appropriate to disclose bankruptcies of non-owners. Where the subject of the bankruptcy petition was a predecessor adviser, and the predecessor advisor/bankrupt is a firm, AICPA believes disclosure is appropriate. Where the predecessor advisor/bankrupt is a management person, AICPA believes that disclosure is not appropriate, unless this person is deemed to be a control person. Where the predecessor adviser/bankrupt is under common control with the advisor, AICPA believes disclosure is appropriate, because there is common management. Part 2B ? The Brochure Supplements for advisory personnel ("supervised persons") -- AICPA supports requiring supplements for relevant advisory personnel. Item 3 of Part 2B: Disclosure of disciplinary actions where supplements are prepared for groups of supervised persons -- AICPA agrees with SEC that where supplements are prepared for groups there should be disclosure and highlighting of disciplinary actions. Item 10 of Part 2B, Personal trading (page 16 of 79) -- AICPA has no problem with the requirement that the brochure discuss any practices giving rise to conflicts, the nature of the conflicts and the procedures and controls the advisers used to address the conflicts. However, the AICPA believe that the books and records requirement for investment advisers (Rule 204-2) should be modified and to the extent an advisor is in a position to benefit from personal trading, that adviser should be required to keep a record and disclose to the firm personal holdings. We recommend that the SEC rethink the requirement of the treating all advisors is the same way including those who are not selecting or recommending securities. AICPA believes that an advisor who is not selecting securities for clients and not recommending securities to clients should not have to disclose to his or her firm what is in his/her own personal portfolio. Again, AICPA is pleased to have the opportunity to provide comments to the SEC on these issues. If you or your staff would like to discuss our comments further, we would welcome the opportunity to do so. Please contact me at 201-938-3663 or Sarah Phelan at 201-938-3717. Very Truly Yours, Phyllis J. Bernstein Director, Personal Financial Planning American Institute of Certified Public Accountants cc: Personal Financial Planning Executive Committee