[Federal Register: December 18, 2002 (Volume 67, Number 243)]
[Rules and Regulations]
[Page 77619-77626]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18de02-19]
[[Page 77619]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 275 and 279
Exemption for Certain Investment Advisers Operating Through the
Internet; Final Rule
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-2091; File No. S7-10-02]
RIN 3235-AI15
Exemption for Certain Investment Advisers Operating Through the
Internet
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Commission is adopting rule amendments under the
Investment Advisers Act of 1940 to exempt certain investment advisers
that provide advisory services through the Internet from the
prohibition on Commission registration. The rule amendments permit
these advisers, whose businesses are not connected to any particular
state, to register with the Commission instead of with state securities
authorities.
EFFECTIVE DATE: The rule amendments will become effective on January
20, 2003.
FOR FURTHER INFORMATION CONTACT: Marilyn Barker, Senior Counsel, or
Jamey Basham, Special Counsel, at (202) 942-0719 or IArules@sec.gov,
Office of Investment Adviser Regulation, Division of Investment
Management, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
rule 203A-2 [17 CFR 275.203A-2], Form ADV [(Part 1A, Item 2)] (17 CFR
279.1) and Schedule D to Form ADV [17 CFR 279.1] under the Investment
Advisers Act of 1940.
Executive Summary
Section 203A of the Investment Advisers Act of 1940 (the ``Advisers
Act'') generally prohibits an investment adviser from registering with
the Commission unless that adviser has more than $25 million of assets
under management or is an adviser to a registered investment company.
The Commission is adopting new rule 203A-2(f) under the Advisers Act to
exempt from the prohibition on Commission registration certain
investment advisers that provide advisory services through the
Internet.\1\ An adviser is eligible for registration under the rule if
the adviser provides investment advice to all of its clients
exclusively through the adviser's interactive Web site, except that the
adviser may advise fewer than 15 clients through other means during the
preceding 12 months.
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\1\ Unless otherwise noted, when we refer to rule 203A-2 or any
paragraph of the rule, we are referring to 17 CFR 275.203A-2 of the
Code of Federal Regulations in which the rule is published, as
amended by this release.
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I. Background
The National Securities Markets Improvement Act of 1996 (``NSMIA'')
amended the Advisers Act to divide the responsibility for regulating
investment advisers between the Commission and state securities
authorities.\2\ Section 203A of the Advisers Act effects this division
by generally prohibiting investment advisers from registering with us
unless they have at least $25 million of assets under management or
advise a registered investment company, and preempting most state
regulatory requirements with respect to SEC-registered advisers.\3\ The
$25 million threshold was designed to distinguish investment advisers
with a national presence from those that are essentially local
businesses.\4\ Congress recognized, however, that some investment
advisers should be regulated at the federal level even though they have
less than $25 million of assets under management, and gave the
Commission the authority in section 203A(c) of the Advisers Act to
exempt investment advisers, by rule or order, from the prohibition on
Commission registration in cases in which the prohibition otherwise
would be ``unfair, a burden on interstate commerce, or otherwise
inconsistent with the purposes'' of section 203A.\5\
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\2\ Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in
scattered sections of the United States Code).
\3\ 15 U.S.C. 80b-18a. Advisers prohibited from registering with
us remain subject to the regulation of state securities authorities.
\4\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-5 (1996)
(hereinafter Senate Report).
\5\ 15 U.S.C. 80b-3a(c). Section 203A was designed to allow the
Commission to better use its limited resources by concentrating its
regulatory responsibilities on advisers with national businesses,
and to reduce the burden to investment advisers of the overlapping
and duplicative regulation (existing prior to the enactment of
NSMIA) by preempting state investment adviser statutes, thus
subjecting advisers with national businesses to a single regulatory
program administered by the Commission. See Senate Report at 2-4.
Relying on this authority, the Commission has adopted and amended
rule 203A-2 under the Advisers Act to permit nationally recognized
statistical rating organizations, certain pension consultants,
affiliated investment advisers, newly formed investment advisers,
and advisers operating in multiple states to register with the
Commission even if these advisers otherwise would not meet the
criteria for Commission registration.
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In April of this year, we proposed to use our exemptive authority
under section 203A(c) to adopt new rule 203A-2(f), providing relief to
certain investment advisers who, unlike state-registered advisers, have
no local presence and whose advisory activities are not limited to one
or a few states.\6\ These advisers, which we call ``Internet Investment
Advisers,'' provide investment advice to their clients through
interactive Web sites. Clients visit these Web sites and answer online
questions concerning their personal finances and investment goals.
Thereafter, the adviser's computer-based application or algorithm
processes and analyzes each client's response, and then transmits
investment advice back to each client through the interactive Web
site.\7\ Clients residing in any state can, upon accessing the
interactive Web site, obtain investment advice at any time.
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\6\ Exemption for Certain Investment Advisers Operating Through
the Internet, Investment Advisers Release No. 2028 (April 12,
2002)[(67 FR 19500 (April 19, 2002))](''Proposing Release'').
\7\ Internet Investment Advisers are required to provide these
prospective Internet clients with a copy of their client brochure.
Rule 204-3 [17 CFR 275.204-3](an investment adviser must deliver
either a copy of their Part 2 of Form ADV [17 CFR 279.1] or a
narrative brochure that contains at least the information required
in Part 2). The personalized nature of the investment advice
provided by these interactive Web sites makes the exception under
Rule 204-3 for impersonal advisory services unavailable. Internet
Investment Advisers may deliver their client brochure
electronically, in compliance with previous SEC guidance on
electronic delivery. See Use of Electronic Media by Broker-Dealers,
Transfer Agents, and Investment Advisers for Delivery of
Information, Investment Advisers Act Release No. 1562 (May 9, 1996)
[61 FR 24644 (May 15, 1996)].
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Internet Investment Advisers typically are not eligible to register
with us. They do not manage the assets of their Internet clients, and
consequently do not meet the $25 million statutory threshold for
registration with the SEC. While traditional advisory firms with less
than $25 million of assets under management usually must register in
one or a few states, Internet Investment Advisers would be required as
a practical matter to register in all the states absent an
exemption.\8\ Furthermore, our existing exemptive rules do not work for
Internet Investment Advisers.\9\
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\8\ See discussion in text accompanying note 13, infra.
\9\ See discussion in Proposing Release at section I.
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In response to our proposal we received 22 comment letters, most of
which supported our proposal.\10\ Ten commenters urged that we expand
the
[[Page 77621]]
exemption, six wanted us to narrow it, and six asserted that we should
take no action. Several commenters representing state securities
authorities objected to the rule, arguing that they should continue to
be responsible for Internet Investment Advisers; some supported a
narrower version of the rule.
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\10\ These comment letters and a summary of comments prepared by
our staff are available for public inspection and copying at our
Public Reference Room in File No. S7-10-02. The comment summary is
also available on our Internet Web site at <http://www.sec.gov/rules/extra/s71002commsumm.htm
.
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II. Discussion
We are today adopting an exemption for Internet Investment Advisers
in a form modified to reflect comments submitted to us. Rule 203A-2(f),
which we discuss in more detail below, provides a narrow exemption for
a type of adviser whose activities do not fall neatly into the model
assumed by Congress when it added Section 203A to the Act to divide
regulatory authority over advisers.\11\ We have concluded that, as
applied to these advisers, the application of the prohibition on
Commission registration would be ``unfair, a burden on interstate
commerce, or otherwise inconsistent with the purposes of [Section
203A].'' \12\
In framing the scope of the exemption, we have carefully balanced
the burdens of multiple state registration requirements for Internet
Investment Advisers with the design of NSMIA to allocate responsibility
for regulating smaller advisers to state securities authorities.
Several commenters urging us to expand the rule suggested approaches
that would or could result in the migration of a large number of
smaller advisers to Commission registration. On the other hand, some of
the commenters opposing or arguing for substantial narrowing of our
proposed exemption seemed not to appreciate fully the burdens of
multiple registration on Internet Investment Advisers.
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\11\ See Section I. of the Proposing Release.
\12\ Section 203A(c).
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Absent an exemption, Internet Investment Advisers would likely
incur the burden of temporarily registering in every state and later
de-registering. State investment adviser registration statutes
generally obligate advisers to register in every state in which the
adviser obtains more than a de minimis number of clients. Because an
Internet Investment Adviser uses an interactive Web site to provide
investment advice, the adviser's clients can come from any state, at
any time. As a result, an Internet Investment Adviser must as a
practical matter register in every state. This ensures that the
adviser's registrations will be in place when it later obtains the
requisite number of clients from any particular state. The adviser may
subsequently become eligible for our existing exemption under Rule
203A-2(e), permitting Commission registration for advisers otherwise
obligated to register in at least 30 states, but not before the adviser
had already incurred the burden of registering in every state.\13\
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\13\ An Internet Investment Adviser relying on the multi-state
adviser exemption provision would not be eligible for that exemption
until the adviser had obtained the requisite number of clients in 30
states to trigger its registration obligations in those states.
Under that rule, the adviser must represent that it has reviewed its
obligation under state and federal law and has concluded that it
would be required to register with the securities administrators of
at least 30 states. Rule 203A-2(e)(2).
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A. New Rule 203A-2(f)
Under rule 203A-2(f), an adviser is exempt from the prohibition on
Commission registration if the adviser provides investment advice to
all of its clients exclusively through an interactive Web site. A
limited exception, however, permits an adviser relying on the rule to
provide investment advice to fewer than 15 clients through other means
during the preceding 12 months. In addition, advisers registering with
us in reliance on the rule must keep records demonstrating that they
meet the conditions of the rule. We discuss each of the elements of the
new exemption below.
1. Interactive Web Site
The exemption is available only to an adviser that provides
investment advice to clients exclusively through an ``interactive Web
site,'' except as permitted by the de minimis exception described
below. The rule defines ``interactive Web site'' as a Web site in which
computer software-based models or applications provide investment
advice to clients based on personal information provided by each client
through the Web site.\14\ The rule is thus not available to advisers
that merely use Web sites as marketing tools or that use Internet
vehicles such as E-mail, chat rooms, bulletin boards and webcasts or
other electronic media in communicating with clients. The Commission
recognizes that most advisers today use (or could use) the Internet in
some aspect of their business. As a result, expansion of the rule to
include such activities as suggested by some commenters could undermine
NSMIA's allocation of regulatory responsibility over smaller advisers
to state securities authorities.
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\14\ Rule 203A-2(f)(2). In response to one comment requesting
technical clarification of the definition, we have added language
clarifying that an interactive Web site is one which provides advice
based on personal information supplied by the client, in order to
distinguish Web sites covered by the exemption from other types of
Web sites that aggregate and provide financial information in
response to user-provided requests that do not include personal
information.
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In addition, the exemption is for advisers that provide investment
advice to their Internet clients ``exclusively'' through their
interactive Web sites. An adviser relying on the exemption may not use
its advisory personnel to elaborate or expand upon the investment
advice provided by its interactive Web site, or otherwise provide
investment advice to its Internet clients, except as permitted by the
de minimis exception discussed below.\15\
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\15\ The firm may still provide clients with assistance in the
technical aspects of accessing and using the interactive Web site.
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2. De Minimis Exception for Non-Internet Clients
The new rule includes an exception that would permit an adviser
relying on the rule to advise clients through means other than its
interactive Web site, so long as the adviser had fewer than 15 of these
non-Internet clients during the preceding 12 months. This is a change
from the proposal, under which an adviser would have been eligible to
rely on the rule so long as at least 90 percent of the adviser's
clients obtained their investment advice exclusively through the
interactive Web site. We included the ``90 percent test'' in our
proposal to prevent Internet Investment Advisers from losing the
exemption as a result of providing advice to a de minimis number of
clients through means other than an interactive Web site.
A few commenters thought the rule should employ a lower percentage
threshold permitting a greater level of non-Internet clients, which we
believe would be inconsistent with the purpose of the exemption. Other
commenters urged a narrower exemption, arguing that an adviser having a
large number of Internet clients could, under the proposed 90 percent
test, have as many or more non-Internet clients than many advisers have
clients.
The commenters have persuaded us that the 90 percent test, as
proposed, would have permitted more than a de minimis number of non-
Internet clients. Accordingly, we have decided to replace the 90
percent test with a provision permitting an adviser relying on the rule
to have fewer than 15 non-Internet clients during the course of the
preceding twelve months.\16\ In
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determining how many clients the adviser provided investment advice
through means other than the adviser's interactive Web site for
purposes of determining eligibility for the exemption, the rule
provides that an Internet Investment Adviser may rely on the definition
of ``client'' in rule 203(b)(3)-1.\17\
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\16\ The new rule's de minimis exception is similar to section
203(b)(3) of the Advisers Act [15 U.S.C. 80b-2(b)(3)], which exempts
from the requirement to register with the Commission any adviser
that, during the course of the preceding 12 months, has had fewer
than 15 clients. We did not include the other requirements under
section 203(b)(3), that the adviser may not hold itself out
generally to the public as an investment adviser, and may not act as
investment adviser to any registered investment company or business
development company.
\17\ See rule 203A-2(f)(3) (citing rule 203(b)(3)-1 [17 CFR
275.203(b)(3)-1]). Rule 203(b)(3)-1 provides a safe harbor provision
for purposes of determining who may be deemed to be a single client
for purposes of section 203(b)(3).
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3. Precluding Use of Rule 203A-2(c)
One commenter expressed concern that, absent changes to the
language of the proposed rule, some advisers might use rule 203A-2(c)
to attempt to evade the limit on the number of non-Internet clients
under new rule 203A-2(f). Rule 203A-2(c) exempts an adviser from the
prohibition on Commission registration if the adviser controls, is
controlled by, or is under common control with, another SEC-registered
adviser with the same principal place of business. The commenter
expressed concern that an Internet Investment Adviser intent on evading
the restrictions on non-Internet clients under new rule 203A-2(f) might
attempt to organize a subsidiary firm to serve its non-Internet
clients, and assert rule 203A-2(c) as a basis to register the
subsidiary with the SEC, even though the subsidiary does not manage $25
million of client assets.\18\ To forestall any such efforts, 203A-2(f),
as adopted, is unavailable to an Internet Investment Adviser if another
adviser in a control relationship with the Internet Investment Adviser
relies on the Internet Investment Adviser's registration under rule
203A-2(f) as the basis for its own registration under rule 203A-
2(c).\19\
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\18\ Such an attempt would not, however, be successful because
it would violate section 208(d) of the Advisers Act [15 U.S.C. 80b-
8(d)], which makes it unlawful for any person ``indirectly, or
through or by any other person, to do any act or thing which it
would be unlawful for such person to do directly'' under the
Advisers Act.
\19\ Rule 203A-2(f)(1)(iii). An investment adviser controlled,
controlling, or under common control with two or more SEC-registered
investment advisers, only one of which is an Internet Investment
Adviser, may still rely on the Commission registration of the other
adviser to establish its eligibility for the exemption in rule 203A-
2(c), and the Internet Investment Adviser will not be precluded from
relying on rule 203A-2(f).
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4. Recordkeeping Requirements
The rule requires an adviser relying on the exemption to maintain
records demonstrating that it provides investment advice to its clients
exclusively through an interactive Web site in accordance with the
limits of the exemption.\20\ An advisory firm relying on the exemption
could comply with this requirement by maintaining records showing which
of its clients the firm advised exclusively through its interactive Web
site and which, if any, of its clients the firm advised through non-
Internet means.\21\
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\20\ Rule 203A-2(f)(1)(ii).
\21\ Internet Investment Advisers maintaining these records in
electronic form must do so in compliance with the Commission's rules
on electronic recordkeeping, rule 204-2(g) [17 CFR 275.204-2(g)].
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B. Form ADV
We are also amending Part 1 of Form ADV, the Uniform Application
for Investment Adviser Registration. Advisers register with us by
electronically submitting the information required by Part 1 of Form
ADV through the Investment Adviser Registration Depository (the
``IARD''). We are adding the exemption under rule 203A-2(f) to the list
of exemptions in Item 2 of Part 1, in which advisers registering with
us indicate the basis upon which they are eligible to register with the
SEC.
It will be some number of months before the National Association of
Securities Dealers (``NASD''), which operates the IARD for us,
completes reprogramming the IARD to implement this change to Item 2 of
Part 1. In the interim, advisers relying on the 203A-2(f) exemption to
register with us should select current Item 2(10), for registrants
eligible for registration by SEC order, and in Schedule D, current Item
2.A(10), enter ``203A-2(f)'' in lieu of an application number. Upon
NASD's implementation of the new 203A-2(f) exemption selection on IARD,
registrants should amend their Item 2 selection and remove the Schedule
D reference to the rule no later than their next annual amendment of
Part 1.
III. Effective Date
The effective date of the new rule and rule amendments is January
20, 2003.
IV. Cost-Benefit Analysis
A. Background
The Commission is sensitive to the costs and benefits imposed by
its rules. New rule 203A-2(f) provides relief to Internet Investment
Advisers. Under the rule, an Internet Investment Adviser is exempt from
the prohibition on Commission registration if the adviser provides
investment advice to all of its clients exclusively through its
interactive Web site (except that the adviser may advise fewer than 15
clients through other means during the preceding 12 months). In
addition, advisers registering with us in reliance on the rule must
keep records demonstrating that they meet the conditions of the rule.
Without the exemption to the prohibition on Commission registration as
provided by new rule 203A-2(f), Internet Investment Advisers typically
would not initially be eligible to register with us, as they do not
manage the assets of their Internet clients, and, consequently, would
not meet the $25 million statutory threshold for SEC-registration.
Unlike a typical state-registered adviser, an Internet Investment
Adviser's advisory activities are not confined to one or a few states.
Because an Internet Investment Adviser uses an interactive Web site to
provide investment advice, the adviser's clients can come from any
state, at any time, without the adviser's prior knowledge. As a result,
an Internet Investment Adviser must register in all states, ensuring it
has its registration in place when the firm obtains the requisite
number of clients from any particular state. Consequently, these
advisers would be required, absent an exemption, to register in every
state.
Moreover, the Commission's existing exemptive rules would not work
for these advisers. For example, an Internet Investment Adviser relying
on the multi-state exemption under rule 203A-2(e) must represent that
it has reviewed its obligations under state law and has concluded that
it would be required to register as an investment adviser with the
securities administrators of at least 30 states. The state registration
obligations of Internet Investment Advisers depend on the residences of
their clients, and their clients can come from any state at any time.
Thus, as a practical matter, these advisers would still need to
register in every state and wait until they encounter registration
obligations in 30 states before registering under rule 203A-2(e) and
then canceling their state registrations.
Nor is it likely Internet Investment Advisers could rely on rule
203A-2(d) to carry them through an initial period of operation without
state registration in anticipation of eligibility under the multi-state
exemption. If an adviser relying on rule 203A-2(d) has not become
eligible for SEC registration within 120 days, it must withdraw its
registration. Internet Investment Advisers must typically register
early in their development and testing phase in order to obtain venture
capital, and many may not even be fully operational 120 days later.
In adopting rule 203A-2(f) and amendments to Form ADV, the
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Commission has given consideration to the costs, as well as the
benefits of the new exemption.
B. Benefits
Rule 203A-2(f) will, we believe, provide several important benefits
to Internet Investment Advisers. We have limited data on the number of
Internet Investment Advisers who would be eligible to obtain these
benefits, since most do not currently register with us. Based on news
articles, we estimate that as many as 20 firms could avail themselves
of the exemption. In the Proposing Release, we requested that
commenters with additional data provide it to us. However, few
commenters addressed the number of Internet Investment Advisers
potentially eligible for the exemption, and none provided supporting
data. Importantly, while these commenters were not in agreement whether
our estimate was too high or too low, all agreed that the number of
firms eligible to benefit by the exemption would likely grow in the
future.
The rule will benefit Internet Investment Advisers by relieving
them of the burden of registering temporarily in every state and
subsequently deregistering upon becoming eligible under the multi-state
exemption, as discussed above. To register in every state, an advisory
firm will, in all likelihood, need assistance of counsel to perform
several tasks. These include evaluating the statutes and regulations of
each state to check for any disparities, responding to varying comments
on the firm's registration submissions from multiple state securities
administrators, reviewing the firm's operations for compliance with the
statutory and regulatory requirements of every state, and the like.
Several small firms commenting on the rule stated that the burden of
complying with the registration requirements of multiple states
prohibited or significantly impeded their firm's ability to provide
investment advice to clients in multiple states.
To estimate the approximate cost advisory firms would incur to
obtain these services, our staff engaged in discussions with counsel
familiar with state adviser registration and regulatory issues. Based
on these discussions, we estimate the cost to be approximately $50,000
for each adviser, for a total of $1 million for all 20 advisers.\22\
Some commenters asserted that the $50,000 estimate was significantly in
excess of true costs, but none of these commenters provided any cost
data or estimates of their own. One of these commenters asserted the
estimate was flawed because it was based on registration with every
state, whereas an Internet Investment Adviser would only be required to
register in 29 states, and would then become eligible for the multi-
state exemption once the adviser's registration obligations were
triggered in a thirtieth state. However, this commenter did not explain
how the Internet Investment Adviser, whose clients can come from any
state at any time, would be able to predict which 29 states to register
with as an initial matter. This commenter also argued the $50,000
estimate should be reduced to reflect the amount a firm would save on
costs associated with SEC registration. We did not include such costs
as an offset in our estimate, since the firm would still incur them
upon reaching eligibility for our multi-state exemption.
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\22\ $50,000 x 20 = $1,000,000. This figure does not, however,
include the time to complete Form ADV initially and the fees to file
Form ADV through the IARD, since advisers relying on the exemption
will still incur these costs in registering with us. Similarly, this
figure does not include state registration fees. States impose
notice filing requirements upon Commission-registered advisers doing
business in their states, with associated fees approximately
equivalent to state registration fees.
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The benefits of rule 203A-2(f) would also include other benefits
that are difficult to quantify. Subjecting Internet Investment Advisers
to the cost of registering temporarily in all states and to multiple
state regulation acts as an impediment to launching these businesses.
Rule 203A-2(f) would benefit this segment of the advisory industry by
removing this potential barrier to entry, and may enable more firms to
offer these types of Internet-based services. Other benefits include
the savings to affected advisers from the cost of examinations by
multiple states' regulators, as well as the savings to state securities
authorities that would no longer examine these firms.
C. Costs
Rule 203A-2(f) would impose certain costs on advisers relying on
the exemption. The Commission estimated that the total cost to each
Internet Investment Adviser to comply with the recordkeeping provision
of the new rule would be approximately $138.80,\23\ such that the total
cost for the 20 advisers that may be eligible for the new exemption at
this time would be $2,776.\24\
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\23\ The Commission estimated this figure by multiplying the
burden hours to comply with the proposed rule's recordkeeping
requirements (4 hours) by an average hourly compensation rate of
$34.70. This compensation rate includes overhead and is the rate for
an operations supervisor outside of New York City, based on a 2000
study by the Securities Industry Association. The estimate of burden
hours is based on the Commission's submission for the proposed rule
under the Paperwork Reduction Act and reflects recent discussions
with counsel familiar with advisers' recordkeeping issues. See infra
Section V of this Release.
\24\ 20 x $138.80 = $2,776.
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We have concluded that the benefits of rule 203A-2(f) and form
amendments adopted today justify their costs.
V. Paperwork Reduction Act
As set forth in the Proposing Release, certain provisions of rule
203A-2(f) and form amendments that we are adopting today contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (the ``PRA'').\25\ The titles for the
collections of information are ``Exemption for Certain Investment
Advisers Operating Through the Internet'' and ``Form ADV,'' both under
the Advisers Act. The Commission submitted those collection of
information requirements to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The collection of information for Form ADV has been previously
approved under OMB control number 3235-0049 (expires June 30, 2003).
The collection of information for rule 203A-2(f) has recently been
approved by OMB; the OMB control number is 3235-0559 (expires November
30, 2005). An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number.
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\25\ 44 U.S.C. 3501-3520.
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A. Rule 203A-2(f)
Rule 203A-2(f) includes a recordkeeping provision requiring an
adviser registering under the new rule to maintain a record
demonstrating that, with the exception of fewer than 15 clients during
the preceding 12 months, all of its clients obtained investment advice
exclusively through the adviser's interactive Web site. This
recordkeeping provision contains a new ``collection of information''
requirement within the meaning of the PRA. Although we anticipate that
most Internet Investment Advisers would generate the necessary records
in the ordinary conduct of their Internet advisory business, we
believe, as discussed in the Proposing Release, that the recordkeeping
requirement might impose a small additional burden on these advisers.
In the Proposing Release, we estimated that the recordkeeping
burden under the proposed rule should not
[[Page 77624]]
exceed an average of four hours annually per Internet Investment
Adviser. We also estimated that there would be approximately 20
potential respondents to the collection of information, for a total
burden of 80 hours annually. We requested comments on the recordkeeping
requirements, as well as on the number of Internet Investment Advisers
likely to register with the Commission under the proposed rule.
Only one commenter addressed our request for comment on the
reasonableness of our estimate of the recordkeeping burden of the
proposed rule. The commenter noted that the burden appeared reasonable
and necessary. As for the number of advisers likely to register with us
under the proposed rule, four commenters responded with views on this
issue. One of the four thought our estimate was too low, suggesting 50
instead. Another of the four, however, considered our estimate of 20
too high. All four commenters opined that the number of Internet
Investment Advisers would likely grow in the future.
Rule 203A-2(f) is being adopted as proposed, with the exception
that the de minimis exception for non-Internet clients was revised to
state that an adviser relying on the rule may only accept fewer than 15
such clients during the preceding 12 months, and the adviser may not
rely on the rule if another adviser with whom it is in a control
relationship relies solely on the Internet adviser`s registration under
rule 203A-2(f) to register under rule 203A-2(c). The burden estimate is
unchanged. Providing the information required under rule 203A-2(f) is
mandatory, as Commission staff uses this collection of information in
its examination and oversight program. Responses to the information
generally will not be kept confidential.
B. Form ADV
Rule 203A-2(f) adds a new category of advisers eligible for
Commission registration and requires that Form ADV be amended. The
addition of Internet Investment Advisers will increase the total burden
under Form ADV, but these advisers' burden for completing Form ADV
would not differ from that for current registrants. The Commission has
revised its estimate of the burden hours required by Form ADV as a
result of a change in the number of estimated respondents. We estimated
in the Proposing Release that approximately 20 Internet Investment
Advisers would register with the Commission under the proposed rule,
and that each of these advisers would file one complete Form ADV and
one amendment annually. The increase in the total annual burden for
this collection of information results in a total revised burden of
46,921 hours. We requested comments on these estimates. As stated
above, only one commenter addressed our request for comment on the
reasonableness of the estimated recordkeeping burden of the proposed
rule, by noting that the estimated burden appeared reasonable and
necessary.
Providing the information required by Form ADV is mandatory, and
responses to the information will not be kept confidential. The
amendments to Form ADV were adopted substantially as proposed, and the
burden estimate has not changed.
VI. Summary of Final Regulatory Flexibility Analysis
An Initial Regulatory Flexibility Analysis (``IRFA'') was published
in the Proposing Release. No comments were received on the IRFA. The
Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA''), in accordance with 5 U.S.C. 604, regarding rule 203A-2(f)
and the amendments to Form ADV. The following summarizes the FRFA.
The FRFA discusses the need for, and objectives of, the new rule
exempting Internet Investment Advisers from the prohibition on
Commission registration. Advisory firms eligible for the exemption will
be relieved of the burden of temporarily registering in every state.
The FRFA also discusses the effect of the rule and rule amendments
on small entities. For purposes of the Advisers Act and the Regulatory
Flexibility Act, an investment adviser generally is a small entity if
(i) it manages assets of less than $25 million reported on its most
recent Schedule I to Form ADV; (ii) it does not have total assets of $5
million or more on the last day of the most recent fiscal year and
(iii) it is not in a control relationship with another investment
adviser that is not a small entity.\26\ The FRFA states that the
Commission estimates that approximately 20 advisers will be affected by
rule 203A-2(f), and all 20 are likely to be small entities.
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\26\ Rule 0-7 [17 CFR 275.0-7].
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As discussed in the FRFA, rule 203A-2(f) imposes no new reporting
requirements, but does impose recordkeeping requirements on advisers,
including small advisers, that provide advisory services through
interactive Web sites. Rule 203A-2(f) requires advisers registering
under the new rule to maintain in an easily accessible place a record
demonstrating that, with the exception of fewer than 15 clients during
the preceding 12 months, all of its clients obtained investment advice
exclusively through the adviser's interactive Web site. As the FRFA
notes, these advisers will likely generate these records in the
ordinary course of their business, and the Commission believes they
will not incur any significant burden under the recordkeeping
requirement. The FRFA also notes that the amendments to Form ADV,
requiring advisers relying on the exemption to check a box indicating
their eligibility for the exemption, would have no measurable effect on
these advisers.
The FRFA discusses alternatives considered by the Commission in
adopting the rule that might minimize adverse effects on small
advisers, including (a) the establishment of differing compliance or
recordkeeping requirements or timetables that take into account
resources available to small advisers; (b) the clarification,
consolidation, or simplification of compliance and recordkeeping
requirements under the new rule and rule amendments for small advisers;
(c) the use of performance rather than design standards; and (d) an
exemption from coverage of the new rule and rule amendments, or any
part thereof, for small advisers.
The FRFA states that the compliance and reporting requirements
contained in the new rule will not impose a significant burden on small
advisers relying on the rule. As such, it does not appear necessary to
establish differing compliance and reporting requirements for small
entities. The FRFA also states that small advisers will likely generate
records to satisfy the compliance and recordkeeping requirements in the
ordinary course of their businesses, and as a result it is not
necessary to clarify, consolidate, or simplify these requirements.
Regarding the use of performance rather than design standards, the FRFA
discusses that the rule uses performance standards in that the rule
does not specify the means by which an adviser must keep records to
demonstrate its compliance with the rule. Finally, the FRFA notes that
exempting small advisers from these recordkeeping requirements would be
inconsistent with NSMIA's allocation of regulatory responsibility for
smaller advisers to the states, because the Commission will use these
records in connection with its examination and oversight program to
verify an adviser's eligibility to register with the Commission under
the exemption
[[Page 77625]]
instead of registering with state securities authorities.
The FRFA is available for public inspection in File No. S7-10-02. A
copy of the FRFA may be obtained by contacting Marilyn Barker, Senior
Counsel, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0506.
VII. Statutory Authority
The Commission is adopting new rule 203A-2(f) pursuant to the
authority set forth in section 203A(c) of the Investment Advisers Act
of 1940 [15 U.S.C. 80b-203A(c)].
List of Subjects in 17 CFR Parts 275 and 279
Investment advisers, Reporting and recordkeeping requirements,
Securities.
Text of Rule and Rule Amendments
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1. The authority citation for Part 275 continues to read in part as
follows:
Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3A, 80b-
4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *
2. Section 275.203A-2 is amended by adding paragraph (f) to read as
follows:
Sec. 275.203A-2 Exemptions from prohibition on Commission
registration.
* * * * *
(f) Internet investment advisers. (1) An investment adviser that:
(i) Provides investment advice to all of its clients exclusively
through an interactive website, except that the investment adviser may
provide investment advice to fewer than 15 clients through other means
during the preceding twelve months;
(ii) Maintains, in an easily accessible place, for a period of not
less than five years from the filing of a Form ADV that includes a
representation that the adviser is eligible to register with the
Commission under paragraph (f) of this section, a record demonstrating
that it provides investment advice to its clients exclusively through
an interactive website in accordance with the limits in paragraph
(f)(1)(i) of this section; and
(iii) Does not control, is not controlled by, and is not under
common control with, another investment adviser that registers with the
Commission under paragraph (c) of this section solely in reliance on
the adviser registered under paragraph (f) of this section as its
registered adviser.
(2) For purposes of paragraph (f) of this section, interactive
website means a website in which computer software-based models or
applications provide investment advice to clients based on personal
information each client supplies through the website.
(3) An investment adviser may rely on the definition of client in
Sec. 275.203(b)(3)-1 in determining whether it provides investment
advice to fewer than 15 clients under paragraph (f)(1)(i) of this
section.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
3. The authority citation for Part 279 continues to read as
follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1,
et seq.
4. Form ADV (referenced in Sec. 279.1) is amended by:
a. Revising Item 2e. of Instructions for Part 1A;
b. Revising the last sentence of the third undesignated paragraph
of Item 2f. of Instructions for Part 1A;
c. Revising the third undesignated paragraph of Item 2g. of
Instructions for Part 1A;
d. Redesignating Item 2h. as Item 2i. of Instructions for Part 1A;
e. Adding a new Item 2h. of Instructions for Part 1A;
f. In newly designated Item 2i., revising the phrase ``box 11'' to
read ``box 12'' in the two places it appears;
g. In Part 1A revising the introductory text of paragraph A, and
paragraphs A(10) and A(11);
h. In Part 1A, adding paragraph A(12); and
i. In Schedule D, revising the heading ``Section 2.A(10) SEC
Exemptive Order'' to read ``Section 2.A(11) SEC Exemptive Order''.
The revisions and additions read as follows:
Note: The text of Form ADV does not and the amendments to it
will not appear in the Code of Federal Regulations.
Form ADV
* * * * *
Form ADV: Instructions for Part 1A
* * * * *
2. Item SEC Registration
* * * * *
e. Item 2.A(7): Affiliated Adviser. You may check box 7 only if you
are eligible for the affiliated adviser exemption from the prohibition
on SEC registration. See SEC rule 203A-2(c). You are eligible for this
exemption if you control, are controlled by, or are under common
control with an investment adviser that is registered with the SEC, and
you have the same principal office and place of business as that other
investment adviser. Note that you may not rely on the SEC registration
of an Internet investment adviser under rule 203A-2(f) in establishing
eligibility for this exemption. See SEC rule 203A-2(f)(iii). If you
check box 7, you must also complete Section 2.A(7) of Schedule D.
f. Item 2.A(8): Newly-Formed Adviser. * * *
* * * * *
* * * If you indicate on that amendment (by checking box 12) that
you are not eligible to register with the SEC, you also must at that
same time file a Form ADV-W to withdraw your SEC registration.
g. Item 2.A(9): Multi-State Adviser. * * *
* * * * *
If, at the time you file your annual updating amendment, you are
required to register in less than 25 states and you are not otherwise
eligible to register with the SEC, you must check box 12 in item 2.A.
You also must file a Form ADV-W to withdraw your SEC registration. See
Part 1A Instructions 2.i.
h. Item 2.A(10): Internet Investment Adviser. You may check box 10
only if you are eligible for the Internet adviser exemption from the
prohibition on SEC registration. See SEC rule 203A-2(f). You are
eligible for this exemption if:
[sbull] You provide investment advice to your clients through an
interactive Web site. An interactive Web site means a Web site in which
computer software-based models or applications provide investment
advice based on personal information each client submits through the
Web site. Other forms of online or Internet investment advice do not
qualify for this exemption.
[sbull] You provide investment advice to all of your clients
exclusively through the interactive Web site, except that you may
provide investment advice to fewer than 15 clients through other means
during the previous 12 months; and
[sbull] You maintain a record demonstrating that you provide
investment advice to your clients exclusively through an interactive
Web site in accordance with these limits.
* * * * *
Part 1A
* * * * *
Item 2 SEC Registration
* * * * *
[[Page 77626]]
A. To register (or remain registered) with the SEC, you must check
at least one of the Items 2.A(1) through 2.A(11), below. If you are
submitting an annual updating amendment to your SEC registration and
you are no longer eligible to register with the SEC, check Item
2.A(12). You:
* * * * *
[ballot] (10) Are an Internet investment adviser relying on rule 203A-
2(f);
See Part 1A Instructions 2.h. to determine whether you should check
this box.
[ballot] (11) Have received an SEC order exempting you from the
prohibition against registration with the SEC;
If you checked this box, complete Section 2.A(11) of Schedule D.
[ballot] (12) Are no longer eligible to remain registered with the SEC.
See Part 1A Instructions 2.i. to determine whether you should check
this box.
* * * * *
Dated: December 12, 2002.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31843 Filed 12-17-02; 8:45 am]
BILLING CODE 8010-01-P