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Securities and Exchange Commission17 CFR Parts 240, 275 and 279[Release Nos. 34-49639, IA-2232; File No. S7-20-04]RIN 3235-AI16Certain Thrift Institutions Deemed Not To Be Investment AdvisersAgency: Securities and Exchange Commission. Action: Proposed rule. Summary: The Securities and Exchange Commission ("Commission") is publishing for comment a new rule under the Investment Advisers Act of 1940 that would address the application of the Act to certain thrift institutions, and a new rule under the Securities Exchange Act of 1934 addressing thrift institutions' collective trust funds. Dates: Comments should be received on or before July 9, 2004. Addresses: Comments may be submitted by any of the following methods: Electronic comments:
Paper comments:
For Further Information Contact: Robert Tuleya, Attorney-Adviser, Jamey Basham, Branch Chief, or Jennifer Sawin, Assistant Director, 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 requesting public comment on proposed rule 202(a)(11)-2 under the Investment Advisers Act of 1940 [15 U.S.C. 80b], and on proposed rule 12g-6 under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.]. TABLE OF CONTENTSA. Thrift Institutions Deemed Not to be Investment Advisers 1. Eligible Thrift Institutions 2. Scope of the Rule a. Fiduciary Purpose Accounts b. Collective Trust Fund Accounts B. Thrift Institutions Registered Under the Act D. Exemption under Securities Exchange Act II. GENERAL REQUEST FOR COMMENT TEXT OF PROPOSED RULES AND FORM AMENDMENTS EXECUTIVE SUMMARYThe Commission is proposing a new rule under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”) that would except thrifts from the Act when they provide investment advice as part of certain trust department fiduciary services. Under the rule, a thrift institution would be deemed not to be an investment adviser if its investment advisory services are provided solely in its capacity as trustee, executor, administrator, or guardian for customer accounts created and maintained for a fiduciary purpose, or to its collective trust funds excepted from the Investment Company Act of 1940 (“Investment Company Act”). The Commission is also proposing to exempt thrift institutions’ collective trust funds from the registration and reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”). I. DISCUSSIONThe Advisers Act regulates the activities of certain “investment advisers,” defined generally by section 202(a)(11) of the Act as persons whose regular business involves providing others with advice about securities for compensation.1 Under the Act, investment advisers are fiduciaries who must fully disclose any material conflict that they have with their clients.2 Advisers must register with the Commission,3 provide their clients with an informational brochure,4 maintain records related to their advisory activities,5 and submit to periodic examination by our staff.6 Banks (and bank holding companies) are excepted from the definition of investment adviser by section 202(a)(11)(A) of the Act.7 The Act, however, contains no exception for thrift institutions,8 which are not “banks” as defined by the Act.9 As a result, a thrift that manages securities portfolios or provides other types of investment advisory services for its customers in connection with its trust operations is generally subject to the Act. The absence of a thrift exception in the Advisers Act can, we believe, be explained by historical context. When Congress enacted the Advisers Act in 1940, federal savings associations, for example, were not authorized to provide the types of services that would subject them to the Act.10 It was not until 1980 that Congress gave federal savings associations the authority to provide trust services, including the authority to act as an investment adviser.11 Today, thrifts may be granted trust powers similar to those of national banks.12 Such thrift trust activities also are subject to similar regulation and supervision by the Office of Thrift Supervision (“OTS”).13 When they serve as trustees, thrifts and banks are both also subject to state trust laws.14 Recently, both Congress and the Commission have recognized that thrift trust powers and activities have converged with those of banks. In 1999, in the Gramm-Leach-Bliley Act, Congress amended the definition of “bank” in the Investment Company Act to include thrifts.15 As a result, common and collective trust funds sponsored by thrifts are now excepted from the definition of “investment company” under the Investment Company Act, subject to the same limitations and conditions as bank common and collective trust funds.16 In May of 2001, we adopted a new rule exempting thrifts from the definitions of “broker” and “dealer” under the Exchange Act, under the same terms and conditions that apply to banks.17 Thrift industry participants,18 a member of Congress,19 and the OTS20 have called upon us to re-examine the status of thrifts under the Advisers Act. Some of these commenters have argued that, because thrift institutions have fiduciary powers similar to those of national banks and are similarly regulated, thrifts should be treated similarly to banks under the Advisers Act. These commenters have also argued that our new rule under the Exchange Act results in thrifts receiving different treatment under the Exchange Act than under the Advisers Act. Another commentator has suggested that it is inconsistent for a thrift to be subject to the Advisers Act when advising its common or collective trust funds that are excepted from the definition of “investment company” under the Investment Company Act.21 On the other hand, two groups of advisers have written us opposing expansion of the Advisers Act bank exception to include thrifts.22 These groups assert that expanded relief would diminish investor protection by eliminating important safeguards that the Advisers Act provides to advisory clients, would be inconsistent with principles of functional regulation, and would create an unfair competitive advantage for thrifts that provide the same investment advisory services as other money managers and financial planners.23 In light of the convergence of bank and thrift trust powers and regulation, we are proposing a new rule that would provide a limited exception from the Advisers Act for thrifts. As described in more detail below, proposed new rule 202(a)(11)-2 would except thrift institutions from the Advisers Act to the extent they provide investment advice in their capacity as trustee, executor, administrator, or guardian. Under the proposed rule, the Act would continue to apply to a thrift institution to the extent the thrift provides other investment advisory services, including advising mutual funds, offering managed agency accounts,24 or providing “retail” financial planning services. Thus, thrifts that offer advice only in the context of other fiduciary trust services would be excepted from the Advisers Act as are banks, while retail advisory services would continue to be subject to the federal securities laws much as retail brokerage services are.25 We are proposing this exception because we believe that the Advisers Act was not intended or designed to regulate certain advisory services provided only as part of these banking (and now thrift) trust services.26 With respect to certain thrift trust relationships, the Advisers Act cannot be meaningfully applied because it does not work well in those situations.27 The Advisers Act permits advisory clients to protect themselves when their interests conflict with those of their investment adviser. The Advisers Act does this by requiring the adviser to obtain the client’s consent after giving the client full and fair disclosure of the conflict.28 The Act implicitly presumes that the adviser has an identifiable client with identifiable interests, and that this client is competent to grant or withhold consent to conflicts that arise in the course of an advisory relationship. Thrift trust relationships, however, often involve settlors who have died, or beneficiaries who are minors or incompetents. Trust instruments may impose fiduciary obligations upon the thrift as trustee with respect to a number of beneficiaries who could be considered clients under the Advisers Act, some of whom may have competing interests, or even be unborn.29 Trust law, and OTS regulations governing a savings association’s administration of fiduciary accounts over which the savings association exercises investment discretion, address these situations in which informed consent alone may not be effective to protect the interests of trust grantors and beneficiaries. These laws and regulations typically either require transactions presenting potential conflicts to be authorized by the trust instrument or impose procedural safeguards designed to prevent the conflicts from harming the trust.30 We are not, however, proposing to give thrifts an unlimited exception from the Advisers Act. We adopted a broad exemption for thrifts under the Exchange Act in light of amendments to that Act that require most brokerage activities of banks to be provided through a registered broker-dealer.31 The Advisers Act contains no similar or comparable “push out” provision. As a result, a general exception from the Advisers Act would except not only thrifts’ trust department services to fiduciary purpose accounts and collective trust accounts, but would also except thrifts’ regular (or “retail”) advisory activities, which the Advisers Act and its rules are clearly designed to regulate.32 Such an exception would be inconsistent with functional regulation principles.33 A general exception would also treat thrifts that provide retail advisory services differently from other registered advisers providing the same services, thus creating regulatory disparity for the firms and for their clients. Further, a general exception could result in many integrated financial services firms moving regular advisory activities to their captive thrifts in order to escape regulation under the Act.34 Most significantly, a general exception would eliminate important investor protections afforded to advisory clients under the Advisers Act. For example, investment advisers must provide clients and prospective clients with an informational brochure addressing certain conflict-of-interest issues and explaining the adviser’s business practices, fees, investment policies and risks, brokerage practices (such as soft dollar usage), and industry affiliations, and must disclose their policies on voting proxies.35 Investment advisers are also restricted with respect to the content of their advertisements and the types of advisory fees they charge.36 A broad exception would eliminate these and other measures under the Advisers Act that currently protect thrifts’ retail advisory clients.37 We discuss the proposed rule and each of its provisions below. A. Thrift Institutions Deemed Not to be Investment AdvisersProposed rule 202(a)(11)-2(a)(1) would except thrift institutions from the Advisers Act to the extent their investment advice is provided in their capacity as trustee, executor, administrator, or guardian for trusts, estates, guardianships and other accounts created and maintained for a fiduciary purpose, and they do not, except in connection with the ordinary advertising of their services as trustee, executor, administrator, or guardian for these fiduciary purpose accounts, hold themselves out generally to the public as providing investment advisory services.38 Proposed rule 202(a)(11)-2(a)(2) would except a thrift institution from the Advisers Act to the extent its investment advice is provided to a collective trust fund maintained by the thrift institution and excepted from the definition of the term “investment company” under section 3(c)(11) of the Investment Company Act.39 Thrifts that meet these conditions would be deemed not to be investment advisers, and thus not subject to any provisions of the Act. 1. Eligible Thrift InstitutionsProposed rule 202(a)(11)-2 would be available to savings associations that have deposits insured by the FDIC.40 These institutions include federal savings associations, federal savings banks, and state-chartered savings associations. Federal savings associations and federal savings banks are chartered and regulated by the OTS, which also oversees and monitors FDIC-insured state-chartered savings associations.41 The requirement that the thrift be FDIC-insured is designed so that the thrifts relying on the rule will be overseen at the federal level.42 We request comment on the coverage of the proposed rule.
2. Scope of the Rulea. Fiduciary Purpose AccountsProposed rule 202(a)(11)-2(a)(1) would except a thrift institution from the Advisers Act to the extent it performs advisory services solely in its capacity as trustee, executor, administrator, or guardian for trusts, estates, guardianships and other accounts created and established for a fiduciary purpose (rather than primarily for money management), provided the thrift does not hold itself out as providing investment advisory services.43 We have drafted these conditions so that only thrift advisory activities that are part of certain fiduciary activities, that have been provided by banks and are now also offered by thrifts, are excepted from the Advisers Act.44 We have drawn the conditions from the Gramm-Leach-Bliley Act’s amendments to the Investment Company Act that permit thrifts to operate common trust funds excepted from the definition of “investment company” under the Investment Company Act on the same basis as banks.45 The Gramm-Leach-Bliley amendments also clarified that the scope of this “bank common trust fund exception” is limited to common trust funds that are operated solely as an aid to a bank’s administration of trusts or other accounts maintained for a “bona fide” fiduciary purpose.46 Proposed rule 202(a)(11)-2(a)(1) would permit a thrift institution to provide advisory services in its capacity as trustee, executor, administrator,47 or guardian for the customer account receiving the advice, without being subject to the Act.48 These are the same capacities in which a thrift must hold assets to place them in a common trust fund that is excepted from the definition of “investment company” under the Investment Company Act. In each case, the account advised by the thrift must be established and maintained for a fiduciary purpose.49 This is the same requirement that a thrift must meet for each customer account included in a common trust fund excepted from the Investment Company Act.50 To meet the “fiduciary purpose” requirement, the customer account must be established and maintained for an underlying fiduciary reason. A customer account established primarily for money management reasons lacks an underlying fiduciary purpose and cannot meet this requirement.51 Thus, “fiduciary purpose accounts” would include those established in connection with estate planning, conservatorships and guardianships,52 and those established for minors under the Uniform Gifts to Minors Act (“UGMA”).53 Accounts established primarily for money management, custodial or administrative purposes, e.g., managed agency accounts,54 individual retirement account (IRA) trusts,55 indenture trusts, college savings trusts, ERISA trusts, “rabbi” trusts, and most revocable inter-vivos trusts, would not be included under rule 202(a)(11)-2(a)(1).56 A thrift institution relying on proposed rule 202(a)(11)-2(a)(1) could not hold itself out generally to the public as providing investment advisory services. Advertising or otherwise holding itself out as providing investment advice, portfolio management services, or financial planning would not be consistent with the proposed rule’s requirement that the thrift’s advisory services be solely in its capacity as trustee, executor, administrator, or guardian. Under the proposed rule, however, a thrift institution could publicize its investment advisory services in connection with the ordinary advertising of its services as trustee, executor, administrator, or guardian to fiduciary purpose accounts.57 We request comment on the scope of this proposed exception.
b. Collective Trust Fund AccountsProposed rule 202(a)(11)-2(a)(2) would except a thrift institution from the Advisers Act to the extent it provides investment advisory services to its collective trust funds that are excepted from the definition of “investment company” under the Investment Company Act. Collective trust funds allow a bank or thrift to manage the assets of tax-qualified pension and profit sharing plans on a pooled basis without creating an “investment company.”58 The Investment Company Act has excepted banks’ collective trust funds from the definition of “investment company” since 1970,59 and in the Gramm-Leach-Bliley Act Congress extended this exception to collective trust funds maintained by thrifts. Consistent with Congress’ extension of the Investment Company Act collective trust fund exception, we are proposing to except thrifts from the Advisers Act to the extent they provide investment advice to their collective trust funds excepted from the definition of “investment company.”60 In addition, our proposed rule would except a thrift from the Advisers Act with respect to accounts invested solely in one or more of the thrift’s sponsored collective trust funds.
B. Thrift Institutions Registered Under the ActMany thrifts may be required to maintain their existing registrations as investment advisers under the Act, even if we adopt the rule that we are today proposing, because of the scope of their advisory business or marketing activities. For these registered thrifts, our proposed rule includes a paragraph clarifying that we would not necessarily apply the Act to all of the thrift’s customer relationships. Under the rule, so long as the thrift makes the undertaking described below, the Advisers Act would apply to the thrift institution only with respect to those customer accounts for which the thrift provides advisory services that subject it to the Act.61 For example, the Advisers Act would apply to the thrift institution when it advises managed agency accounts or IRA trusts, but may not apply to the same thrift when it serves as trustee to a testamentary trust. To qualify for this provision of proposed rule 202(a)(11)-2, a thrift institution registered with us as an adviser would be required to confirm that it will provide us with access to all of its trust department records.62 Under section 204 of the Advisers Act, all records of any investment adviser, including a thrift institution that provides advisory services, are already subject to examination by Commission representatives.63 Continued access to these records will permit us to determine whether the thrift institution has defrauded advisory clients, for example, by failing to disclose misallocations of initial public offerings or other trades in favor of other trust department clients.64 These records are considered examination records, and thus receive the confidentiality available under section 210(b) of the Advisers Act.65 C. Amendment to Form ADVWe are proposing minor amendments to Form ADV and its instructions to identify those registered investment advisers that are thrift institutions.66 Form ADV, the investment adviser registration form, currently asks whether the adviser is actively engaged in business as a bank.67 We propose to amend the Form also to ask whether the adviser is actively engaged in business as a thrift institution. We believe this information would be necessary to allow us to enforce the conditions of proposed rule 202(a)(11)-2(b), if adopted. D. Exemption under Securities Exchange ActWe are proposing new rule 12g-6 under the Exchange Act, to exempt thrift-sponsored collective trust funds from the registration and reporting requirements of the Exchange Act. As discussed above, the Gramm-Leach-Bliley Act amended the Investment Company Act to exempt thrift-sponsored common trust funds and thrift-sponsored collective trust funds from the definition of “investment company.” Like bank common trust funds, thrift-sponsored common trust funds are exempt from the Exchange Act.68 However, the provision exempting bank collective trust funds from the Exchange Act does not extend to thrifts.69 We believe that exempting thrifts’ collective trust funds from the Exchange Act is consistent with Congress’ determination in the Gramm-Leach-Bliley Act to exempt those collective trust funds from the Investment Company Act. We request comment on the scope of this proposed exemption. E. Effects on CompetitionBased on our general understanding of the types of clients served by the trust departments of thrift institutions, we believe the proposed rule would have the effect of eliminating certain regulatory disparities between banks and thrifts that carry on a fiduciary trust business, without creating new regulatory disparities between thrifts and regular investment advisory firms. We are requesting comment on our understanding of the thrift industry in this regard. There are approximately 932 insured savings associations in operation. Of these, only 117 savings associations were authorized to establish trust departments, and even fewer – 98 – filed regulatory reports indicating that they administer any assets pursuant to their trust powers.70 We estimate that approximately 34 savings associations are registered with us as investment advisers.71 Nineteen of the savings associations registered with us as investment advisers are part of national or regional securities or insurance firm complexes in which a number of different types of regulated firms carry out various roles in order to provide a broad selection of financial services and products. With limited exception, the savings associations in these large firms do not appear to engage in any appreciable lending or deposit-taking.72 Eight of these large firms appear to use their savings associations predominantly to provide services to clients seeking agency accounts or employee benefit trust accounts such as IRAs or ERISA plan accounts, which, under the proposed rule, would not have a fiduciary purpose.73 Eleven of these large firms may be using, to varying extents, their savings associations to provide fiduciary services to clients in connection with trusts, estates, guardianships and other accounts created and maintained for a fiduciary purpose.74 However, total trust assets reported by the former group far exceeds that of the latter.75 The other 15 savings associations registered with us appear to function as depository institutions, focused primarily on lending and deposit-taking, and are not business units of national or regional securities or insurance firms.76 Four of these depository-institution savings associations appear to use their trust departments predominantly to provide services to clients seeking agency accounts and employee benefit trust accounts such as IRAs or ERISA plan accounts, which, under the proposed rule, would not have a fiduciary purpose.77 The remaining 11 of these depository-institution savings associations may be using, to varying extents, their trust departments to provide fiduciary services to clients in connection with trusts, estates, guardianships and other accounts created and maintained for a fiduciary purpose.78 Total trust assets reported by the 11 depository institution savings associations providing a greater proportion of fiduciary account services far exceed the total trust assets reported by the four focusing on non-fiduciary accounts.79 The above data lead us to infer that, for the savings associations registered with us that use a lending and deposit-taking business model in competition with banks, the savings associations with the majority of the trust business may be holding significant proportions of their total trust assets in fiduciary purpose accounts. By excepting thrift institutions from the Advisers Act to the extent they provide investment advice in their capacity as trustee, executor, administrator, or guardian for accounts with an underlying fiduciary purpose, proposed rule 202(a)(11)-2 will eliminate an existing regulatory disparity between banks and these savings associations. In addition, it is our understanding that the category of thrift customer relationships that the proposed rule would affect – that is, fiduciary purpose trust customers – is not commonly served by regular investment advisory firms. Thus, the proposed rule will not create regulatory disparities between thrifts and regular investment advisory firms. On the other hand, the above data also lead us to infer that the vast majority of trust business conducted by all the savings associations registered with us is carried on by savings associations that are part of securities and insurance firms, that do not use a lending and deposit-taking business model in competition with banks, and that do not hold significant proportions of their trust assets in fiduciary purpose accounts. Thus, a blanket exception for thrifts from the Advisers Act would be likely to create a new regulatory disparity between the majority of savings associations engaged in significant levels of advisory activity and the regular investment advisory firms with which they currently compete. Regular investment advisory firms would continue to be subject to the investor protection requirements under the Advisers Act, whereas savings associations that are part of large firms holding the dominant share of trust department assets (as discussed above) would be exempted from the same investor protection requirements, notwithstanding that they all appear to service the same types of clients.80 The proposed rule would not alter whatever competitive effects are caused by the existing regulatory disparity between savings associations that are part of large firms and banks. However, the existence and extent of any competitive effects is dependent upon other factors as well. For example, there may be few or no competitive effects if banks are not presently seeking to provide the same types of retail investment advisory services as are being provided by these savings associations. Even if banks are providing the same types of retail investment advisory services, there may be no competitive effects if banks seek to provide these services primarily to their depository institution customer base as an accommodation.81 This issue also raises a question as to whether the existing regulatory disparities are truly between banks and thrifts, or can more accurately be described as being between banks and the financial services complexes of which the thrifts are part. We request comment on the following questions:
II. GENERAL REQUEST FOR COMMENTAny interested persons wishing to submit written comments on the proposed rules that are the subject of this release, or to suggest additional changes or submit comments on other matters that might have an effect on the proposal described above, are requested to do so. Commenters suggesting alternative approaches are encouraged to submit proposed rule text. For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, the Commission also is requesting information regarding the potential impact of the proposed rule on the economy on an annual basis. Commenters should provide empirical data to support their views. III. COST-BENEFIT ANALYSISA. Background Under proposed rule 202(a)(11)-2, certain thrifts would be deemed not to be “investment advisers” as defined in the Advisers Act when they render investment advice solely in their capacity as trustee, executor, administrator, or guardian to customer accounts created and maintained for a fiduciary purpose, or when they advise collective trust funds they maintain under an exemption from the Investment Company Act. The Commission is sensitive to the costs and benefits of its rules. We estimate that the proposed amendments may result in benefits to certain thrifts in the form of reduced regulatory compliance costs. As we discussed above, we estimate that approximately 34 thrifts are currently registered with us as investment advisers and incurring compliance costs that would be partially reduced by the proposed rule.82 The extent of these cost reductions would depend on whether these thrifts continue using their trust departments primarily to provide retail investment advisory services.83 Other thrifts that wish to begin operating trust departments under a business model that focuses exclusively on activities that would be covered by the proposed rule would obtain the benefit of complete avoidance of these compliance costs. We believe all these benefits can be obtained without imposing any significant costs on thrifts or investors. B. Benefits 1. Complete Avoidance of Registration and Compliance Costs To the extent their trust department activities fit within the activities identified in the proposed rule, thrifts will benefit in the form of saved costs they would otherwise expend in connection with Advisers Act compliance. Based on our staff’s review of regulatory reports filed by SEC-registered thrifts describing their trust department activities, it appears that few, if any, currently engage exclusively in the type of fiduciary-purpose activities that would be exempted by proposed rule 202(a)(11)-(2)(a)(1). All but one or two of the 34 savings associations currently registered with us as investment advisers report to the OTS that some or all of their trust assets are held in connection with non-fiduciary agency accounts or non-fiduciary employee benefit trust accounts such as IRAs or participant-directed 401(k) plans.84 Thrift institutions operating under proposed rule 202(a)(11)-2(a)(2) could also save compliance costs associated with trust assets they manage for certain employee benefit plans through collective trust funds. They could also save the costs of registration and reporting required under the Exchange Act for those collective trust funds, under our proposed rule 12g-6 under the Exchange Act. However, it appears that few, if any, of the 34 currently-registered thrifts use collective trust funds. Moreover, few of them manage more than a nominal amount of employee benefit plan assets that would be eligible for inclusion in a collective trust fund.85 Benefits under proposed rule 202(a)(11)-2(a)(1) and (2) would be greater for thrifts that choose to operate their trust departments under a business model that focused exclusively on the types of accounts excepted under the proposed rule. Based on our staff’s discussions with thrift industry representatives, we believe certain thrifts wish to establish or expand trust department operations using this business model, but we do not have sufficient information to estimate the number or size of such thrifts. These thrifts would be excepted from the requirement to file their registration statement on Form ADV and to pay filing fees to the operator of the IARD system that range from $800 to $1,100 initially and $400 to $550 annually.86 For Paperwork Reduction Act (“PRA”) purposes, the Commission further estimates that the burden of completing and filing Form ADV for a new registrant is approximately 22 hours, and approximately 1.13 additional hours each year for annual amendments.87 These thrifts would also save the cost of staff time expended in responding to questions and supplying records requested by our examiners during periodic exams. Additionally, thrifts that operated under a business model that focuses exclusively on accounts exempted under the proposed rule would save costs associated with establishing and maintaining internal procedures and systems for complying with the Advisers Act and the rules under the Advisers Act. In connection with adopting our recent rules concerning investment adviser compliance programs, we estimated for Paperwork Reduction Act purposes that the average annual burden of these compliance programs is 80 hours.88 However, given the systems and records these thrifts would still be required to maintain to comply with OTS requirements governing trust department activities, it is difficult to estimate whether these thrifts would obtain any marginal cost or burden decrease. 2. Partial Avoidance of Costs For most of the 34 thrifts currently registered with us, the proposed rule offers benefits in the form of saved compliance costs for that portion of their operations that manages trust assets held in fiduciary-purpose trust accounts. The proposed rule would include a paragraph clarifying that a thrift’s obligations under the Advisers Act extend only to those customer accounts for which the thrift provides advisory services that subject it to the Act.89 Our staff has reviewed the trust department activities of the thrifts currently registered with us as investment advisers to identify the proportion of assets and accounts that may have lower compliance costs because they qualify for the proposed exception. The proportion of potentially-exempt assets in each thrift appears to vary across a range, from approximately 0.5 to 15 percent for 12 of the thrifts at the low end, up to 50 to 100 percent for nine thrifts at the high end.90 For the group, we estimate trust assets that may qualify for the fiduciary-purpose exception total approximately $17.5 billion, or approximately 15% of the $119 billion in total trust assets reported by the group.91 For the exempt accounts containing these assets, these thrifts would save the cost of making client disclosures required under the Advisers Act.92 These thrifts would also save the costs associated with other requirements under the Act and its rules relating to matters such as recordkeeping, custody, proxy voting on behalf of customers, and the like. While we use the percentage of a thrift trust department’s assets held in potentially fiduciary-purpose accounts to describe, in relative terms, the proportion of these thrifts’ exempt activities, their relative cost savings would not necessarily vary by the same proportions. For a given amount of trust assets, a savings association’s compliance costs may vary depending on the number of clients, their investment objectives, the type and turnover rate of the assets, the savings association’s other securities activities, or even the personal activities of its trust department employees. 3. Competitive Effect Costs The proposed rule would also benefit some of the 34 thrifts registered with us by eliminating certain regulatory disparities between banks and thrifts that carry on a fiduciary-purpose trust business covered by the proposed rule. This benefit is difficult to quantify. Other parties interested in this issue have suggested these regulatory disparities can be eliminated only by giving thrifts a blanket exemption from the Advisers Act.93 However, our review of registered thrifts shows this is unnecessary and would primarily create new regulatory disparities benefiting thrifts competing with other securities firms for retail advisory business. As discussed above, our staff has reviewed the trust department activities of the thrifts currently registered with us as investment advisers. Based on this review, we infer that the vast majority of the trust activities conducted by thrifts, overall, are conducted by thrifts that are part of securities and insurance firms, that do not use a lending and deposit-taking business model in competition with banks, and that do not hold significant proportions of their trust assets in fiduciary purpose accounts. The following table summarizes these firms by business model:94
This table shows that 15 of the 34 SEC-registered thrifts engage in a deposit-taking and lending business model in competition with banks. Eleven of these thrifts that compete with banks may be holding significant portions of their trust assets in fiduciary-purpose accounts, and the proposed rule would eliminate an existing regulatory disparity between these thrifts and banks. However, most of the trust business carried on by the 34 SEC-registered thrifts is being conducted by 8 thrifts using the retail advisory model that are part of a securities or insurance complex. Creating a blanket exception would create a new regulatory disparity between these thrifts and the regular investment advisory firms with which they currently compete. C. Costs We expect that a thrift relying on the proposed amendments would incur only minimal incremental costs. Thrifts that would be required to maintain their Advisers Act registration and that could take advantage of the rule only with respect to certain accounts would be required to confirm, by including an undertaking in their Form ADV (Schedule D), that they will make all trust department records available to Commission examiners upon request. For PRA purposes, the Commission estimates that including this undertaking would impose an annual burden of only five minutes per thrift, or less than 10 hours in the aggregate.95 Thrifts maintaining their registration under the Advisers Act would also be required to check a box on their Form ADV to indicate that they are actively engaged in business as a thrift institution. For PRA purposes, the Commission estimates that completing this item on Form ADV would impose an annual burden of only two minutes per thrift, or less than four hours in the aggregate.96 Costs to customers that receive investment advice from a thrift are also expected to be minimal. Customers whose accounts no longer subject the thrift to the Advisers Act will not receive the benefits and protections of the Act, including the disclosure that the Act requires. As discussed earlier, however, the Advisers Act does not work well when applied to certain thrift trust department relationships, and thus the benefits of the Act in these circumstances may already be minimal. Accordingly, we estimate the cost of removing the Act’s benefits and protections with regard to these accounts would also be minimal, although those costs cannot be quantified.97
IV. PAPERWORK REDUCTION ACTThe proposed form amendment and certain provisions of the proposed rule contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 to 3520), and the Commission has submitted the amendment and proposed rule to the Office of Management and Budget (“OMB”) in accordance with 44�U.S.C. 3507(d) and 5�CFR�1320.11. The title for the collections of information are “Rule 202(a)(11)-2” and “Form ADV” both under the Advisers Act. 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. Rule 202(a)(11)-2 Certain thrift institutions relying on the proposed rule would be deemed not to be “investment advisers” as defined in the Advisers Act. These thrifts would not be subject to any provision of the Advisers Act, including the various registration, disclosure and recordkeeping requirements under the Act. These thrifts could continue to render investment advice to customer accounts created and maintained for a fiduciary purpose if the advice is provided solely in the thrift’s capacity as trustee, executor, administrator, or guardian for that account. For these thrift institutions, the proposed rule would serve to eliminate altogether the annual reporting and recordkeeping burden under the Advisers Act. As previously discussed, we estimate that approximately 34 advisers currently registered with us appear to be thrift institutions, but most engage in trust activities that would not be covered by the proposed exception.98 Each thrift institution would need to assess both its current and planned trust department business in order to determine whether it would seek to rely on the proposed rule to be excluded from the Advisers Act and thus from the Act’s reporting and recordkeeping requirements. Because the number of thrifts that would qualify for the proposed exception will depend on the future business decisions of individual thrift institutions, it would be speculative to quantify the number of thrifts whose paperwork burden will be entirely eliminated as a result of the proposed rule.99 Comment is requested on the number of thrift institutions that would qualify to use the proposed exception from the Advisers Act, and on the number of those qualifying thrifts that would elect to use it. Thrifts that would be required to maintain their registration under the Advisers Act and that elected to rely on the rule with respect to certain customer accounts would be required to confirm, in an undertaking in their Form ADV (Schedule D), that they will make all trust department records available to Commission examiners, upon request. This collection of information is necessary to obtain the benefit of the proposed rule with regard to these certain accounts. The Commission staff will use this collection of information in its examination and oversight program. The Commission estimates that compliance with the requirement to type in this brief undertaking in Form ADV would impose a total annual burden of 5 minutes for each thrift registered under the Act and relying on the rule to exclude, from the Act, its services to certain customer accounts. In addition, data contained on Thrift Financial Reports submitted by all savings associations indicate that approximately 117 savings associations have been granted trust powers.100 Based on these data, the Commission estimates that approximately 117 thrift institutions could potentially take advantage of the proposed rule to exclude, from the scope of the Advisers Act, their advisory services to certain customer accounts. Accordingly, the total burden hours imposed by proposed rule 202(a)(11)-2 is estimated to be 9.75 hours annually.101 The Commission believes this undertaking will not impose a significant additional recordkeeping burden on thrift institutions. The undertaking does not require that new or additional records be kept, only that existing records required under adviser or thrift regulations be made available.102 Form ADV Thrifts that would be required to maintain their registration under the Advisers Act would also be required to check a box on their Form ADV that they are actively engaged in business as a thrift institution. This collection of information is mandatory. The Commission staff will use this collection of information in its examination and oversight program. The Commission estimates that compliance with this requirement to check a box on Form ADV would impose a total annual burden of 2 minutes per thrift responding to the question. As discussed above, the Commission estimates that as many as approximately 117 thrift institutions may be required to register with us and respond to this question. Accordingly, the total annual burden imposed by this collection of information is estimated to be 3.9 hours.103 Any information received by the Commission related to the proposed rule and form amendment would not be kept confidential. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments (i) to evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (ii) to evaluate the accuracy of the agency’s estimate of the burden of the proposed collections of information; (iii) to enhance the quality, utility, and clarity of the information to be collected; and (iv) to minimize the burden of these collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. Persons desiring to submit comments on these collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, D.C. 20503, and also should send a copy of their comments to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Stop 6-9, Washington, D.C. 20549 with reference to File No. S7-20-04. OMB is required to make a decision concerning the collection of information requirements between 30 and 60 days after publication. A comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. V. REGULATORY FLEXIBILITY ACTPursuant to section 605(b) of the Regulatory Flexibility Act,104 the Commission hereby certifies that proposed rule 202(a)(11)-2, proposed rule 12g-6, and the proposed amendment to Form ADV would not, if adopted, have a significant economic impact on a substantial number of small entities. Proposed rule 202(a)(11)-2 and the proposed amendment would except savings associations from the Advisers Act when they provide investment advice as part of certain trust department fiduciary services and revise the investment adviser registration form so that registrants could identify themselves as savings associations. Based on data reported by all savings associations in their September 30, 2003 Thrift Financial Reports (TFRs), there are no thrifts that meet the definition of a “small business” for purposes of the Advisers Act.105 Proposed rule 12g-6 would exempt collective trust funds maintained by savings associations from the registration and reporting requirements of the Exchange Act. Based on the same TFR data, there are no thrift-managed collective trust funds that meet the definition of a “small business issuer” for purposes of the Exchange Act.106 No other entities would incur obligations from or otherwise be directly affected by the proposed rules and amendment. Accordingly, the Commission certifies that proposed rule 202(a)(11)-2, proposed rule 12g-6, and the proposed amendment to Form ADV would not have a significant economic impact on a substantial number of small entities. The Commission requests written comments regarding this certification. The Commission requests that commenters describe the nature of any impact on small businesses and provide empirical data to support the extent of the impact. VI. STATUTORY AUTHORITYWe are proposing rule 202(a)(11)-2 pursuant to our authority under sections 202(a)(11)(F) and 211(a) of the Advisers Act.107 Section 202(a)(11)(F) gives us authority to except, by rule or order, from the statutory definition of “investment adviser” persons not within the intent of that definition. Section 211(a) gives us authority to classify, by rule, persons and matters within our jurisdiction and to prescribe different requirements for different classes of persons, as necessary or appropriate to the exercise of our authority under the Act. We are proposing amendments to Form ADV under section 19(a) of the Securities Act of 1933,108 sections 23(a) and 28(e)(2) of the Securities Exchange Act of 1934,109 section 319(a) of the Trust Indenture Act of 1939,110 section 38(a) of the Investment Company Act of 1940,111 and sections 203(c)(1), 204, and 211(a) of the Investment Advisers Act of 1940.112 We are proposing rule 12g-6 pursuant to our authority under section 12(h) of the Exchange Act.113 Section 12(h) gives us authority to, by rules or regulations, exempt any issuer or class of issuers from the provisions of section (g) of the Exchange Act, if we find by reason of the nature and extent of the activities of the issuer that such action is not inconsistent with the public interest or the protection of investors. Section 12(h) also gives us authority to classify issuers and prescribe requirements appropriate for each such class. TEXT OF PROPOSED RULES AND FORM AMENDMENTSList Of Subjects 17 CFR Part 240 Reporting and recordkeeping requirements, Securities. 17 CFR Part 275 and 279 Investment advisers, Reporting and recordkeeping requirements. For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows: PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The general authority citation for Part 240 continues to read as follows: AUTHORITY: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted. * * * * * 2. Section 240.12g-6 is added to read as follows: � 240.12g-6 Exemption from Section 12(g) for collective trust funds. An issuer that is a collective trust fund excluded from the definition of an investment company under section 3(c)(11) of the Investment Company Act of 1940 shall be exempt from the requirement to register any class of equity securities pursuant to section 12(g)(1) of the Act (15 U.S.C. 78l(g)(1)). PART 275 -- RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940 3. The general authority citation for Part 275 continues to read as follows: AUTHORITY: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted. * * * * * 4. Section 275.202(a)(11)-2 is added to read as follows: � 275.202(a)(11)-2 Certain thrift institutions deemed not to be investment advisers. (a) A thrift institution will be deemed not to be an investment adviser if the thrift institution limits its investment advisory services to the following: (1) Investment advisory services that the thrift institution performs solely in its capacity as trustee, executor, administrator, or guardian for trusts, estates, guardianships and other accounts created and maintained for a fiduciary purpose, provided that the thrift institution does not, except in connection with the ordinary advertising of its services as trustee, executor, administrator, or guardian for such accounts, hold itself out generally to the public as providing investment advisory services. (2) Investment advisory services for a collective trust fund maintained by the thrift institution and excluded from the definition of the term “investment company” under section 3(c)(11) of the Investment Company Act of 1940, and for accounts the assets of which are invested solely in one or more such collective trust funds. Note to paragraph (a)(1): Under paragraph (a)(1), each account to which the thrift institution provides investment advisory services must be created and maintained for a fiduciary purpose, whether that account is a trust, an estate, a guardianship or another type of account. (b) A thrift institution will not be deemed to be an investment adviser with respect to accounts for which it provides investment advisory services that do not subject the thrift institution to the Act, but only if the thrift institution confirms in an undertaking on Schedule D of its Form ADV (17 CFR 279.1) that it will make available to Commission examiners, upon request, all trust department records. Such records shall be considered examination records under section 210(b) of the Act (15�U.S.C. 80b-10(b)). (c) The term thrift institution means a “savings association” as that term is defined in sections 3(b)(1) and of the Federal Deposit Insurance Act (12�U.S.C. 1813(b)(1)) that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12�U.S.C. 1811), and that is not operated for the purpose of evading the provisions of the Investment Advisers Act of 1940. PART 279 – FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 1940 5. 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. 6. Item 6A of Part 1A of Form ADV (��279.1) is amended to read as follows: Form ADV * * * * * Part 1A * * * * * Item 6 Other Business Activities * * * * * A. You are actively engaged in business as a (check all that apply): 〉 (1) Broker-dealer 〉 (2) Registered representative of a broker-dealer 〉 (3) Futures commission merchant, commodity pool operator, or commodity trading advisor 〉 (4) Real estate broker, dealer, or agent 〉 (5) Insurance broker or agent 〉 (6) Bank (including a separately identifiable department or division of a bank) or thrift institution 〉 (7) Other financial product salesperson (specify): _________________________ Note: The text of Form ADV does not and the amendment will not appear in the Code of Federal Regulations. * * * * * By the Commission. Jill M. Peterson Assistant Secretary April 30, 2004. Endnotes
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