Proposed Rule:
Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 275, and 279
[Release No. IA-1862; 34-42620; File No. S7-10-00]
RIN 3235-AD21
Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV
Agency: Securities and Exchange Commission.
Action: Proposed rules.
Summary: The Commission and the state securities authorities are creating an electronic filing system for investment advisers. The system will permit investment advisers to satisfy their filing obligations with federal and state regulators with a single electronic filing made over the Internet. The system also will provide public access to information about investment advisers and persons who work for investment advisers. In connection with the development of the electronic filing system, we are proposing new rules under the Investment Advisers Act of 1940 and proposing to amend others. The new rules would require advisers to submit their filings electronically. Form ADV would be substantially updated and revised to accommodate electronic filing. Finally, we are proposing amendments that would require advisers to deliver to clients a narrative brochure written in plain English.
Dates: Comments must be received on or before June 13, 2000.
Addresses: Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Comments also may be submitted electronically at the following e-mail address: rule-comments@sec.gov. All comment letters should refer to File No. S7-10-00; this file number should be included on the subject line if e-mail is used. Comment letters will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, N.W. Washington, D.C. 20549. Electronically submitted comment letters also will be posted on the Commission's Internet web site (http://www.sec.gov).
For Further Information Contact: Lori H. Price, pricel@sec.gov or Jeffrey O. Himstreet, himstreetj@sec.gov;, at (202) 942-0716, Task Force on Investment Adviser Regulation, Division of Investment Management, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0506.
Supplementary Information
The Commission today is requesting public comment on proposed amendments to rules 30-5 and 30-11 of the SEC's Organization and Program Management rules [17 CFR 200.30-5 and 200.30-11], new rule 203-3 and Form ADV-H; proposed amendments to rules 0-2, 0-7, 203-1, 203-2, 203A-1, 203A-2, 204-1, 204-2, and 204-3 [17 CFR 275.0-2, 275.0-7, 275.203-1, 275.203-2, 275.203A-1, 275.203A-2, 275.204-1, 275.204-2, and 275.204-3]; and Form ADV, Form ADV-W, and Form 4-R [17 CFR 279.1, 279.2, and 279.4] under the Investment Advisers Act of 1940 [15 U.S.C. 80b-1] (the Advisers Act or the Act). The Commission also is proposing to withdraw rules 204-5 and 206(4)-4 [17 CFR 275.204-5 and 275.206(4)-4] and Forms 5-R, 6-R, 7-R, and ADV-Y2K [17 CFR 279.5, 279.6, 279.7, and 279.9] under the Advisers Act.
Table of Contents
EXECUTIVE SUMMARY
I. INTRODUCTION
II. DISCUSSION
III. COST/BENEFIT ANALYSIS
IV. PAPERWORK REDUCTION ACT
V. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ANALYSIS
VI. STATUTORY AUTHORITY
TEXT OF PROPOSED RULE AND FORM AMENDMENTS
[Webmaster note: these appendixes are PDF files]
Appendix A: Proposed Form ADV
Appendix B: Proposed Form ADV-W
Appendix C: Proposed Form ADV-H
Appendix D: Proposed Form ADV-NR
EXECUTIVE SUMMARY
The Commission and the state securities authorities are creating an Internet-based system of electronic filing for investment advisers. The system, which we call the Investment Adviser Registration Depository (IARD), will permit investment advisers to satisfy filing obligations under state and federal laws by making a single electronic filing. Information contained in filings made through the IARD will be stored in a database that members of the public will be able to access free of charge through the Internet. The IARD, which is being built and will be operated for us by NASD Regulation, Inc. (NASDR), will give investors easy access to information about investment advisers.
Today we are proposing to amend our rules to require advisers to make filings with us through the IARD after the system begins to operate. In addition, we are proposing substantial amendments to our application, reporting, and disclosure requirements for investment advisers. Some of the amendments are designed to take advantage of electronic filing. Others reflect recent regulatory changes. And others are designed to improve the quality of information advisers must provide to their clients and prospective clients in their information statements (brochures).
I. INTRODUCTION
Since we implemented our EDGAR system in 1993, we have sought additional ways to take advantage of developments in information technology to provide investors with better access to market information.1 More and more types of filings are made with us electronically each year.2 As a result, investors have timely access to the latest reports and filings made by public issuers. Last year, we required broker-dealers to begin to register with us electronically.3 Today we are proposing a number of rules and rule amendments designed to bring electronic filing to investment advisers.
Approximately 8,000 investment advisers are registered with the Commission under the Advisers Act. We estimate that another 12,000 are registered with state securities authorities. These advisers currently make filings with us and the states on paper, much as they have since 1940, when the Advisers Act was enacted. Investment adviser filings do not appear on our EDGAR system and are not easily accessible or widely available from other sources. In 1996, Congress passed legislation giving us authority to modernize our registration system and requiring us to provide investors with easy access to information about advisers.4
NASDR currently is building the IARD for us and the state securities authorities.5 The IARD will permit advisers to make filings with the Commission and the states through the Internet. The information advisers submit will be stored in a database, and investors will have access to it by visiting a web site. The IARD will not only improve public access to information about advisers, it will also ease regulatory burdens on advisers by permitting a single electronic filing to satisfy SEC and state filing requirements.6 It also will help us better monitor advisers and administer the federal securities laws. The IARD is described in Section II.A. of this Release.
Most of the filings made with the IARD will be on Form ADV, the Uniform Application for Investment Adviser Registration. Advisers use Form ADV to apply for registration with us and with the state securities authorities, and must keep it current by filing periodic amendments as long as they are registered.7 We are proposing to require that new advisers apply for registration electronically, and that advisers currently registered with us re-submit their Form ADV to us through the IARD. The proposed new filing rules are described in Section II.B. and the proposed transition rules are described in Section II.C. of this Release.
Form ADV currently has two parts. Part I asks for information about an adviser's business, the persons who own or control the adviser, and whether the adviser or certain of its personnel have been sanctioned for violating the securities or other laws. It provides us with information we need to decide whether to grant an application for registration or to revoke a registration, and to manage our regulatory and examination programs. Our proposed changes to Part I are discussed in Section II.D.1. of this Release.8
Part II, or a written brochure containing the same information, must be delivered to clients before they engage the adviser and then offered to them each year.9 Part II provides clients with information about business practices, fees and conflicts of interest the adviser may have with its clients. We are proposing that all advisers provide clients with a narrative brochure containing disclosure about the advisory firm written in plain English, and update the brochure at least once a year to reflect changes. We also are proposing to require that the firm brochure be accompanied by a supplement containing important information about the advisory personnel with whom the client will be dealing. Proposed Part 2A sets forth the information about the advisory firm that an adviser must include in its brochure. Proposed Part 2B sets forth the information about advisory personnel that an adviser must include in brochure supplements. These proposed changes are described in Section II.D.2. of this Release.
II. DISCUSSION
A. The Investment Adviser Registration Depository
The IARD is being built and will be operated by NASDR under contracts with the Commission and the North American Securities Administrators Association, Inc. (NASAA).10 The IARD will be modeled on NASDR's Web Central Registration Depository (CRD), which is used by broker-dealers to make filings with us, state securities authorities, and NASDR.11
NASDR will perform certain administrative tasks related to the filing and public disclosure systems described below. It will not, however, act as a self-regulatory organization for advisers.12
1. The Investment Adviser Filing System
The IARD will be an Internet-based system that advisers will access through computers in their offices, without the need for specialized hardware or software. An adviser will be able to use the system to apply for registration, amend its registration, and withdraw from registration.13 An SEC-registered adviser will also be able to electronically send "notice filings" to the states and pay state fees through the IARD.14
The IARD will contain a number of features designed to make it easy for persons to complete Form ADV, even if they are unfamiliar with the form. To use the system, an adviser will visit a designated web site, which it will be able to enter through our web site.15 Persons visiting the web site to make a filing will indicate whether they wish to apply for registration, amend an existing registration, or withdraw from registration as an investment adviser. Persons wishing to register as an investment adviser will be presented with a blank Form ADV, which they would complete on-line. A partially completed form could be saved in draft form.16 A "help" function will be available to answer questions,17 and an on-line glossary will allow persons completing the form to review the definition of key terms used in the form.18
The IARD will present an adviser completing Part 1 of Form ADV with only those items relevant to its application. An adviser indicating that it is registering with us, for example, will not see items that apply only to advisers registering with the states.19 The system also will prevent an adviser from submitting an incomplete form or from entering inconsistent information at different places on the form.20 These features should help prevent the most common errors we see in applications for registration under the Advisers Act and speed the registration process.
We also have designed the system to provide efficiencies for firms registered with us as both an investment adviser on Form ADV through the IARD and a broker-dealer on Form BD21 through the CRD. These advisers will be able to link their responses to common items to avoid entering the data twice.22
Unlike the check-the-box and multiple-choice format of proposed Part 1, proposed Part 2 of Form ADV would require the adviser to prepare a narrative brochure containing disclosure about the advisory firm.23 NASDR will design the part of the system that will accept Part 2.24 Once this part of the system is built, an adviser will be able to prepare its brochure on its own computer using its word processing software and transmit the file to the IARD.25 We do not anticipate, however, that brochure supplements will be submitted to the IARD.
2. The Public Disclosure System
All current information submitted to the IARD by advisers will be available to members of the public through our web site without charge.26 Interested persons will be able to search the database to retrieve information about advisory firms and persons associated with them.27 Anyone with access to the Internet will be able to look up an adviser and review its Form ADV -- including the disciplinary records of the adviser and persons associated with the adviser.28
3. System Implementation
We expect that the IARD will begin to receive filings later this year. We anticipate that the entire system will be "rolled out" in four separate releases:29
- First, SEC-registered advisers and applicants for SEC registration will begin using the system to file Part 1 with us and submit notice filings to state securities authorities.30 We expect that most (if not all) state securities authorities will accept "notice filings" from SEC-registered advisers through the IARD at that time, and that many state securities authorities also will begin to require advisers registered with them to use the system. We understand, however, that some state securities authorities lack statutory authority to require advisers registered with them to file through the IARD and will postpone full participation in the system until necessary legislation is enacted.31
- Second, NASDR will release the public disclosure system, which should begin operating a few months after the first filings are made on the system.32
- Third, NASDR will release the state investment adviser representative licensing system. We expect that it will begin operating a few months after the public disclosure system is released. It is likely that some states will not participate until their laws have been changed.
- Fourth, the IARD will begin to accept Part 2A of Form ADV.
4. Filing Fees
The Advisers Act permits the operator of the IARD to charge reasonable fees to cover system costs.33 We will pay NASDR to build the system; filing fees will be used to pay for its operation and maintenance. NASDR will charge fees for initial applications and annual updating amendments.34 These fees will be based on the amount of assets an adviser has under management and the number of states to which the adviser submits notice filings. We expect IARD annual filing fees to range from $200 for smaller advisers to $400 for the largest advisers.35 We must approve any fee or fee change, and we will do so only if the proposed fees are reasonable and necessary to support proper operation of the IARD. The IARD also will collect registration, licensing and notice fees on behalf of state securities authorities.36 All fee revenues will be segregated from NASDR's other assets and retained for the exclusive benefit of the IARD. The system will be audited annually by an independent public accountant, the results of which will be reported to us and NASAA. We will provide a copy of the report to interested persons.
Advisers using the system will be required to establish an account with NASDR and maintain funds in the account necessary to pay state fees as well as IARD filing fees.37 The IARD will automatically calculate the amount of the fees due based on information provided by the adviser on its Form ADV, debit the adviser's account, and remit amounts due to the appropriate state securities authorities. The IARD will not accept a filing if insufficient funds are on account to pay fees due.
The one-stop filing and fee collection functions of the IARD should substantially reduce regulatory burdens on advisers. Larger advisers, which typically will impose more costs on the system by submitting notice filings and paying fees in multiple states, will benefit the most. We believe, therefore, that it is appropriate that larger advisers pay higher fees to support the system.
B. Proposed Amendments to SEC Rules
To implement the IARD, we are proposing new rules and amendments to rules that govern the process by which advisers apply for registration with us, amend their registrations, and withdraw from registration.38 This section discusses the proposed rules and rule amendments.39
1. Applications for Registration on Form ADV
We propose to amend our rules under the Advisers Act to require all advisers applying for registration with us to file Form ADV through the IARD.40 Each adviser currently registered with us would be required to re-submit its Form ADV to us using the IARD and the revised form.41 We will publish a schedule of dates by which each adviser registered with us must re-submit its Form ADV through the IARD.42 Paper filings would be accepted only if the adviser has obtained a continuing hardship exemption, as described below.43
2. Amendments to Form ADV
After an adviser has submitted an application for registration on Form ADV or re-submitted its Form ADV through the IARD, the adviser will have to make all amendments through the system.44 Our rules would continue to require each adviser to update its Form ADV at least once a year, or more frequently depending upon the information in the form that becomes stale.45 To amend its Form ADV, an adviser would access its Form ADV through the IARD and simply type over the stale information.46 The adviser would then electronically "sign"47 the form and submit it to the IARD.48 The IARD would replace the stale information with the new information submitted and record the date of the change.49
3. Withdrawal from Registration
Investment advisers generally withdraw from SEC registration as a result of ceasing operations or switching to state registration.50 In either case, an adviser would file Form ADV-W with the IARD.51 The IARD will pre-populate the Form ADV-W with information from the adviser's most recent Form ADV filing; the adviser would then complete Form ADV-W, electronically sign it, and submit it to the IARD. We propose to make investment adviser withdrawals effective upon filing, eliminating the current 60-day waiting period.52 Eliminating the 60-day waiting period for investment adviser withdrawals would smooth the transition process for advisers switching to state registration.
An adviser withdrawing from SEC registration and switching to state registration currently has a grace period to allow time for the adviser to register with the states.53 The preemptive provisions of the Advisers Act, however, preclude the states from regulating the adviser until it has withdrawn from SEC registration.54 We propose to adopt a rule amendment that would suspend preemption of a state's laws when the adviser registers with that state.55 Once registered with a state, an adviser would become subject to that state's adviser statute while also remaining subject to SEC regulation until it files Form ADV-W to withdraw from SEC registration.56 Once the adviser has filed Form ADV-W with us, the adviser generally would be subject only to state regulation.
4. Hardship Exemptions
In proposing to require advisers to file electronically, we are assuming that advisers have computers and access to the Internet, and will be able to submit filings through the IARD.57 We recognize, however, that there may be circumstances under which an adviser cannot make an electronic filing, and thus we are proposing two hardship exemptions that advisers could request by filing a short form with NASDR.58
An adviser that files electronically could request a temporary hardship exemption if unexpected difficulties prevent it from filing, such as a computer malfunction or electrical outage.59 The exemption would be available upon filing and allow an adviser to delay the deadline for an electronic filing for seven business days.60 A continuing hardship exemption would be available only to an adviser that is a "small business"61 and can demonstrate that the electronic filing requirements would create an undue hardship (e.g., the adviser does not have a computer and is unable to afford a filing service). If we grant a continuing hardship exemption, the adviser would file on paper with NASDR, which would then convert the filing to electronic format and charge the adviser an additional fee to cover conversion costs.62 Since primarily larger advisers are registered with us, we expect that few would qualify for a continuing hardship exemption. We request comment on whether a continuing hardship exemption is necessary for SEC-registered advisers.
C. Proposed Transition to Electronic Filing
When we adopt these amendments, we will provide an effective date that will correspond to the commencement of operations of the IARD. After that date, all applicants for registration must file their Form ADV and any amendments electronically through the IARD. We expect to publish a schedule by which advisers registered with us on the effective date will re-submit their registration forms to us through the IARD. We are asking for volunteers to be among the first group of advisers to submit their registration to the IARD.63 We encourage advisers that have used the CRD to volunteer. The experiences of this first group will alert us to any problems with the system and allow NASDR to make adjustments. We request comment on our proposed transition process. How soon after the adoption of the new rules and revised form can advisers be ready to submit their Form ADVs through the IARD?
As discussed above, a later release of the IARD will ultimately accept Part 2A of Form ADV.64 We propose to require each adviser to file its brochure with us when it makes its first annual update after the IARD begins to accept Part 2A.65 During the interim period, advisers will not be required to submit their brochures to us (either in electronic or paper form), but will, instead, be required to keep them and make them available to our staff.66 At the request of NASAA, we have included a provision in our proposed rules that a brochure retained by the adviser would be considered "filed" with us.67 As a result, until advisers submit Part 2A to the IARD, the state securities authorities could require SEC-registered advisers to file a copy of Part 2A (on paper) with them.68
D. Proposed Revisions to Form ADV
We are proposing substantial revisions to Form ADV.69 We have redrafted many items in simpler, more direct language, and have included brief explanations (in the form) of why we need the requested information. We believe that these changes will make it easier for persons to complete the form. The items continue to be drafted broadly to apply to the different types of advisory organizations registered with us and the state securities authorities. We request comment generally on the organization of the form and the clarity of the language we have used.
1. Part 1
Part 1 of Form ADV asks for information about the adviser and persons associated with the adviser. We need this information to decide whether to grant an application for registration or revoke a registration, and to manage our regulatory and examination programs. Some of the changes we are proposing in Part 1 are necessary to accommodate electronic filing. Many are in response to developments since Uniform Form ADV was adopted in 1985.70
The most significant regulatory development affecting investment advisers since 1985 occurred in 1996 when Congress passed NSMIA, dividing regulatory jurisdiction over investment advisers between the Commission and the states.71 As a result, advisers are no longer required to register with both. Larger advisory firms (generally, those with at least $25 million of assets under management) register only with us, but often must send notice filings to the states and pay state fees.72 Smaller advisers register with one or more states,73 not with us, and most of our regulatory requirements do not apply to them.
The changes made by NSMIA have allowed us to substantially reorganize Part 1, which we propose to divide into two parts. All advisers would complete Part 1A, while only state-registered advisers would complete Part 1B.74 This new organization would allow SEC-registered advisers (and persons applying for SEC registration) to avoid responding to items requiring information we do not need.
a. Part 1A
Part 1A would require an adviser to provide information describing itself and its business through a series of fill-in-the-blank, multiple-choice, and check-the-box questions. As proposed, Part 1A consists of 12 items that request information similar to that requested by current Form ADV.75 We are proposing a number of changes, the most significant of which are discussed below.
i. Identifying Information. We propose to revise the identifying information we require about the adviser to reflect new information we need. For example, we would ask for the CRD number of the adviser (if it has one), any web site addresses of the adviser,76 an e-mail address of a person we can contact about the form, and the fax number of the adviser.77 The identifying information would be included in Item 1 of Part 1A of the form, and multiple or additional narrative responses to certain sub-items would be included on Schedule D.78 Schedule I, which currently requires information relevant to whether the adviser should be registered with us or the state securities authorities, would be incorporated into the body of Form ADV in a new Item 2A.79
ii. Educational and Business Background. We propose to delete the requirements that an adviser report the educational and business background of its personnel.80 Instead, advisers would be required to provide this information to clients in the adviser's brochure or brochure supplements.81
iii. Disciplinary Disclosure. We propose several amendments to the item requiring disclosure of disciplinary information about the adviser and certain of its advisory personnel.82 Many of these amendments update the form, and reflect changes that we have made to Form BD over the years.83 These changes will also permit advisers that are registered as broker-dealers to electronically copy and link disciplinary disclosure made in response to Form BD on NASDR's CRD system without re-typing the data into the IARD.84 As proposed, each adviser --
- Would complete a Disciplinary Reporting Page (DRP) if it responds affirmatively to any of the disciplinary questions.85 We are proposing three DRPs, one each for criminal, civil, and regulatory actions. The DRPs would elicit details regarding each disciplinary event in a structured format and replace current Schedules D and E.86 The structured format, which we currently use in Form BD, is designed to yield better information than the free-text format of the current schedules.87
- Would only report disciplinary events occurring in the past ten years.88 Currently, some questions limit reporting to events that occurred no more than ten years ago, but others have an unlimited reporting period.89 Our authority to deny or revoke an adviser's registration for the most serious events -- those involving criminal convictions -- is limited to ten years following conviction,90 a limitation recently reaffirmed by Congress.91 Although we have authority to deny or revoke registration based upon lesser (civil or administrative) sanctions occurring more than ten years ago, we typically do not use that authority.92 Over the years, however, we have received many complaints from advisers that are required to report minor disciplinary events occurring decades ago, but that have no other disciplinary events.93
- Would not report an unsatisfied judgment or lien; bankruptcy; or bond denial, payout, or revocation.94 These disclosures generally are not relevant to our authority to grant or deny registration. An adviser also would not report a finding by a self-regulatory organization that the adviser violated a rule designated as "minor" under a plan approved by the Commission if the sanction imposed consists of a fine of $2,500 or less and the sanctioned person does not contest the fine.95
- Would be required to report actions of foreign courts and regulatory authorities,96 and cease-and-desist orders issued by the Commission.97 Advisers also would be required to report felony criminal indictments and informations, and misdemeanor informations involving certain offenses,98 as well as report military court convictions, misdemeanor perjury convictions, and conspiracy to commit certain offenses.99
- Could omit disciplinary information for advisory affiliates no longer associated with the adviser.100
iv. Control Person Disclosure. We are proposing revisions to the requirements for identifying persons who own or control the investment adviser. These changes, which are reflected in proposed Schedules A, B, and C, conform to the corresponding schedules of Form BD.101 They should clarify and simplify the reporting of indirect interests in the adviser when, for example, the adviser is part of a large corporate structure. An adviser generally would no longer be required to report an indirect owner unless the indirect owner owned twenty-five percent of a direct owner.102 Similarly, the instructions to these schedules clarify the requirements for imputing beneficial ownership of an adviser for reporting purposes.103
v. Small Businesses. We are proposing to add a new Item 12 that would request information we need to determine whether the adviser is a small business. We are required by the Regulatory Flexibility Act to consider the effects of our regulations on small businesses and need to know how many advisers registered with us are small businesses.104 Generally, only those SEC-registered advisers with assets under management of less than $25 million would be required to respond to this item.105
b. Part 1B
Part 1B of Form ADV has been prepared by NASAA on behalf of the state securities authorities. It would require state-registered advisers to provide information about bonding, arbitration actions, other civil and regulatory actions, and whether sole proprietors have taken certain qualifying exams or attained various professional designations. Most of this information is currently required by the state securities authorities.
Only state-registered advisers will be required to complete Part 1B.106 Completion of this part of the form, therefore, is not an SEC requirement, and Part 1B is not included in this Release as a proposed SEC rule. We will accept any comments and forward them to NASAA for consideration by the state securities authorities.107
2. Part 2
Currently, Part II of Form ADV contains the requirements for the disclosure statement that advisers must provide to prospective clients and offer to clients annually. The disclosure statement contains information about the adviser's fees, business practices, and conflicts of interest. Advisers are required to provide clients either a copy of Part II or a narrative brochure that contains at least the information required in Part II.108 Most advisers provide clients with Part II, which asks a series of multiple-choice and fill-in-the-blank questions supplemented in some cases by narrative schedules.
Our experience over the 15 years since Uniform Form ADV was adopted has convinced us that we need a better approach to client disclosure. First, the format of Part II does not lend itself to meaningful, clear disclosure. In some cases, an adviser's response to a question may be accurate but paint an inaccurate picture of its practices. For example, an adviser may truthfully respond to current Item 4.C. by indicating it uses all of the strategies listed by the item, but a client may not appreciate that the adviser's principal strategy involves, for example, risky options trading. In other cases, clients must draw inferences from an adviser having checked a box. For example, if an adviser is paid through commissions on securities that it advises clients to purchase or sell, a checked box in current Item 1.C. will disclose this practice, but not the conflict of interest the adviser has as a result. Advisers can use Part II's narrative schedules to expand on a check-the-box answer, but the schedules are physically separate from the checked box and are often written in legalese or technical jargon.
Second, because the information in Part II concerns the advisory firm, clients may not receive information they want and need about the firm's employees with whom they have contact and on whom they rely for investment advice. In the case of smaller firms, the current disclosure requirements, which focus on the senior executives of the advisory firm, may be adequate.109 But in a growing number of large advisory firms, clients may never meet the firm's senior executives, who may be located in a different city and may have only an indirect effect on the advice given to the client. We believe clients of these firms may be more interested in the background and qualifications of the individuals with whom they are dealing than in the background and qualifications of executive officers.
We propose to address these concerns (and others, described below) by extensively revising the format of advisers' disclosure requirements. Under the proposed rules, each adviser would be required to give clients a narrative brochure written in plain English.110 Items in Part 2 would specify the disclosure required in the brochure, but advisers would be generally free to structure the disclosure and order the topics in a manner that best conveys the required information. Our model is Schedule H to Form ADV, which currently requires wrap fee program sponsors to give clients a narrative brochure describing the wrap program.111 Our experience with the wrap fee brochure suggests that narrative firm brochures will provide advisers' clients with better, more understandable disclosure.
The new adviser brochures would be organized in two parts, a firm brochure and a brochure supplement for each individual who provides advisory services to clients on the adviser's behalf. As described in more detail below, advisers would be required to deliver a brochure to each client, and would be required to deliver an individual's supplement only to those clients to whom that individual will provide advisory services. Part 2A would contain the requirements for the firm brochure, and Part 2B for the brochure supplements.
a. Part 2A: The Firm Brochure
Each adviser registered with us would be required to deliver its brochure at the start of the advisory relationship,112 and to offer to deliver the brochure annually.113 Advisers would be required to use their new brochures and brochure supplements to meet these delivery requirements by the end of the first "roll out" phase of the IARD.114 To allow advisers to make a smooth transition, we are proposing a further 30-day transition period to allow advisers to provide the new brochures and supplements to existing advisory clients.115
The proposed delivery requirements would be very similar to the current ones, with two differences of note.116 First, we propose to clarify that an adviser acting as the general partner for a limited partnership must provide a brochure to each limited partner.117 Second, we propose to require that updates to the brochure be delivered to clients whenever information in the brochure becomes materially inaccurate.118 Currently, our rules require initial delivery of the brochure, but require no further brochure delivery unless the client accepts the adviser's annual offer.119 The anti-fraud provisions of the Act require, however, an adviser to fully disclose information about all material conflicts, which require the adviser to correct previous disclosure about conflicts to clients.120
We believe it is incumbent upon an adviser, as a fiduciary, to keep its clients apprised of material changes in its operations, its fees, key advisory personnel, and other information provided in the advisory brochure. Mutual fund shareholders are not required to rely on information in stale prospectuses; we see no reason why advisory clients should rely on stale brochures. Therefore, we are proposing to require that an adviser provide clients with written brochure updates whenever information in the brochure becomes materially incorrect, and include these updates with brochures delivered to prospective clients.121 These updates can take the form of either a reprinted brochure or a "sticker," a piece of paper identifying the stale information and providing the current information.122 Advisers that deliver their brochure to clients electronically could also deliver stickers electronically.123
As proposed, advisers could use stickers to update a firm brochure in the same way that sponsors of wrap fee programs currently use stickers to update their narrative wrap fee program brochures.124 Generally, an adviser could use a sticker for any amendment(s) so long as the brochure remains readable and clear. We would, however, require the adviser to revise (and reprint) its brochure each year as part of its annual updating amendment. Thus, the current brochure that the adviser offers clients annually would be a "clean" document that incorporates the text from all existing stickers. We request comment on this proposal. How many stickers would advisers expect to accumulate over one year? How many changes would those stickers effect, and how complex would they be? Would clients be confused if advisers were required to reprint their brochures only every two or three years, rather than every year?
The information required in a firm brochure would be specified by Part 2A of Form ADV.125 Part 2A would consist of 19 separate items, each of which elicits required disclosure on a distinct topic.126 We have drawn the items in Part 2A largely from current Part II, redrafting them as necessary to reflect the narrative format of the new brochure.127 Some Part 2A items are new, or have been revised to reflect new concerns or developments in the investment adviser industry. Much of the information required in the proposed narrative brochure concerns an adviser's conflicts of interest with its clients, and is disclosure the adviser already must make to clients, as a fiduciary, under the anti-fraud provisions of the Advisers Act.128 Thus, many of the proposed disclosure items will serve to give advisers guidance on fulfilling their statutory disclosure obligations to clients.
The items in proposed Part 2A will not, of course, cover every possible conflict. As a result, delivering a brochure (and supplements) prepared in accordance with Part 2 may not fully satisfy an adviser's disclosure obligations. We make this point clear in both the proposed Form and brochure rule.129 We request comment whether there are other common disclosures advisers make to clients that we should also include in the items of Part 2.
Item 1. Cover Page. The brochure cover page would be required to identify the advisory firm, its business address, and telephone number; the date of the brochure; and the name of a person who can be contacted for further information. The cover page would also include a statement that the brochure has not been approved by the Commission or any state securities authority. If the adviser holds itself out as being "registered," the cover page must also explain that registration does not imply that the adviser possesses a certain level of skill or training.130 The cover page would also provide the address of a web site so that a client or prospective client can obtain additional information about the adviser through the IARD.
Item 2. Material Changes. The brochure would include a summary of material changes since its last annual update, to help clients identify new or revised information. The summary would appear on the cover page of the brochure or immediately thereafter, or could be included in a separate letter sent to clients accompanying the brochure.131
Item 3. Table of Contents. The new brochures would include a table of contents detailed enough to permit clients to locate topics easily.
Item 4. Advisory Business. Advisers would be required to include background information about the advisory firm, including how long it has been in business and the names of its principal owners. The brochure would also describe the firm's advisory business -- the types of advisory services offered, whether the adviser tailors services to clients' individual needs, and whether clients may impose individual investment restrictions.132
We are not proposing to require all advisers to disclose the details of how they manage client assets. For many advisers, descriptions of how they formulate advice or manage client portfolios are likely to be either too generalized or too client-specific to be helpful. However, we propose to require an adviser that holds itself out as specializing in a particular service to explain its specialty in detail,133 and to require an adviser that provides advice about only limited types of securities to explain its services and their limitations. In addition, advisers that manage assets would disclose the amount they manage with investment discretion, and the amount without. Wrap fee portfolio managers would explain any differences in their portfolio management for wrap fee and non-wrap clients, as well as identifying the wrap programs they participate in and disclosing that they receive part of the wrap fee.134
Item 5. Fees and Compensation. The brochure would describe how the adviser is paid for providing advisory services.135 The adviser would be required to disclose its fee schedule, disclose whether fees are negotiable, discuss whether the firm bills clients or deducts fees directly from the clients' accounts, and explain how often the firm assesses fees. Advisers charging fees in advance would also be required to explain how they calculate and refund prepaid fees when a client contract terminates.136
Advisory clients may not appreciate that they will bear other costs in addition to advisory fees. Thus, in addition to information about advisory fees, we propose to require the brochure to describe the types and amounts (or ranges) of other costs, such as brokerage, custody fees, and fund expenses, that clients may pay in connection with advisory services.
In some cases, the type of compensation an adviser receives will involve a conflict of interest. An adviser that receives commissions or other payments for sales of securities to clients (transaction-based compensation) has a serious conflict of interest with its clients.137 This practice gives the adviser and its personnel an incentive to base investment recommendations on the amount of compensation they will receive rather than on the client's best interests.138 We propose to require advisers who receive transaction-based compensation (or whose personnel receive transaction-based compensation) to disclose this practice and the conflict of interest, and to describe the firm's control procedures for addressing the conflict.139 Item 5 would also require these advisers to disclose that clients may purchase the same securities or investment products from other brokers.140 Should proposed Item 5 also require an adviser to discuss its conflict of interest in charging performance or incentive fees, or should we continue to rely on anti-fraud provisions to require disclosure when this type of fee structure presents a material conflict?141
Item 6. Types of Clients. The brochure would describe the types of advisory clients the firm generally has. The adviser would also disclose its requirements, such as minimum account size, for opening or maintaining an account.142
Item 7. Methods of Analysis, Investment Strategies and Risk of Loss. Item 7 would require the brochure to describe the adviser's methods of analysis and investment strategies. As noted earlier, Item 4 of Part II currently asks for the adviser's methods of analysis, sources of information, and investment strategies through a series of check boxes. The current format necessarily covers a limited number of analytical methods and strategies. Moreover, clients may not appreciate the meaning of the methods listed, or may not understand the implications for how client accounts are actually managed using a particular method.143 We believe that an adviser's narrative description will provide clients with more useful information.
We are also proposing that the brochure discuss the risks clients face in following the adviser's advice or permitting the adviser to manage assets. Advisers that offer a wide variety of advisory services could simply explain that investing in securities involves a risk of loss; we would not require these advisers to list the risks involved in each type of security or trading strategy. Advisers that use primarily a particular method of analysis, strategy, or type of security would be required to explain the specific risks involved,144 with more detail if those risks are significant or unusual.
Item 8. Disciplinary Information. We propose to require an adviser's brochure to disclose information about the firm's disciplinary history. This disclosure would include descriptions of, among other events, any convictions for theft, fraud, bribery, perjury, forgery and violations of securities laws by the adviser or one of its executives. Disciplinary events such as these reflect on the integrity of the adviser and its management persons. Thus, disclosure of this information is material to clients.
Although we have long viewed the anti-fraud provisions of the Advisers Act as requiring advisers to disclose disciplinary information,145 we have not required this disclosure to be included in Part II of Form ADV or the client brochure.146 One of our anti-fraud rules, rule 206(4)-4, requires advisers to inform clients and prospective clients promptly about any "legal or disciplinary event that is material to an evaluation of the adviser's integrity or ability to meet contractual commitments to clients."147 The rule provides a list of events that are presumed to be material if they occurred in the previous ten years.148 The adviser may (but is not required to) make this disclosure in its brochure, and may make it orally.
Information about an adviser's illegal or unethical conduct is very important to a client who is deciding whether to engage or continue to engage the adviser. When assessing whether an adviser will fulfill its obligations to clients, an investor would likely give great weight to whether the adviser has met its fiduciary and other legal obligations in the past. Because of the importance of this information to clients, we are proposing to require it be in writing and included in the brochure along with other material information about the adviser.149 A writing requirement will also permit us to better monitor compliance with this disclosure requirement.150 We request comment on this proposal, specifically whether disciplinary information should appear in a separate written document accompanying the brochure, rather than the brochure itself, in order to highlight its importance to advisory clients. We also request comment whether there are other approaches to achieve these same disclosure and compliance objectives.
We have modeled proposed Item 8 on rule 206(4)-4, which we propose to rescind. Item 8 would require an adviser's brochure to disclose all material facts about any legal or disciplinary event material to evaluating the adviser's business or the integrity of its management. An adviser must presume that certain disciplinary events described in Item 8 are material if the event involved the adviser or a management person and occurred in the previous ten years.151 The adviser may overcome (rebut) this presumption, in which case no disclosure is required. A note in Item 8 would explain four factors the adviser should consider when assessing whether the presumption can be rebutted.152 We propose to require advisers registered with us to keep a file memorandum if the adviser does not disclose an event described in Item 8. The memorandum will memorialize the adviser's determination, avoid later disagreements as to the basis for the determination, and better permit our staff to monitor compliance with this important disclosure requirement.153
We are proposing several revisions to the provisions in the list of disciplinary events that would move from rule 206(4)-4 into new Item 8. First, we would update some of the provisions to reflect changes in the law.154 Second, we would make certain clarifying revisions to the listed events.155 Finally, we would require an adviser subject to one of our administrative orders to provide clients and prospective clients with a copy of that order for a period of one year following the date of the order.156
Rule 206(4)-4 requires an adviser to disclose a civil action in which the adviser is found to have violated an investment-related statute.157 Today, however, many disputes between securities firms and their customers are resolved through arbitration or other alternative dispute resolution, rather than civil lawsuits. As a result, there may now be more violations of investment-related statutes that are not presumed to be material under rule 206(4)-4 and therefore are not typically disclosed to clients. In Item 20 of Part 2A, state securities authorities have included a requirement that state-registered advisers disclose certain arbitration liability if the claim was in excess of $2,500. Should we include a similar requirement in Item 8? If so, should our requirement be limited to arbitration awards for $2,500 rather than claims for $2,500? Should the amount be higher? Since some arbitrators may not issue reports of their findings, how should we draft Item 8 to distinguish arbitrations involving matters that do not reflect upon the integrity of the adviser (such as some contract disputes), from those that do? Should we limit the requirement to arbitrations in which the arbitrator finds a violation of an investment-related statute? If we do, will advisers and their affiliates decline to agree to use arbitrators who make findings?
Item 9. Other Financial Industry Activities and Affiliations. We propose to require advisers to disclose information about their other financial industry activities and affiliations. These other activities and affiliations may create conflicts of interest between the advisory firm and its clients, and may impair the objectivity of the investment advice given.
Proposed Item 9 would require an adviser to disclose whether it (or any of its management persons) is registered or has applied to register as a broker or commodities professional. The brochure would also describe material arrangements the adviser (or any of its management persons) has with related financial industry participants. Advisers must currently provide similar disclosure under Item 8 of Part II. The brochure would also describe any material conflict of interest with advisory clients that the relationship or arrangement creates with clients, and the restrictions or other control procedures the adviser uses to address the conflict.158 In addition, if the adviser selects or recommends other advisers for clients, proposed Item 9 would require disclosure of any compensation arrangements and other business relationships between the two advisory firms, as well as of the conflicts created.
Item 10. Participation or Interest in Client Transactions; Personal Trading. Item 10 would require the brochure to discuss the conflicts of interest the adviser faces when the advisory firm or a "related person" has a financial interest in, or trades in, securities they recommend to clients.159 Advisers would be required to disclose any practices giving rise to these conflicts, the nature of the conflicts presented, and any procedures and controls the adviser uses to address the conflicts.160
Proposed Item 10 is designed to shed sunlight on two types of practices that can harm advisory clients. The first is when an advisory firm (or a related person) has a material financial interest in an issuer of securities it recommends to clients. For example, the adviser may recommend that clients invest in an investment company that the firm advises, or a partnership for which the firm is the general partner.161 Similarly, the adviser may recommend that a client buy securities in a public offering underwritten by the adviser's affiliate. Or, an adviser with a material financial interest in a company may recommend that a client buy shares in that company's public offering, when the success of the offering could increase the value of the adviser's investment.162 An adviser engaging in these practices has an incentive to base its advice on its own financial interests rather than the interests of clients, and the proposed item is designed to help a client understand the conflict. Item 10.A. would require full disclosure of these conflicts and provide guidance on the types of conflicts covered.163 We request comment whether additional guidance would be useful to advisers.
The second practice involves personal trading abuses. Because of the information they have, advisers and their personnel can "front run" client trades or otherwise abuse their positions. For example, an adviser may be able to sell (or sell short) its own position in a security in advance of large client sell orders that could be expected to drive down the price of that security. Similarly, an adviser may acquire a position in a stock, advise clients to buy the same stock, and profit by the resulting increase in price.164 These practices not only may affect the adviser's recommendations, but also can harm clients by affecting adversely the prices at which clients buy or sell securities.
Under proposed Item 10.B., an adviser would disclose whether it or a related person (e.g., advisory personnel) invest -- or are permitted to invest -- in the same securities as their clients, or in related securities such as options or other derivatives.165 Firms engaging in or permitting this practice would discuss the conflicts presented, and describe the firm's restrictions and/or internal procedures to address the conflicts. Item 10.C. would require a similar discussion, but focus on the specific conflicts an adviser has when it (or a related person) trades in the same securities at or about the same time as a client. In response to this item, an adviser might explain how its internal controls prevent the firm and its staff from buying or selling securities in advance of client transactions.
Item 11. Brokerage Practices. Item 11 would require the brochure to describe the adviser's policies and practices in selecting brokers for client transactions, and in determining the reasonableness of brokers' compensation. As we explain in more detail below, the item would require the adviser to disclose its policies and practices with respect to "soft dollars," i.e., the receipt of benefits such as research for the allocation of client brokerage.
Soft Dollar Practices. Advisers often receive "soft dollar" benefits from using particular brokers for client trades.166 Client brokerage, however, is an asset of the client -- not of the adviser. When, in connection with client brokerage, an adviser receives products or services that it would otherwise have to produce itself (or pay for), the adviser's interest may conflict with those of its clients. For example, soft dollar arrangements may cause an adviser to violate its best execution obligation by directing client transactions to brokers who are not able to adequately execute the transactions, or may give the adviser incentive to trade client securities more often than it would absent the benefits the adviser receives. Because of these conflicts, we have required advisers to disclose their policies and practices on use of client brokerage to obtain soft dollar benefits.167
During 1997-98, our staff conducted a wide-ranging examination of advisers' soft dollar practices and disclosure. Our Office of Compliance Inspections and Examinations found widespread use of soft dollars by investment advisers that manage client portfolios.168 The Office concluded that advisers' disclosure often failed to provide sufficient information for clients or potential clients to understand the adviser's soft dollar practices and the conflicts those practices present. In its report, the Office noted that most advisers' descriptions were simply boilerplate, and urged that we consider amending Form ADV to require better disclosure.169 Today we are acting on those recommendations.170
Item 11 would require an adviser that receives research or other products or services in connection with client securities transactions (soft dollar benefits) to disclose the adviser's practices and discuss the conflicts of interest that result.171 The brochure's description of soft dollar practices must be specific enough for clients to understand the types of products or services the adviser is acquiring and permit them to evaluate conflicts.172 Disclosure must be more detailed for products or services not used in the adviser's investment decision-making process.
Item 11 would describe the types of conflicts the adviser must disclose when it accepts soft dollar benefits,173 and require the adviser to disclose its procedures for directing client transactions to brokers in return for soft dollar benefits.174 The item would require the adviser to explain whether it uses soft dollars to benefit all clients175 or just those accounts whose brokerage "pays" for the benefits, and whether the adviser seeks to allocate the benefits to client accounts proportionately to the brokerage credits those accounts generate. The item would also require the adviser to explain whether it "pays up" for soft dollar benefits.176
Client Referrals. The brochure would also be required to discuss the adviser's practice in using client brokerage to reward brokers that refer clients.177 This practice also presents advisers with serious conflicts of interest since they may have a bias towards referring brokers. The brochure would have to disclose this practice, the conflict it creates, and any procedures the adviser used to direct client brokerage to referring brokers during the last fiscal year, i.e., the system of controls used by the adviser when allocating brokerage.
Transaction Costs. Clients engaging an adviser can benefit when the adviser negotiates lower commissions or "bunches" trades to obtain volume discounts on execution costs.178 Item 11 would require the adviser to describe these practices. If the adviser does not bunch trades when it has the opportunity, the brochure would be required to explain that clients may pay higher brokerage costs. Similarly, if the adviser does not negotiate commissions, or limits the extent to which it negotiates them, the brochure would be required to explain that clients may pay higher brokerage costs as a result.179
Directed Brokerage. Clients sometimes instruct their adviser to send transactions through a specific broker. Clients may initiate this type of arrangement for a variety of reasons: the client may wish to favor a family member or friend, or the client may be using its own brokerage to pay for services the broker provides to the client.180 But the arrangement may also be initiated by the adviser, who may benefit, for example, when brokerage is directed to its affiliated broker-dealer. In either case, clients directing (or agreeing to direct) brokerage need to understand the consequences of directing brokerage, including the possibility that their accounts will pay higher commissions and receive less favorable execution.181
If an adviser permits clients to direct brokerage, we would require the brochure to explain that the adviser may be unable to get best execution, and that directing brokerage may cost clients more money. If, however, the adviser routinely requests or requires clients to direct brokerage, the brochure would also be required to describe the adviser's policy or practice, to disclose that not all advisers require directed brokerage, and to discuss any broker-dealer relationship that creates a material conflict of interest.182
Commission Recapture.183 An adviser that sends brokerage to a firm providing commission recapture would describe how recapture works, explain the benefits of recapture, and explain how a client could participate in recapture. We request comment on this disclosure requirement: which types of clients can generally participate in commission recapture programs, and how do clients currently learn that such programs are available?
Item 12. Review of Accounts. The brochure would disclose whether, and how often, the adviser reviews clients' accounts or financial plans, and would identify who conducts the review.184 Advisers that review accounts, but not regularly, would explain what circumstances would trigger an account review.
Item 13. Payment for Client Referrals. The brochure would describe any payment, whether in cash or otherwise, that the adviser or a related person makes for client referrals. The brochure would also disclose whether the adviser receives any benefit, including sales awards or prizes, from a non-client for providing advisory services to clients.185
Item 14. Custody. Advisers that accept custody of client funds or securities would say so in their brochure and would describe any special reports they give to those clients.186 Advisers that require custody of client assets would also explain that most advisers do not impose this requirement.187 The brochure would also disclose that clients face greater risk than if an independent custodian held their assets.188
Item 15. Investment Discretion. Advisers with discretionary authority over client accounts would be required to disclose that fact in their brochure,189 and any limitations clients may (or customarily do) place on this authority.190
Item 16. Proxy Voting Policies. Item 16 would require advisers to disclose their proxy voting practices. This would be a new disclosure requirement, which we propose to add so that clients will be fully informed about who is responsible for voting their proxies and how their interests in proxy voting decisions are protected.
We propose to require advisers to state whether they vote proxies for clients.191 Advisers that vote client proxies would disclose their voting policies, practices, and procedures.192 These advisers would also explain whether a client can direct the vote in a proxy solicitation, and whether clients can find out how the adviser voted their securities on a given issue.193 Advisers that do not vote client proxies would explain how clients will receive proxies (for example, directly from a transfer agent or custodian or through the adviser), and whether the client can discuss particular proxy solicitations with the adviser.
Item 17. Investment Performance. Advisers that advertise or report their investment performance would be required to describe any standards they use to calculate (or present) performance. "Standards" may include industry standards, but would also include any proprietary standards used solely by the adviser.194 The brochure would also discuss whether a third party reviews the adviser's performance information for accuracy or for compliance with presentation standards.195
Item 18. Financial Information. We are proposing to require the brochure to include certain financial information about the adviser when material to clients. An adviser that has custody of client assets or requires prepayment of fees exposes clients to the risk that the firm may become insolvent and unable to return the assets or refund unearned fees. We propose to continue requiring advisers to give clients an audited balance sheet showing the adviser's assets and liabilities at the end of its most recent fiscal year.196 We propose to exclude from the balance sheet requirement advisers that have custody, but are banks, insurance companies, or broker-dealers registered with us.197 These firms have capital and regulatory requirements that provide protections against these types of losses.
We are also proposing to require advisers with discretionary authority over client assets to disclose, in their brochures, any financial condition reasonably likely to impair the adviser's ability to meet contractual commitments to clients. These clients are exposed to the risk that their assets may not be properly managed for a period of time if the adviser becomes insolvent and ceases to do business. This disclosure is currently required by rule 206(4)-4, which, as discussed above, we propose to rescind.
Finally, we would require an adviser that has been the subject of a bankruptcy petition during the past ten years to disclose that fact to clients. Clients would likely find this information material to their decision whether to hire the adviser.198 We request comment on other disclosures concerning bankruptcies. Should Item 18 require disclosure if the subject of a bankruptcy petition was a predecessor adviser? A management person?199 Another firm under common control with the adviser?
Item 19. Index. The brochure filed with us would be required to include an index of the items required by Part 2A.200 This index is intended to facilitate review by our staff for compliance with the requirements of Part 2A; the adviser would not need to provide it to clients.
Part 2A Appendix 1: The Wrap Fee Program Brochure. Advisers that sponsor wrap fee programs201 would be required to prepare a separate, specialized firm brochure referred to as a "wrap fee program brochure" or "wrap brochure," and would be required to give the wrap brochure to clients of the wrap fee program, in lieu of the sponsor's standard advisory firm brochure.202 The ten items in Part 2A Appendix 1 contain the proposed requirements for a wrap fee program brochure, which are substantially similar to those currently in Schedule H, with changes to incorporate many of the proposed revised requirements for other firm brochures.
b. Part 2B: The Brochure Supplement
As discussed above, we are proposing that adviser brochures be accompanied by brochure supplements providing information about the adviser's advisory personnel. We believe that clients want and need information about the individuals on whom they will rely for investment advice.
The current brochure requirements of Form ADV consist of a series of compromises on disclosure about advisory personnel that we believe can be improved on. We currently require brochures to include background information only on firm executives and members of the firm's "investment committee,"203 which does not include most advisory personnel of the growing number of larger advisory firms registered with us.204 It is unclear to us whether the information provided about executives and investment committee members is useful to most clients of these firms. Moreover, brochures contain no information about the disciplinary backgrounds of advisory personnel -- information that may be of key importance to a client who may be entrusting his investments to the care of the individual.205 When we considered Uniform Form ADV in 1985, we recognized these shortcomings of the brochure, and proposed expanding the required background information on advisory personnel.206 We decided not to do so after commenters objected that many advisers' brochures would become lengthy and less readable.207
Today we are proposing a different approach to resolving the same concerns that led to the 1985 proposals. We propose to require advisers to prepare separate supplements for advisory personnel -- called "supervised persons."208 Each supplement would contain background information about an individual or group.209 Advisers would be required to give a client a supplement only for a supervised person who will provide advisory services to that client. Thus, a client would receive information about supervised persons who are specifically relevant to that client. The supplements should only be a page or so in length, and each supervised person could provide clients with his own supplement along with the firm's brochure as he would a resumé.210 Supplements would not have to be filed with us, but would be kept by advisers for review by our examiners.211 We are not proposing to require that advisers file supplements with us, in part because of the additional cost of building the IARD to accept supplements. The additional cost would have to be reflected in higher filing fees. The most important information in the supplements -- the supervised person's disciplinary history -- would be reported on the DRP Schedules in Part 1 of Form ADV and available through the IARD. Moreover, prospective clients could obtain supplements from advisers. On balance, we concluded that the additional costs of requiring advisers to file supplements with us exceeded the benefits. We request comment on this conclusion.
Under our proposed amendments to rule 204-3, an adviser must deliver a supplement for a supervised person to a client before or at the same time the supervised person begins to provide advisory services for the client.212 The proposed rule would require delivery to a client only if it is expected that the supervised person will either (i) regularly communicate investment advice to that client,213 or (ii) formulate investment advice for that client, including exercising investment discretion over that client's assets.214 Advisers would not have to deliver a supplement for a supervised person who has no client contact and formulates advice only as part of a team. This provision is designed to require information about persons who have substantial responsibility for the investment advice clients receive. The requirements for updating a brochure supplement and delivering the corrected information to clients would be essentially the same as for the firm's brochure.215 We request comment on the scope of the delivery requirement. Are there better ways to provide clients with information about a firm's advisory personnel?
The contents of brochure supplements would be specified by Part 2B, which would consist of seven items. Where Part 2A would require disclosure about the advisory firm, Part 2B would require disclosure about certain supervised persons of the advisory firm. We request comment on the scope of proposed Part 2B. Will clients find this to be useful information? Is there other information about supervised persons that clients need and that we should require in brochure supplements?
Item 1. Cover Page. The supplement's cover page would include information identifying the supervised person and the advisory firm.
Item 2. Educational Background and Business Experience. The supplement would be required to describe the supervised person's formal education and business background for the past five years.216 Professional designations have also become important to a client's understanding of the supervised person's qualifications in the investment adviser industry. We are therefore proposing that the supplement identify the supervised person's professional designations or attainments.
Item 3. Disciplinary Information. The supplement would be required to disclose the disciplinary history of the supervised person. We are proposing substantially the same disclosure requirements for the supervised person's disciplinary history as we are proposing for the firm's disciplinary history.217 Item 3 would also require, again because of the importance of professional designations, that the supplement disclose any proceeding revoking or suspending a professional attainment, designation, or license of the supervised person.
In the case of a supplement for a single individual, a client receiving an updated supplement should be able to identify any new disciplinary disclosure easily. We request comment, however, on whether this information might be obscured in supplements prepared for groups of supervised persons. Should a supplement for a group be required to highlight any changes to disciplinary disclosure, or otherwise alert clients to the change? If so, should the alert appear on the cover page of the supplement, or should it accompany the disciplinary disclosure itself?
Item 4. Other Business Activities. We would require the supplement to describe any other business activities of the supervised person, particularly other capacities in which the supervised person participates in the financial markets.218 A relationship between the business of the advisory firm and other business of the supervised person may create a material conflict of interest with the adviser's clients. If this occurs, the supplement would be required to describe the nature of the conflict and any procedures the adviser uses to address the conflict.
The supplement would also disclose whether the supervised person receives transaction-based compensation, including bonuses and non-cash compensation. As discussed earlier,219 this practice creates an incentive for the individual to base investment recommendations on his own compensation rather than on clients' best interests. If the supervised person receives transaction-based compensation, we would require the supplement to explain this incentive.
Item 5. Additional Compensation. A supplement would be required to describe arrangements in which someone other than a client gives the supervised person an economic benefit (such as a sales award or other prize) for providing advisory services.220
Item 6. Investment Advice and Supervision. Not all supervised persons formulate the investment advice they give to their clients, so we propose to require the supplement to discuss who formulates that advice. If the supervised person does formulate advice for clients, the supplement would also explain how the firm monitors the advice provided.
We would also require the supplement to provide the client with the name, title and telephone number of the person responsible for supervising the advisory activities of the supervised person. This information would permit the client to contact other advisory personnel when necessary to address any problems in the advisory relationship.
Item 7. Financial Information. The supplement would be required to disclose whether the supervised person was the subject of a bankruptcy petition during the past ten years.
3. Execution Pages
Form ADV would be electronically "signed" by an authorized person of the adviser before the form could be submitted to the IARD. The authorized person would sign the form by typing his or her name and submitting the filing on behalf of the adviser.221 Under the proposed amendments, an authorized person would sign one of three different execution pages, depending on whether the adviser is resident in the United States or another country and whether it is registered or registering with the Commission or the states.222 As under current Form ADV, by signing the form, the authorized person would affirm that the information in the form is true and complete, and would appoint certain officials as agents for service of process in states where the adviser conducts business.223 These appointments allow state securities authorities, private parties, and us to bring actions against the adviser by delivering necessary papers to any or all of the appointed agents.224
Non-resident advisers,225 in addition to executing Form ADV, currently must submit a separate form appointing the Commission as their agent for service of process.226 Non-resident advisers also submit a separate undertaking to provide required books and records to our staff.227 We propose to incorporate both of these requirements into a Form ADV execution page that would be used by non-resident advisers, and thereby eliminate the additional filings non-resident advisers currently make.228 In addition, non-resident general partners or managing agents of all SEC-registered advisers must appoint the Commission229 as their agent for service of process on Form 7-R.230 We propose to revise Form 7-R and rename it Form ADV-NR. The form would be filed with us in paper format.231
A separate execution page for state-registered advisers has been prepared by NASAA. It is similar to the one for SEC-registered advisers, but includes affirmations that would be required for state registration.232
E. Proposed Revisions to Form ADV-W
Form ADV-W was designed for an adviser to use to withdraw its registration after ceasing operations.233 Today, SEC-registered advisers also use the form to switch to state registration,234 and state-registered advisers use it to withdraw their registration with one or more states while remaining registered with others. We propose to amend Form ADV-W to reflect this expanded use.235 As proposed, an adviser could file Form ADV-W to withdraw from some (partial withdrawal)236 or all (full withdrawal) jurisdictions in which it is registered. An adviser ceasing operations would complete the entire form to file for full withdrawal.237 An adviser filing for partial withdrawal would omit certain items, such as the location of its books and records, that we do not need from an adviser continuing in business as a state-registered adviser.238 We request comment on these proposed revisions.
F. General Request for Comment
Any interested persons wishing to submit written comments on the proposed rule and forms, and the proposed rule and form amendments 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 proposals 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, we also are 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 ANALYSIS
The Commission is sensitive to the costs and benefits of its rules and has, in preparing this proposal, carefully balanced the two. As described in more detail below, electronic filing will impose some costs on advisers, particularly the filing fees that advisers will pay to the operator of the system. We believe that electronic filing will yield substantially greater benefits to advisers and investors. The new, improved disclosure requirements will also impose additional costs. These costs are chiefly transitional costs, as advisers prepare new brochures and brochure supplements for the first time. We believe that, over time, these costs will be more than justified by the ongoing benefits to clients who receive better, more useful disclosure.
A. Electronic Filing Requirements
The rules we are proposing will require advisers to make filings with us through the Investment Adviser Registration Depository (IARD). Although advisers will pay fees to submit certain filings through the system, the IARD will also provide substantial benefits to advisers, including eliminating many of the costs advisers currently incur in filing their Form ADV. Today, advisers must prepare registration materials on paper, copy them, and submit the paper copies to both the SEC and states. Many of these copies must be manually signed and notarized. Correcting a mistake requires the adviser to repeat this entire process. The IARD, in contrast, would permit an adviser to satisfy all of these filing obligations by submitting a single electronic filing prepared using a personal computer in its office.239 Electronic signatures could be used, and mistakes could be corrected by simply typing over incorrect information and re-sending the electronic submission.240 Today, advisers must determine the amount of filing fees due each state, prepare checks and mail them so that they are delivered in a timely manner.241 Errors can result in penalties or cause disruptions in business. The IARD, in contrast, would eliminate these costs by automatically determining the amount of filing fees owed and debiting the adviser's account when those fees are due.242 These benefits should more than justify the filing fees and other expenses for the typical adviser registered with the Commission.
In drafting the new form, we have sought additional ways to reduce costs. An adviser may save a partially completed form as a "draft" that the adviser can access and complete at a later time. Our proposed on-line glossary would allow an advisers' personnel to refer to explanations of key terms while completing Form ADV, and we would also provide an on-line "help" function, to answer frequently-asked questions and provide guidance on completing the form.243 When an adviser prepares an amendment to its Form ADV, the IARD will pre-populate most of the items from the adviser's previous filings, reducing the adviser's time (and therefore expense) in completing the amendment. Further, we have designed the IARD so that advisers that also are registered as broker-dealers will complete Schedules to their Form ADV by "linking" to parallel responses in their Form BD already on file. Thus, these firms will recognize additional cost savings by avoiding entering certain data twice.244
We have taken into consideration that not all advisers may have access to the Internet. A continuing hardship exemption would be available to certain "small advisers" that are unable to file through the IARD without undue burden and expense (if, for example, the adviser does not have Internet access and is unable to afford a filing service).245 The continuing hardship exemption is intended to minimize any burden imposed by the electronic filing requirements.
The IARD also has the potential to speed the registration process for investment adviser representatives of SEC-registered advisers. Registration of investment adviser representatives on the IARD will be a matter for state securities authorities; we do not register or license investment adviser representatives. Our experience with the CRD system, however, provides an analogy. Our understanding of how broker-dealer agent filings on the CRD system are processed suggests that electronic filings on the IARD for investment adviser representatives are likely to be more efficient and cost effective than the current system of paper filings.
Electronic filing also will produce substantial benefits for investors. First, and most important, the information on these filings will be available for investors to view, without cost, on a web site.246 Investors will be able to determine, for example, whether a prospective adviser has reported disciplinary events, what types of fees it charges, and whether the types of advisory services it offers are designed to meet their needs. As a result, investors -- potential clients -- will be in a better position to make informed decisions.
The added "sunlight" the web disclosure will shine on advisers may have additional, secondary benefits. Information from advisers' filings will be available through a web site, and easy availability of information about advisers and advisory affiliates may, for example, discourage advisers from engaging in certain practices or hiring certain persons (such as those with disciplinary history or limited qualifications). Investors' access to information may also facilitate greater competition among advisers, which may in turn lower prices or encourage the development of different fee structures or different kinds of services that may benefit clients. These types of benefits are difficult to isolate or to quantify, but our experience is that they are real and are often the result of better disclosure.
Electronic filing will also give us better access to information about advisers to administer our regulatory programs. We expect this information will permit us to increase both the efficiency and effectiveness of our programs and thus increase investor protection. The IARD will permit us to better monitor advisers' failure to make required filings, identify advisers whose activities suggest a need for closer scrutiny, and manage our regulatory programs. The IARD will generate reports on the industry, its characteristics and trends. These reports will help us anticipate regulatory problems, allocate and reallocate our resources, and more fully evaluate and anticipate the implications of various regulatory actions we may consider taking.
B. Proposed Form ADV
We have divided proposed Form ADV into two parts, Part 1 and Part 2. For purposes of assessing costs and benefits, each part is discussed separately below.
1. Part 1
SEC-registered advisers would experience few additional costs in completing revised Part 1. We have re-drafted Part 1A in plain English, improved its organization, and added instructions to clarify some items. Proposed Part 1A would require no additional information that should not be readily available to an adviser. The revised Schedules would make it much simpler, in comparison to current Schedules A, B, and C, to provide information about control persons.247 While smaller advisers may find these benefits limited, larger advisers (particularly advisers that are part of a larger, more intricate corporate structure) should see cost savings from the proposed changes to the Schedules. The proposed new Disciplinary Reporting Pages (DRPs) would require substantially more detailed information about disciplinary events than is specified in the current form, but the new DRPs should serve mainly to clarify existing disclosure obligations, which are worded more generally.248 Moreover, we would only require an adviser to report disciplinary events occurring in the past ten years,249 and would remove information about the educational and business background of employees.250 We expect that these changes will justify any additional costs associated with amendments to Part 1A.
2. Part 2
An analysis of the costs and benefits of Part 2 is more complex. Most advisers would be required to replace their current Part II with a narrative brochure in plain English, and to re-file this new brochure with us. In addition, the disclosure in the new brochure may be more complete, and in some cases more detailed, than Form ADV currently requires. Thus, drafting the new narrative brochure will likely entail additional expenses.
Most of the cost associated with preparing a brochure would be incurred in the initial preparation, specifically in drafting the narrative brochure. Advisers are already required to provide us and/or their clients with much of the information required in the new brochure,251 so we do not expect advisers to have substantial expenses in gathering this information. In addition, since most of the costs of redrafting the new brochure will be incurred in the first year, we do not expect proposed Part 2A to result in any significant cost increase over time. The cost of preparing a narrative firm brochure is likely to vary substantially among advisers, in part because proposed Part 2A would give an adviser considerable flexibility in structuring its disclosure. Drafting a brochure to describe the adviser's business practices and disclose conflicts of interest need not be a long or an expensive process. Some advisory firms, however, may elect to use their brochure to market their services, as well as to make required disclosure. These firms will likely face significantly higher expenses, particularly if they bring in legal, design and marketing professionals. Other firms may choose to prepare multiple brochures, which would also require higher drafting costs.
Under the proposed rules, the brochure would have to be reprinted annually to incorporate all interim amendments. The cost of printing a narrative brochure, however, should not be substantially different from the current cost of printing Part II; the narrative brochure is not required to be professionally printed. Further, we have sought to make interim amendments inexpensive by permitting advisers to use "stickers" to correct a brochure. We also do not anticipate that the costs of distributing the proposed brochures (and stickers) would be significantly higher than the costs of distributing Part II or a brochure under existing delivery requirements. These costs currently vary among advisers, depending on how the adviser delivers the brochure and the number of advisory clients who receive it.252 Because of this large number of variables -- initial drafting costs, number and extent of corrections, mode of distribution, number of clients, and others -- quantifying the overall costs to advisers of the proposed narrative brochure is not practicable.
Advisers also would incur some costs to prepare brochure supplements for supervised persons, but the supplements would provide important disclosure to advisory clients about relevant advisory personnel. Many supervised persons are already subject to state regulation as investment adviser representatives, and much of the information needed for the brochure supplement can be obtained from the adviser's current Form ADV and the representative's registration application.253 The costs of preparing brochure supplements would also vary widely from one adviser to the next, depending on the number of supervised persons of the adviser, the extent of a supervised person's professional and educational background, and the amount of disciplinary information required to be disclosed. The aggregate cost to the investment adviser industry in preparing the proposed brochure supplements therefore is not readily quantifiable. The proposed amendments would, however, include several options to minimize advisers' costs in preparing and distributing the brochure supplements.254
C. Form ADV-W
Advisers would incur less cost in completing proposed Form ADV-W than in completing the current form. Under proposed amended Form ADV-W, the adviser would complete only those items needed to process the withdrawal.255 Form ADV-W would also become effective immediately, rather than after a sixty-day "waiting period," thereby smoothing the transition period for advisers switching to state registration.
D. Request for Comment
We request comment on the effects of the proposed rule and form amendments on individual investment advisers and on the advisory profession as a whole, and request data to quantify the costs and value of the benefits associated with these proposed amendments. Specifically, we request comment on the cost savings for advisers (and their representatives) filing through the IARD. We also request data on advisers' current costs of complying with state notice filing and investment adviser representative registration requirements. We also request comment on the costs of completing and re-filing Part 1A of proposed Form ADV, and of preparing and delivering the firm brochure, wrap brochure, and brochure supplement(s). Commenters should provide analysis and empirical data to support their views on the costs and benefits associated with this proposal.
IV. PAPERWORK REDUCTION ACT
The proposed rule and form amendments contain several "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995,256 and the Commission has submitted the amendments 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 title for the collections of information are "Form ADV," "Schedule I to Form ADV," "Rule 206(4)-4," "Form ADV-W and Rule 203-2," "Rule 0-2 and Forms 4-R through 7-R," "Rule 204-2," and "Rule 204-3," all under the Advisers Act. We are proposing to amend Form ADV, Schedule I to Form ADV, Rule 206(4)-4, Form ADV-W and Rule 203-2, Rule 0-2 and Forms 4-R through 7-R, Rule 204-2, and Rule 204-3. These rules and forms contain currently approved collection of information numbers under OMB control numbers 3235-0049, 3235-0490, 3235-0345, 3235-0313, 3235-0240, 3235-0278, and 3235-0047, respectively. We also are proposing new rule 203-3 and new Form ADV-H, which both would contain a collection of information requirement. An agency may not sponsor, conduct, or require response to an information collection unless a currently valid OMB number is displayed.
Form ADV
Form ADV contains collection of information requirements. Rule 203-1 requires every person applying for investment adviser registration with the Commission to file Form ADV. Rule 204-1 requires each registered adviser to file amendments to Form ADV at least annually, and also would require advisers to begin submitting electronic filings through the IARD. This collection of information is found at 17 CFR 275.203-1, 275.204-1, and 279.1 and is mandatory. Responses are not kept confidential. The likely respondents to this information collection would be all advisers registered with us or applying for registration after advisers begin making filings through the IARD.
An increase in the number of respondents to the collection of information for Form ADV will increase the currently approved burden of the collection of information. The current burden for new registrants is approximately 6,848 hours,257 and assumes approximately 760 new applicants per year and a weighted average of 9.01 hours per adviser. The current burden also applies to current registrants amending their Form ADV, is approximately 1.07 hours per amendment, and is based on approximately 7,300 advisers registered with us and filing 11,810 amendments annually. The current total burden for all advisers filing Form ADV is 19,448 hours.
Based, however, on the Commission's recent experience in processing investment adviser registration applications, the Commission now estimates that approximately 1,000 advisers each year are new applicants for SEC registration, increasing the total burden by 2,162 hours.258 Also, approximately 8,100 advisers are registered with us, increasing the current burden of filing amendments to Form ADV by 1,541 hours.259 The total increase in the collection of information for Form ADV resulting from an increase in the number of respondents is 3,703 hours.260
The collection of information for Form ADV would incorporate the burdens of rule 206(4)-4 and Schedule I into Form ADV. The collections of information for rule 206(4)-4 and Schedule I to Form ADV are discussed below.
The proposed amendments to Form ADV at first would increase the paperwork burden, as most advisers would have to redraft and disseminate a narrative brochure and brochure supplements. The paperwork burdens of preparing a narrative firm brochure is likely to vary substantially among advisers, in part because proposed Part 2A would give an adviser considerable flexibility in structuring its disclosure, and also because the amount of disclosure required would vary among advisers. Most of the new paperwork burden would be incurred in this initial preparation, specifically in drafting the narrative text. Once the adviser has redrafted its narrative brochure, proposed Parts 2A and 2B are not expected to result in any significant burden increase over time (except for changes to the brochure that are necessitated by changes in the adviser's business).261 Part 1A is expected to impose a minimal paperwork burden, as none of the new items requests information that should not be readily available to the adviser. The efficiencies of filing through the IARD, over time, are expected to reduce the initial burdens associated with completing the revised Form ADV.
The burdens associated with using the revised form would be amortized over the estimated period that advisers would use their revised brochure. We adopted significant changes to Form ADV in 1985,262 and required advisers to re-file their amended Form ADV, and to prepare and begin using a new brochure. At that time, advisers incurred paperwork burdens in the "start-up" costs of the revised Form ADV. Once advisers re-filed their Form ADV, advisers' paperwork burdens generally were limited to amending the form as needed. Advisers thus have used current Form ADV (and thus the current brochure) for approximately the past fifteen years (depending on exactly when they re-filed their Form ADV with us). The paperwork burdens of the revised form would be amortized over a similar fifteen-year period.263
The additional burdens that would be imposed by the revised form also would be reflected in the revised collection of information. During the first year that an adviser uses new Form ADV, the burden of completing the revised form for the first time would result in a new total collection of information burden of an estimated 22 hours per adviser, including preparation of brochure supplements. This total collection of information would total 22,000 hours for new registrants and 178,200 hours for currently registered advisers that re-file Form ADV through the IARD system, for a total of 200,200 hours.264 Amortizing this total burden imposed by Form ADV over a fifteen-year period would result in an average burden increase of an estimated 13,346.67 hours per year,265 or 1.47 hours per year for each new applicant and for each adviser currently registered with the Commission that would re-file through the IARD.266
In addition, during the first year the IARD is operational, advisers filing through the system would likely amend their Form ADV at least once.267 Electronic filing, however, should yield significant benefits to advisers filing amendments, and is estimated to reduce the information collection burden of filing an amendment to Form ADV by approximately thirty percent. The collection of information burden for amendments therefore would be 0.75 hours per amendment.268 Based on the Commission's experience in processing investment adviser amendments, new registrants are estimated to amend their Form ADV once in the first year they are registered, currently-registered newly-formed advisers relying on the exemption found at rule 203A-2(d)269 are estimated to amend their Form ADV twice per year, currently-registered advisers relying on the multi-state exemption found at rule 203A-2(e)270 are estimated to amend their Form ADV once per year, and other currently-registered advisers are estimated to amend their Form ADV, on average, 1.5 times per year. Advisers thus file an estimated total of 13,250271 amendments per year for an estimated total paperwork burden of 9,938 hours per year.272
The total collection of information burden for advisers to file and complete the revised Form ADV therefore would be approximately 23,315 hours per year.273 The total collection of information burden therefore would be 27,018 hours.274
Rule 206(4)-4; Schedule I to Form ADV
The collection of information requirements for both rule 206(4)-4 and Schedule I to Form ADV would be incorporated in the collection of information requirements for Form ADV, discussed above. The new burden estimate for Form ADV includes these collection of information burdens. Rule 206(4)-4 and Schedule I to Form ADV currently contain collection of information requirements. Rule 206(4)-4 requires advisers to disclose certain disciplinary and financial information to clients. Advisers file Schedule I to Form ADV to claim eligibility for SEC registration (if applying for SEC registration) or to reaffirm their eligibility for SEC registration (if currently registered). These collections of information are found at 17 CFR 275.206(4)-4 and 17 CFR 279.1, are mandatory, and responses are not kept confidential.
We are proposing to rescind rule 206(4)-4 and incorporate its substantive provisions into Part 2A of Form ADV. We also are proposing to incorporate the substantive requirements of Schedule I into Part 1A of Form ADV. The collection of information requirements for rule 206(4)-4 and Schedule I to Form ADV would be eliminated.
Form ADV-W and Rule 203-2
Form ADV-W and Rule 203-2 contain collection of information requirements. Rule 203-2 requires every person withdrawing from investment adviser registration with the Commission to file Form ADV-W. This collection of information is found at 17 CFR 275.203-2 and 17 CFR 279.2 and is mandatory. Responses are not kept confidential. The likely respondents to this information collection would be all advisers registered with the Commission once the transition period to electronic filing is complete.
A decrease in the number of advisers filing to withdraw from SEC registration will decrease the current burden. The currently approved collection of information is one hour. The Commission in the past received approximately 616 notices of withdrawal on Form ADV-W per year. The weighted average burden hours for completing Form ADV-W is one hour, and the total annual burden hours currently approved by OMB for this form are 616 hours. Based on the Commission's recent experience in processing investment adviser withdrawals, the Commission estimates that approximately 1,300 withdraw from SEC registration each year, decreasing the total burden by 684 hours.275
The Commission is proposing to amend rule 203-2 to (a) require advisers to file Form ADV-W through the IARD and (b) make investment adviser withdrawals effective upon filing (rather than after a sixty-day period, as provided in the current rule). The Commission also is proposing to amend Form ADV-W. The proposed form amendments would tailor the required items to the reason for the adviser's withdrawal. An adviser ceasing operations would complete the entire form to withdraw from all jurisdictions in which it is registered (full withdrawal), while an adviser withdrawing from some, but not all, of the jurisdictions in which it is registered would omit certain items that we do not need from an adviser continuing in business as a state-registered adviser.276
The proposed amendments to Form ADV-W are expected to reduce the collection of information burden for advisers filing for withdrawal. An adviser filing for partial withdrawal (e.g., the adviser is switching to state registration) would omit certain items, such as the location of its books and records that we do not need from an adviser continuing in business as a state-registered adviser; an adviser filing for full withdrawal (i.e., the adviser is ceasing operations) would complete the entire form. For purposes of this Paperwork Reduction Act analysis, the Commission staff estimates that approximately 50 percent of the advisers filing for withdrawal would file for full withdrawal and the remaining 50 percent would file for partial withdrawal. Compliance with the requirement to complete Form ADV-W would impose a total burden of approximately 0.75 hours (45 minutes) for an adviser filing for full withdrawal and approximately 0.25 hours (15 minutes) for an adviser filing for partial withdrawal. The weighted average total time for each applicant to complete revised Form ADV-W therefore is estimated to be 0.5 hours (30 minutes), for a total collection of information burden of 650 hours.277
Rule 0-2 and Forms 4-R through 7-R
Rule 0-2 and Forms 4-R, 5-R, 6-R, and 7-R contain collection of information requirements. Rule 0-2 requires non-resident advisers to furnish us with a written irrevocable consent and power of attorney that designates the Commission as an agent for service of process, and that stipulates and agrees that any civil suit or action against such person may be commenced by service of process on the Commission. Rules 279.4, 279.5, 279.6 and 279.7 [17 CFR 279.4, 279.5, 279.6 and 279.7] designate Forms 4-R through 7-R as the irrevocable appointments of agent for service of process, pleadings and other papers to be filed.278 It is necessary for us to obtain appropriate consent to permit the Commission and other parties to bring actions against non-resident advisers and non-resident partners or agents of investment advisers for violations of the federal securities laws. The likely respondents to this information collection would be each non-resident adviser, and each non-resident partner or agent of an SEC-registered adviser.
An increase in the number of non-resident advisers registered with the SEC will increase the current collection of information burden. Forms 4-R through 6-R are required by rule 0-2 to be filed by non-resident advisers, and Form 7-R is required by rule 0-2 to be filed by a non-resident general partner or managing agent of an SEC-registered adviser. The Commission in the past received approximately 300 filings pursuant to rule 0-2. The weighted average burden for Forms 4-R, 5-R, 6-R, and 7-R is one hour per form, and the total annual burden hours currently approved by OMB for these forms is 300 hours. Our records indicate that we receive approximately 475 filings per year from non-resident advisers, partners and agents, increasing the current burden to 475 hours.
The paperwork burdens of Forms 4-R through 6-R are incorporated into the collection of information requirements for Form ADV, discussed above. We are proposing to amend rule 0-2 and delete Forms 4-R, 5-R, 6-R and 7-R. The substance of Forms 4-R through 6-R would be contained in the execution page to Form ADV. The substance of Form 7-R would be contained in new Form ADV-NR. The Commission staff estimates that approximately 380 respondents would be subject to rule 0-2, with approximately 285 respondents being non-resident advisers that would execute Form ADV to comply with rule 0-2.
The remaining approximately 95 respondents are non-resident general partners or managing agents of SEC-registered investment advisers, and would be required to file Form ADV-NR with the Commission. A non-resident general partner or managing agent would be required to file Form ADV-NR only once. SEC staff estimates that the preparation and filing of Form ADV-NR would require approximately one hour of the non-resident general partner's or managing agent's time. The total estimated burden therefore would be 95 hours.
Rule 204-2
Section 204 of the Advisers Act provides that investment advisers required to register with the Commission must make and keep certain records for prescribed periods, and make and disseminate certain reports. Rule 204-2 sets forth the requirements for maintaining and preserving specified books and records. This collection of information is mandatory. The Commission staff uses this collection of information in its examination and oversight program, and the information generally is kept confidential.279 The likely respondents to this collection of information requirement are all advisers registered with the Commission.
A reduction in
