Transition Rule for Ohio Investment Advisers

1Title III of the National Securities Markets Improvement Act of 1996, Pub. L. No. 104–290, 110 Stat. 3416 (1996) (codified in scattered sections of the United States Code). 2 15 U.S.C. 80b–3A(a). 3See Rules implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997) [64 FR 28112 (May 22, 1997)] at II.E.1. 4Colorado, Iowa and Wyoming also did not have investment adviser statutes at the time Congress enacted the Coordination Act. Since that time, Colorado and Iowa have enacted investment adviser legislation, and we recently amended Schedule I to Form ADV to reflect these developments. Technical Changes to Schedule I to Form ADV, Investment Advisers Act Release No. 1733A (Jan. 7, 1999) [64 FR 2120 (Jan. 13, 1999)]. 5H.B. 695, 122d Gen. Ass., Reg. Sess. (Ohio 1997– 1998). 6Transition Rule for Ohio Investment Advisers, Investment Advisers Act Release No. 1787 (Jan. 29,
1999) [64 FR 5722 (Feb. 5, 1999)].
7Letter from Thomas Geyer, Commissioner, Ohio Securities Division to Jonathan G. Katz, Secretary, SEC (Feb. 17, 1999), File No. S7–2–99; Letter from Peter C. Hildreth, President, North American Securities Administrators Association, Inc. to Johathan G. Katz, Secretary, SEC (Mar. 8, 1999), File No. S7–2–99. SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 275 and 279 [Release No. IA–1794; File No. S7–2–99] RIN 3235–AH60 Transition Rule for Ohio Investment Advisers AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (‘‘Commission’’) is adopting a new rule and form amendments under the Investment Advisers Act of 1940 for investment advisers that will be subject to a new Ohio investment adviser statute. The new rule provides a transition process for these investment advisers to switch from Commission to state registration. EFFECTIVE DATES: Rule 203A–6 (17 CFR
275. 203A–6) will become effective May
3, 1999. Amendments to Schedule I to Form ADV (279.1) will become effective on December 31, 1999. FOR FURTHER INFORMATION CONTACT:
Jeffrey O. Himstreet, Attorney, at (202) 942–0716, Task Force on Investment Adviser Regulation, Division of Investment Management, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549–0506. SUPPLEMENTARY INFORMATION: The Commission is adopting rule 203A–6 (17 CFR 275.203A–6) and technical amendments to Schedule I of Form ADV (17 CFR 279.1 W), both under the Investment Advisers Act of 1940 (15 U.S.C. 80b)(‘‘Advisers Act’’ or ‘‘Act’’.
I. Background
Under the Advisers Act, as amended by the Investment Advisers Supervision Coordination Act (‘‘Coordination Act’’),1 the Commission has regulatory responsibility for investment advisers that have at least $25 million of assets under management or advise a registered investment company.2 The Commission also has regulatory responsibility for advisers that have their principal place of business in a state that has not enacted an investment adviser statute, regardless of their assets under management.3 At the time the Coordination Act was adopted, Ohio was one of four states that did not have an investment adviser statute.4 Recently, Ohio enacted investment adviser legislation that will become effective on March 18, 1999.5 On January 29, 1999, we issued a release proposing rule 203A–6 (‘‘Proposing Release’’) to assist the Ohio Division of Securities and to facilitate the transition of regulatory responsibilities for smaller Ohio advisers.6 We also proposed technical, corresponding changes to Schedule I to Form ADV. We received two comment letters in response to the proposal, both of which supported the new rule and form amendments.7 The Commission is adopting rule 203A–6 and technical revisions to Schedule I to Form ADV as proposed.
II. Discussion
Under new rule 203A–6, new Ohio advisers (i.e., those advisers that are not currently registered with the Commission) that would not be eligible for Commission registration would

8The Ohio Division of Securities estimates that its implementing rules would be effective by March 24, 1999. 9Ohio Legislation, supra note 5 (to be codified at
section 1707.161(E) of the Ohio Revised Code). In
addition, advisers ineligible for Commission registration may be required to register with other state securities authorities, subject to the Advisers Act. The Coordination Act amended the Advisers Act to add Section 222(d) [15 U.S.C. 80b–22(d)], which makes state investment adviser statues inapplicable to advisers that do not have a place of business in the state and have fewer than six clients who are residents of that state. 10New rule 203A–6(b). We recognize that Ohio investment advisers may be registered with, and regulated by, both the Ohio Divison of Securities and the Commission until the advisers withdraw from Commission registration. During this time, Ohio investment advisers may be subject to both federal and state regulatory requirements. Ohio investment advisers no longer eligible for Commission registration may avoid this ‘‘duplicate regulation’’ by withdrawing from Commission registration at any time after they registered with the State of Ohio. 11The Office of Management and Budget has approved a collection of information for Form ADV–W (OMB Control No. 3235–0313). The estimated burden is 1.0 hours, per response. Based on an average salary of $10 per hour, including benefits, the total costs imposed by the Advisers Act on Ohio advisers required to withdraw from Commission registration is approximately $5,400. 12Under current rules, advisers that are no longer eligible for Commission registration under section 203A(a) of the Act [15 U.S.C. 80b–3a(a)] must withdraw from registration within 90 days after the date the adviser is required by rule 204–1(a)[17 CFR 275.204–1(a)]. See 17 CFR 279.1 (Schedule I, instruction 6). 13 13 44 U.S.C. 3506(c)(1)(B)(v). register with the Ohio Division of Securities on or after the effective date of Ohio’s implementing rules.8 Smaller Ohio advisers (i.e. those that have less than $25 million in assets under management) that are currently registered with the Commission will switch over to registration with the Ohio Division of Securities between March 18,1999 and December 31, 1999.9 These advisers may withdraw their Commission registration after they register with the Ohio Division of Securities, but not later than March 30, 2000.10 With the enactment of the Ohio law, smaller Ohio advisers may no longer rely on the location of their principal office and place of business as a basis for Commission registration. The Commission therefore is amending
Schedule I by deleting the references to
Ohio from both Schedule I and the Instructions to Schedule I. The amendments to Schedule I will become effective on December 31, 1999. As a result of the amendments to Schedule I, advisers will no longer be able to claim eligibility for Commission registration based on the location of their principal office and place of business in Ohio and must withdraw from Commission registration, unless otherwise eligible.
III. Cost/Benefit Analysis
New rule 203A–6 and the technical amendments to Schedule I to Form ADV are designed to facilitate the transition of certain advisers from Commission to state registration. This transition further implements congressional intent to reallocate regulatory responsibilities for investment advisers between the Commission and state securities authorities. New rule 203A–6 will not have a significant effect on the regulatory burden borne by investment advisers. The Coordination Act imposes certain costs on advisers as a consequence of no longer being registered with the Commission, and, at the same time, confers benefits on these advisers, such as no longer requiring them to file amendments to Form ADV with the Commission. The costs the Advisers Act imposes on advisers withdrawing from Commission registration is estimated to be $10 per adviser (or, $5,400 in the aggregate).11 The new rule does not alter these burdens and benefits, but merely establishes a time by which advisers are required to switch their registration from the Commission to the Ohio Division of Securities.12 Therefore, the net costs imposed by the new rule and form amendments are negligible. Smaller Ohio advisers may withdraw from Commission registration at any time and avoid any potential burdens associated with new rule 203A–6. In the Proposing Release, we requested comment on the cost/benefit analysis. No comments on the cost/ benefit analysis were provided. The Commission believes that the costs imposed by the new rule are insignificant.
IV. Paperwork Reduction Act
As discussed in the Proposing Release, the amendments to Schedule I to Form ADV contain a ‘‘collection of information within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 to 3520). The amendments to Schedule I to Form ADV are necessary to implement the Coordination Act with respect to advisers with their principal office in Ohio. The Commission received no public comment in response to its request for comments on the Paperwork Reduction Act analysis. Under Office of Management and Budget rules, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a valid OMB control number.13 Therefore, we have submitted the collection of information requirements to the Office of Management and Budget for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of information is ‘‘Schedule I to Form ADV,’’ under the Advisers Act. Schedule I to Form ADV contains a currently approved collection of information under OMB control number 3235–0490. OMB has approved the PRA request in accordance with 44 U.S.C. 3507(d), and has assigned control number 3235–0490 to Schedule I to Form ADV with an expiration date of March 31, 2002. The Commission is adopting amendments to Schedule I to Form ADV that will delete references to Ohio contained in Schedule I and the Instructions to Schedule I. Each investment adviser must declare on
Schedule I to Form ADV whether it is
eligible for Commission registration. The rules imposing this collection of information are found at 17 CFR 275.203–1 and 17 CFR 279.1. Rule 204– 1 (17 CFR 275.204–1) requires an investment adviser registered with the Commission to file an amended
Schedule I to From ADV annually
within 90 days after the end of the investment adviser’s fiscal year. The Commission is amending Schedule I only, and not Form ADV. There are no additional burdens associated with this filing that are not already imposed by the statutory requirement that advisers withdraw from Commission registration if no longer eligible for Commission registration. The withdrawal procedures impose no additional paperwork burdens on advisers. The new rule creates a March 30, 2000 deadline by which smaller Ohio advisers must withdraw from Commission registration. Additionally, smaller Ohio advisers may withdraw from Commission registration at any time prior to March 30, 2000 and not be subject to the new rule. The Commission estimates that there are approximately 8,200 investment advisers registered with the Commission. Approximately 899 investment advisers with their principal office in Ohio that are registered with the Commission would respond annually to the information requirements of Schedule I. In addition, an estimated 760 new advisers will file
Schedule I to Form ADV annually,
approximately 83 of which are estimated to have their principal office in Ohio. Of these 83 advisers, an estimated 72 will file Schedule I to Form ADV an average of once a year, and the remaining 11 that rely on the exemption provided by rule 203A–2(d) (17 CFR 275.203A–d) will file Schedule I to Form ADV an average of twice each

14Rule 0–7 [17 CFR 275.0–7].
15The Office of Management and Budget has approved a collection of information for Form ADV–W (OMB Control No. 3235–0313). The estimated average burden is 1.0 hours, per response. Based on an average salary of $10 per hour, including benefits, the total costs imposed by the Advisers Act on Ohio advisers required to withdraw from Commission registration is approximately $5,400. 16Currently, investment advisers that are required to withdraw from Commission registration because they are no longer eligible under section 203A(a) of the Act [15 U.S.C. 80b–3a(a)] are required to withdraw from registration within 90 days after the date the adviser’s Schedule I was required by rule 204–1(a) [17 CFR 275.204–1(a)] to have been filed with the Commission. See Schedule I, instruction 6 [17 CFR 279.1] year. It is estimated that the Commission will receive approximately 993 total responses from investment advisers with their principal office in Ohio. The form amendments will affect only investment advisers with their principal office in Ohio, and will not materially alter the number of burden hours for those advisers. It is estimated that the amendments to Schedule I to Form ADV imposes on Ohio investment advisers
852.75 total burden hours. This estimate
would likely remain constant absent the new rule and form amendments. The collection of information required by
Schedule I is mandatory, and responses
are not kept confidential. The form amendments, as adopted, do not impose a greater paperwork burden upon respondents than that estimated and described in the Proposing Release.
V. Summary of Final Regulatory
Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility Analysis (‘‘FRFA’’) in accordance with the Regulatory Flexibility Act (‘‘Reg. Flex. Act’’) (5 U.S.C. 604) in connection with the adoption of the rule described in this Release. An Initial Regulatory Flexibility Analysis (‘‘IRFA’’) was prepared in accordance with 5 U.S.C. 603 in conjunction with the Proposing Release and was made available to the public. A summary of the IRFA was published in the Proposing Release. We received no comments on the IRFA. The FRFA discusses both the need for, and objectives of, the rule and form amendments adopted by the Commission. The new rule and form amendments, as adopted, create a transition process for smaller Ohio advisers. The new rule (a) provides a one-year transition period for advisers to switch from Commission registration to state registration, and (b) requires smaller Ohio advisers to withdraw from Commission registration by March 30,
2000. The amendments to Schedule I
delete references to Ohio to reflect that Ohio has recently enacted an investment adviser statute. The FRFA also provides a description and an estimate of the number of small entities to which the rule amendments will apply. For the purposes of the Advisers Act and the Reg. Flex. Act, an investment adviser, under Commission rules, generally is a small entity if (i) it has assets under management of less than $25 million reported on its most recent Schedule I to Form ADV (17 CFR 279.1); (ii) it does not have total assets of $5 million or more on the last day of the most recent fiscal year; and (iii) it is not in a control relationship with another investment adviser that is not a small entity.14 It is estimated that approximately 1,000 Commission-registered advisers are small entities. It is estimated that approximately 540 of these small-entity advisers have their principal office in Ohio. Relatively few small entities thus will be affected by the new rule and form amendments. As explained in the FRFA, the majority of these advisers are smaller Ohio advisers that will be required by the Coordination Act to withdraw from Commission registration and register with the various state securities authorities. Absent Commission rulemaking, the Coordination Act requires smaller Ohio advisers to withdraw from Commission registration after the Ohio law is effective. It takes, on average, one hour to complete form ADV–W.15 The costs associated with withdrawing from Commission registration would exist absent the new rule and form amendments. Therefore, the net costs imposed by the new rule and form amendments are negligible. The FRFA states that the rule amendments will impose no new reporting or recordkeeping requirements and will eliminate certain other requirements. The new rule does, however, create a deadline for complying with an existing requirement. Smaller Ohio advisers no longer eligible for Commission registration will be required to withdraw from Commission registration by March 30, 2000. These advisers will no longer be required to file an amended
Schedule I with the Commission each
year, or the other annual updates to Form ADV. The new rule and form amendments will not materially alter the time required for investment advisers to comply with these rules.16 The new rule and form amendments also are necessary to implement the Coordination Act with respect to smaller Ohio advisers. The FRFA states that the burden to investment advisers subject to the rule should be outweighed by the benefits to the investment advisers subject to the new rule and form amendments. There are no rules that duplicate, overlap, or conflict with, the new rule and form amendments. Finally, the FRFA states that, in adopting the new rule and form amendments, we considered (a) the establishment of differing compliance or reporting requirements or timetables that take into account resources available to small entities; (b) the clarification, consolidation, or simplification of compliance and reporting requirements under the new rule for small entities; (c) the use of performance rather than design standards; and (d) an exemption from coverage of the new rule, or any part of the new rule, for small entities. The FRFA explains that the Commission concluded that establishing different standards for small entities is unnecessary and inappropriate. The FRFA is available for public inspection in File No. S7–2–99, and a copy may be obtained by contacting Jeffrey O. Himstreet, Attorney, Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 20549–0506.
VI. Statutory Authority
The Commission is adopting new rule 203A–6 pursuant to the authority set forth in section 203(h) (15 U.S.C. 80b– 3(h)); section 203A(c) (15 U.S.C. 80b– 3a(c)); and section 211(a) (15 U.S.C. 80b–11(a)) of the Investment Advisers Act of 1940. The Commission is adopting amendments to Form ADV pursuant to the authority set forth in section 203(c)(1) (15 U.S.C. 80b–3(c)(1)); and
section 204 (15 U.S.C. 80b–4) of the
Investment Advisers Act of 1940.
List of Subjects in 17 CFR Parts 275 and 279 Reporting and recordkeeping requirements, Securities. Text of Rule and Form Amendments For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:
PART 275—RULES AND
REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

1. The authority citation for Part 275
   continues to read in part as follows:
   Authority: 15 U.S.C. 80b–2(a)(17), 80b–3, 80b–4, 80b–6(4), 80b–6a, 80b–11, unless otherwise noted.

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2. Section 275.203A–6 is added to
   read as follows:
   § 275.203A–6 Transition period for Ohio investment advisers. (a) Ohio Authority. Notwithstanding
   section 203A(b) of the Act (15 U.S.C.
   80b–3a(b)), the Ohio Revised Code, sections 1707.01 to 1707.99, is effective with respect to an investment adviser registered with the Commission that, but for having its principal office and place of business in Ohio, would be prohibited from registering with the Commission under section 203A of the Act (15 U.S.C. 80b–3a). (b) Withdrawal Required. Every investment adviser that is registered with the Commission solely because its principal office and place of business is located in Ohio must withdraw from Commission registration by March 30, 2000.
   PART 279—FORMS PRESCRIBED
   UNDER THE INVESTMENT ADVISERS ACT OF 1940
3. The authority citation for part 279
   continues to read as follows:
   Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b–1, et seq.
4. By amending Schedule I to Form
   ADV (referenced in § 279.1) to remove all references to ‘‘Ohio’’ and by amending the Instructions to Schedule I to Form ADV (referenced in § 279.1) to remove all references to ‘‘Ohio’’. § 279.1 [Amended] Note: The text of Schedule I to Form ADV (§ 279.1) does not and the amendments will not appear in the Code of Federal Regulations. Dated: March 25, 1999. By the Commission. Margaret H. McFarland, Deputy Secretary. [FR Doc. 99–7955 Filed 3–31–99; 8:45 am] BILLING CODE 8010–01–P