Securities and Exchange Commission: Rules Implementing Amendments to the Investment Advisers Act of 1940 (Rule 203A-2)

Published by the Government Accountability Office on 1997-06-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Office of the General Counsel


      June 2, 1997

      The Honorable Alfonse M. D'Amato
      The Honorable Paul S. Sarbanes
      Ranking Minority Member
      Committee on Banking, Housing, and Urban Affairs
      United States Senate

      The Honorable Thomas J. Bliley, Jr.
      The Honorable John D. Dingell
      Ranking Minority Member
      Committee on Commerce
      House of Representatives

      Subject:   Securities and Exchange Commission: Rules Implementing Amendments
                 to the Investment Advisers Act of 1940 (Rule 203A-2)

      Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on
      a major rule promulgated by the Securities and Exchange Commission, entitled
      "Rules Implementing Amendments to the Investment Advisers Act of 1940 (Rule
      203A-2)" (RIN: 3235-AH07). We received the rule on May 16, 1997. It was published
      in the Federal Register as a final rule on May 22, 1997. 62 Fed. Reg. 28112.

      The final rule, which was issued simultaneously with six other rules relating to
      the amendment of the Investment Advisers Act by the National Securities Markets
      Improvement Act of 1996, particularly title III, the Investment Adviser Supervision
      Coordination Act, exempts four types of advisers from the prohibition on SEC
      registration. These are: (1) certain pension consultants, (2) nationally recognized
      statistical rating organizations, (3) certain advisers affiliated with SEC-registered
      investment advisers, and (4) newly formed advisers that have a reasonable
      expectation of becoming eligible for SEC registration within 120 days.

      Enclosed is our assessment of the SEC's compliance with the procedural steps
      required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule.
      Our review indicates that the SEC complied with the applicable requirements.

If you have any questions about this report, please contact James Vickers, Assistant
General Counsel, at (202) 512-8210. The official responsible for GAO evaluation
work relating to the Securities and Exchange Commission is Jean Stromberg,
Director, Financial Institutions and Markets Issues. Ms. Stromberg can be reached
at (202) 512-8678.

Robert P. Murphy
General Counsel


cc: The Honorable Jonathan G. Katz
    Securities and Exchange Commission

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       ANALYSIS UNDER 5 U.S.C. § 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE
                                ISSUED BY
            INVESTMENT ADVISERS ACT OF 1940 (RULE 203A-2)"
                            (RIN: 3235-AH07)

(i) Cost-benefit analysis

The SEC has submitted to our Office a cost-benefit analysis of the final rule. The
analysis concludes that the quantifiable costs associated with the rule are $600,000
for the Pension Consultant exemption, $18,000 for the Nationally Recognized
Statistical Rating Organization exemption, $300,000 for the Affiliated Adviser
exemption, and $8,700 for the New Adviser exemption for a total of $926,700.

The analysis lists quantifiable benefits of $5,000,000 for the Affiliated Adviser
exemption and $2,000,000 for the New Adviser exemption. In addition, another
benefit includes permitting real estate advisers to pension plans to continue to
register with the SEC, which will allow the advisers to comply with the
requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Also, new advisers would not have to register initially with a state or states, then
deregister and register with the SEC if they had the expectation of being eligible for
SEC registration within 120 days.

(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. §§ 603-605,
607 and 609

The SEC prepared an Initial Regulatory Flexibility Analysis (IRFA) in connection
with the proposed rule, which was summarized in the notice of proposed
rulemaking (61 Fed. Reg. 68480, 68491-92, December 27, 1996), and was available to
the public in its entirety. One comment was received in response to the IRFA.

The preamble to the final rule contains a summary of the Final Regulatory
Flexibility Analysis, a complete copy of which was submitted to our Office and was
available to the public. The analysis describes the reason for the final rule and the
legal basis for it; descriptions and estimates of the number of small entities affected
by the rule; a discussion of the recordkeeping, reporting, and other compliance
requirements; and the steps taken to minimize the burdens on small entities.

The SEC estimated that of the 23,350 investment advisers currently registered with
the SEC, 17,650 advisers would be considered small entities. After July 8, 1997,

approximately 850 of those small entities would remain eligible for registration with
the SEC.

The comment received in response to the IRFA concerned the impact of the
proposed rule on small entities that manage funds regulated under ERISA. ERISA
protects a plan's named fiduciary from liability for the individual decisions of an
"investment manager" appointed by the fiduciary to manage the plan's assets.
"Investment manager" is defined by ERISA to include investment advisers registered
under the Advisers Act. Although ERISA has been amended to include state-
registered investment advisers as "investment managers," the amendment expires
2 years after enactment. When this amendment expires, small advisers effectively
will not be able to manage ERISA funds.

While the SEC found that it would be inconsistent with the Coordination Act to
grant an exemption for the above-described small entities, the Commissioner has
written to the congressional committees concerned urging that the sunset provision
be eliminated and the ERISA exemption be made permanent.

Also, in response to concerns expressed, the final rule increases the threshold for
Commission registration from $25 to $30 million of assets under management.

(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform
Act of 1995, 2 U.S.C. §§ 1532-1535

As an independent regulatory agency, the SEC is not subject to title II of the
Unfunded Mandates Reform Act of 1995.

(iv) Other relevant information or requirements under acts and executive orders

Administrative Procedure Act, 5 U.S.C. §§ 551 et seq.

The final rule was promulgated using the notice and comment procedures of
5 U.S.C. § 553. A notice of proposed rulemaking was published on December 27,
1996, 61 Fed. Reg. 68480, and requested the submission of comments. The SEC
received 105 comments in response to the proposed rule. The comments received
and actions taken as a result of the comments are discussed in the preamble to the
final rule, including the redrafting of certain language on the Form ADV-T for
greater clarity.

Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520

The final rule requires the collection of information which is subject to review by
the Office of Management and Budget (OMB) under the Paperwork Reduction Act.
OMB has approved the information collection contained on the Form ADV and has

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issued OMB No. 3235-0049 following the submission of revised burden hour
estimates. The SEC now estimates that the annual burden estimate for all
respondents to Form ADV is 18,128 hours.

Statutory authorization for the rule

The SEC cites section 203A(c) of the Investment Advisers Act of 1940 (15 U.S.C.
§ 80b-3A(c)) as authority for the promulgation of the final rule.

Executive Order No. 12866

The rule, promulgated by an independent regulatory agency, is not subject to the
review requirements of Executive Order No. 12866.

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