SEC Adopts Amendments to Investment Adviser Act Rules, July 1998

Washington, DC, July 24, 1998 - The Securities and Exchange Commission has adopted amendments to Rule 203A-3 under the Investment Advisers Act of 1940. Proposed last fall, the amendments will (1) permit investment advisers operating in multiple states to register with the Commission regardless of their assets under management and (2) revise the number of accommodation clients an investment adviser representative may have without triggering state registration requirements. In addition, the Commission has adopted technical or clarifying amendments to various other rules or forms under the Advisers Act. These amendments, which are summarized below, will be effective August 31, 1998.

Multi-State Exemption
A new subsection (e) has been added to Rule 203A-2 that would permit an investment adviser to register with the Commission even if it does not have $25 million of assets under management, provided that it has a multi-state practice that requires it to be registered with 30 or more state securities authorities. The adviser can maintain such registration with the Commission so long as it remains obligated to register in at least 25 states. (This 5 state differential is intended to avoid transient registration problems.) An investment adviser that registers with the Commission pursuant to subsection (e) must:

submit an annual representation to the Commission that is attached to Schedule I and certifies that the adviser is obligated to register in the requisite number of states;
include on Schedule E of Form ADV an undertaking to withdraw from registration with the Commission if Schedule I indicates that the adviser would be required by the laws of fewer than 25 states to register; and
maintain, in an easily accessible place, a record of those states in which the investment adviser has determined it would be required to register but for its registration with the Commission.

Accommodation Clients
Rule 203A-3 under the Advisers Act, which defines "investment adviser representative," has been amended to revise the number of accommodation clients a supervised person could have without triggering state registration. Currently, the rule excludes from the definition of "investment adviser representative" a supervised person more than ten percent of whose clients are natural persons, other than certain "excepted persons." As amended, a supervised person could have the greater of five natural person clients or the number of natural person clients permitted under the ten percent allowance without triggering state registration. Appendix C to the Release includes five examples illustrating how to compute the maximum number of accommodation clients a representative may have without triggering state registration requirements.

The Commission has also revised the criteria in Rule 203A-3 for determining which clients are "excepted persons." As originally adopted, the term "excepted persons" was defined to include the same criteria that were used in Rule 205-3 under the Advisers Act, which defines those persons with whom an adviser could enter into a performance fee contract. Effective August 20, 1998, the criteria in Rule 205-3 have been amended. To ensure continued consistency between the criteria in these two rules, the Commission has revised the definition of "excepted persons" in Rule 203A-3 to now mean a "qualified client as described in [SEC Rule 205-3]." As a result, the following persons, who are "qualified persons" for purposes of Rule 205-3, would be considered "excepted persons" under Rule 203A-3(a)(3)(i) and not counted toward the ten percent allowance:

clients who immediately after entering into the advisory contract have at least $750,000 under management with the adviser;
clients whom the adviser reasonably believes, immediately prior to entering into the advisory contract, have a net worth of more than $1,500,000 at the time the contract is entered into or are qualified purchasers as defined in Section 2(a)(51)(A) of the Investment Company Act; and
executive officers, directors, trustees, general partners, or persons serving in a similar capacity, of the investment adviser, as well as certain other employees of the adviser who participate in investment activities and have performed such functions for at least 12 months.

The Release notes that the increase in the threshold amounts under (1) and (2) above, from the current thresholds of $500,000 and $1,000,000, respectively, may result in some supervised persons being subject to state registration requirements to which they were previously not subject. In order to provide supervised persons who are affected by this change with sufficient time to obtain state registration, the Commission has decided not to require compliance with the amendments to Rule 203A-3(a)(3)(i) until December 31, 1998.

Finally, the Commission has amended Rule 203A-2(b)(3) to permit investment advisers relying on the pension consultant exemption from the prohibition on Commission registration to determine the aggregate value of plan assets during a 12-month period ending 90 days before the investment adviser files Schedule I to Form ADV; adopted several technical and clarifying amendments to instructions to Form ADV, including Schedules G and I; and, withdrawn Form ADV-T from further use.