The Impact of NSMIA on State Regulation of Broker-Dealers and Investment Advisers

Business Lawyer

Volumn 53, Issue 2, 1997, Pages 511-561

  Friedman, Howard M ^a  

^a UNIVERSITY OF TOLEDO   (United States)

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EID: 0642334448     PISSN: 00076899     EISSN: None     Source Type: Journal    
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References (354)

1. Pub. L. No. 104-290, 110 Stat. 3416 (to be codified in scattered sections of 15 U.S.C.).
2. See 15 U.S.C.A. § 77r(c)(1). (West Supp. 1997).
3. Id. § 77r(c)(2); see also id. § 80b-3a note (Continued State Authority).
4. Id. § 80b-3a.
5. Id. § 780(h).
6. See Robert G. Bagnall & Kimble Cannon, The National Securities Markets Improvement Act of 1996: Summary and Discussion, 25 SEC. REG. L.J. 3, 4 n.6 (1997); Andrew Taylor, Senate Clears Bill Promising Streamlined Regulations, 54 CONG. Q. 2850 (1996).
7. See Robert G. Bagnall & Kimble Cannon, The National Securities Markets Improvement Act of 1996: Summary and Discussion, 25 SEC. REG. L.J. 3, 4 n.6 (1997); Andrew Taylor, Senate Clears Bill Promising Streamlined Regulations, 54 CONG. Q. 2850 (1996).
8. See infra notes 121-297 and accompanying text.
9. For the historical development of federal regulation of broker-dealers, see DAVID A. LIPTON, BROKER-DEALER REGULATION §§ 1.01-.02 (1997). The historical development of state broker-dealer regulation does not appear to be well-documented. For a discussion of the type of broker-dealer regulation that existed at the time the Uniform Securities Act was drafted, see LOUIS LOSS & EDWARD M. COWETT, BLUE SKY LAW 26-33, 83-85, 142-46 (1958).
10. For the historical development of federal regulation of broker-dealers, see DAVID A. LIPTON, BROKER-DEALER REGULATION §§ 1.01-.02 (1997). The historical development of state broker-dealer regulation does not appear to be well-documented. For a discussion of the type of broker-dealer regulation that existed at the time the Uniform Securities Act was drafted, see LOUIS LOSS & EDWARD M. COWETT, BLUE SKY LAW 26-33, 83-85, 142-46 (1958).
11. For a discussion of the CRD system, see HOWARD M. FRIEDMAN, OHIO SECURITIES LAW AND PRACTICE 582-85 (2d ed. 1996); see also NASAA, NASD Inaugurate Central Depository for Registering Securities Salesmen Nationwide, Sec. Reg. & L. Rep. (BNA) No. 609, at F-1 (June 24, 1981).
12. For a discussion of the CRD system, see HOWARD M. FRIEDMAN, OHIO SECURITIES LAW AND PRACTICE 582-85 (2d ed. 1996); see also NASAA, NASD Inaugurate Central Depository for Registering Securities Salesmen Nationwide, Sec. Reg. & L. Rep. (BNA) No. 609, at F-1 (June 24, 1981).
13. See Bagnall & Cannon, supra note 6, at 39-40.
14. NSMIA § 103(a), 110 Stat. 3416, 3420-21.
15. N.Y. ABAND. PROP. LAW §§ 510-14 (McKinney 1991).
16. MODEL STATE COMMODITY CODE §§ 1.01-3.08 (North Am. Sec. Adm'rs Assoc. 1997), reprinted in Model State Commodity Code, NASAA Rep. (CCH) ¶ 4401-48, at 3201-25 (Nov. 18, 1997).
17. For a list of adopting states, see NASAA Rep. (CCH) ¶ 264, at 297 (May 1992).
18. See id. ¶ 4404, at 3207 (Nov. 18, 1997) (citing MODEL STATE COMMODITY CODE § 1.03(b), (f)). NSMIA also does not cover the many aspects of commodities trading that are subject to the jurisdiction of the Commodity Futures Trading Commission. Id. ¶¶ 4404-4405 at 3207 (citing MODEL STATE COMMODITY CODE §§ 1.03(a), (d); 1.04(a)(1)).
19. See id. ¶¶ 4403-4404, at 3207 (citing MODEL STATE COMMODITY CODE, §§ 1.02, 1.03).
20. 15 U.S.C. §§ 1011-15 (1994).
21. Id. § 1012(b).
22. 15 U.S.C.A. § 77r(a)(1)(A) (West 1997).
23. Id. § 77r(a)(1).
24. Staff Legal Bulletin No. 3(CF), 6 Fed. Sec. L. Rep. (CCH) ¶ 60,003, at 50,110 (July 25, 1997).
25. Id. at 50, 111-13.
26. See 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
27. DEL. CODE ANN., tit. 12, §§ 1198-1199 (1995 & Supp. 1996).
28. Id.
29. See supra note 12 and accompanying text.
30. See NORMAN S. POSER, BROKER-DEALER LAW AND REGULATION - PRIVATE RIGHTS OF ACTION 77-185 (1995).
31. Joint Explanatory Statement of the Committee of Conference, H.R. CONF. REP. NO. 104-864, at 39-40 (1996), reprinted in 1996 U.S.C.C.A.N. 3920, 3920-21 (emphasis added).
32. See 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
33. 505 U.S. 504 (1992).
34. 15 U.S.C. § 1334(b) (1994) (emphasis added).
35. Cipollone, 505 U.S. at 521.
36. See, e.g., Conway v. Icahn & Co., 16 F.3d 504, 510 (2d Cir. 1994) ("The relationship between a stockbroker and its customer is that of principal and agent and is fiduciary in nature. . . ."); People v. Mercer Hicks Corp., 155 N.Y.S.2d 740, 744 (Sup. Ct. 1956) ("It is established that the relation between a customer and his stock broker is that of principal and agent. The stockbroker is a fiduciary."), aff'd, 160 N.Y.S.2d 806 (App. Div. 1957).
37. 17 C.F.R. § 240.15c3-1 (1997).
38. See HUGH L. SOWARDS & NEIL H. HIRSCH, BLUE SKY REGULATION § 8.06[1] (1997).
39. 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
40. SOWARDS & HIRSCH, supra note 35, § 8.06[1].
41. 15 U.S.C.A. § 780(h)(1).
42. NASD Conduct Rule 3020, NASD Manual (CCH) at 4834-36 (Nov. 1997).
43. NYSE Rule 319, 2 N.Y.S.E. Guide (CCH) ¶ 2319 (Feb. 1997); American Stock Exchange Rule 330, 2. Am. Stock Ex. Guide (CCH) ¶ 9380 (May 1998).
44. See, e.g., MICH. COMP. LAWS ANN. § 451.602(f) (West Supp. 1997).
45. 15 U.S.C.A. § 780(h)(1).
46. 17 C.F.R. § 240.15c3-3(b) (1997).
47. 15 U.S.C.A. § 780(h)(1).
48. Id.
49. 15 U.S.C § 780(c)(3) (1994).
50. 15 U.S.C.A. § 780(h)(1).
51. 15 U.S.C. § 78q.
52. See SOWARDS & HIRSCH, supra note 35, § 8.09.
53. 17 C.F.R. § 240.17a-4(a) (1997).
54. Rachel Witmer, SEC Likely to Reissue Proposal Soon to Govern Broker-Dealer Books and Records, 30 Sec. Reg. L. Rep. (BNA) 887 (1998).
55. Id.
56. See, e.g., FLA. ADMIN. CODE ANN. r. 3E-600.013 (1997); OHIO ADMIN. CODE § 1301:6-3-19 (1997); 64 PA. CODE § 305.019(c) (1997). These provisions were modeled generally on NASAA's Statement of Policy on Dishonest or Unethical Business Practices. See FRIEDMAN, supra note 9, at 613.
57. 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
58. 17 C.F.R. § 240.15g-2(b).
59. Id.
60. Id. (emphasis added).
61. The author thanks Professor Ronald J. Coffey, Case Western Reserve University Law School, for pointing out the analogue in Rule 15g-2, although suggesting a different conclusion should be drawn from it. For a general discussion of Professor Coffey's views on NSMIA's preemption provisions, see Ronald J. Coffey, Reform Follows Function: Efficient Federalism? (last modified Dec. 31, 1996) 〈http://holmes.law.cwru.edu/cwrulaw/faculty/coffey/coffey .html〉.
62. See SOWARDS & HIRSCH, supra note 35, § 8.08.
63. 17 C.F.R. § 240.17a-5.
64. See SOWARDS & HIRSCH, supra note 35, § 8.08.
65. 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
66. See 17 C.F.R. § 240.15b3-1.
67. National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, § 103(a), 110 Stat. 3416, 3420-21 (to be codified as amended at 15 U.S.C. § 780(h)).
68. H.R. REP. NO. 104-622, at 36 (1996), reprinted in 1996 U.S.C.C.A.N. 3877, 3899.
69. 15 U.S.C.A. § 780(h)(1).
70. 15 U.S.C.S. § 780(h)(1) (Law. Co-op. Supp. 1997).
71. See Newt Gingrich, Preface 1994 Edition, U.S.C. (Jan. 4, 1995).
72. See 1 U.S.C. §§ 112, 204(a) (1994).
73. See David A. Lipton, Governance of Our Securities Markets and the Failure to Allocate Regulatory Responsibility, 34 CATH. U. L. REV. 397 (1985).
74. See S. REP. NO. 94-75, at 1-3, 28-32 (1975), reprinted in 1975 U.S.C.C.A.N. 179, 180-82, 207-09.
75. 15 U.S.C. § 78f(b).
76. Id. § 78f(c). On the scope of the SEC's substantive authority under § 19(c), see Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990).
77. 15 U.S.C. § 78s.
78. 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
79. Books and Records Requirements for Brokers and Dealer Under the Securities Exchange Act of 1934, SEC Release No. 34-37850 (Oct. 22, 1996), [1996-1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,853, at 88,707.
80. SEC Likely to Reissue Proposal Soon to Govern Broker-Dealer Books and Records, 30 Sec. Reg. & L. Rep. (BNA) 887 (1998).
81. Id.
82. 117 S. Ct. 2365 (1997).
83. Id. at 2383.
84. Nothing in the Printz decision precludes states from voluntarily assisting the federal government in enforcing federal law. See id. at 2375-76.
85. 17 C.F.R. § 240.17a-3 (1997).
86. As to the notion of dynamic conformity, see PAUL M. BATOR ET AL., HART AND WECHSLER'S THE FEDERAL COURTS AND THE FEDERAL SYSTEM 668-72 (2d ed. 1973).
87. For a list of states that have adopted by reference the SEC's net capital rule, see SOWARDS & HIRSCH, supra note 35, § 8.06[1] n.15. But cf. OHIO REV. CODE ANN. § 1707.44(L) (Anderson 1997) (incorporating SEC requirements imposed on broker-dealers under Exchange Act §§ 15(c) and 15(g), but requiring the Ohio Division of Securities to act in order to adopt future amendments to the federal provisions).
88. See FRIEDMAN, supra note 9, at § 9.05(B); DANIEL R. MANDELKER ET AL., STATE AND LOCAL GOVERNMENT IN A FEDERAL SYSTEM 584-85 (3d ed. 1990); 16 AM. JUR. 2D Constitutional Law § 343 (1979); R.T. Kimbrough, Annotation, Permissible Limits of Delegation of Legislative Power, 79 L. Ed. 474, 504 (1934).
89. See FRIEDMAN, supra note 9, at § 9.05(B); DANIEL R. MANDELKER ET AL., STATE AND LOCAL GOVERNMENT IN A FEDERAL SYSTEM 584-85 (3d ed. 1990); 16 AM. JUR. 2D Constitutional Law § 343 (1979); R.T. Kimbrough, Annotation, Permissible Limits of Delegation of Legislative Power, 79 L. Ed. 474, 504 (1934).
90. 15 U.S.C. § 78c(a) (1994).
91. NY GEN. BUS. LAW § 359(e)(1)(a) (McKinney 1996).
92. See LIPTON, supra note 8, § 1.04[3][b][i].
93. UNIF. SEC. ACT § 401(b), 7 U.L.A. 509, 578 (1985); see SOWARDS & HIRSCH, supra note 35, § 8.02[2][b].
94. See 17 C.F.R. § 240.3a4-1 (1997); see also LIPTON, supra note 8, § 1.04[3][b][i].
95. 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
96. For the definition of "prepared by or on behalf of the issuer," see 62 Fed. Reg. 24,572, 24,573 (1997) (to be codified at 17 C.F.R. § 230.146).
97. 15 U.S.C.A. § 77r(a).
98. 15 U.S.C. § 780(a)(1) (1994).
99. See LIPTON, supra note 8, § 1.05.
100. But cf. OHIO REV. CODE ANN. § 1707.14(B)-(E) (Anderson 1997); OHIO ADMIN. CODE § 1301:6-3-14(B) (requiring most Ohio intrastate dealers to register with the SEC even when federal law does not mandate such registration).
101. See Edward A. Schrag, Jr., SEC No-Action Letter [1991-1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 76,041, at 78,967 (Sept. 3, 1991); see also LIPTON, supra note 8, § 1.05.
102. 15 U.S.C. §78q(a).
103. See id. § 780(b)(8).
104. See SOWARDS & HIRSCH, supra note 35, § 8.02.
105. 15 U.S.C.A. § 780(h)(1) (West Supp. 1997).
106. See SOWARDS & HIRSCH, supra note 35, § 8.06[3].
107. See 15 U.S.C.A. § 77r, discussed in Mark A. Sargent, Blue Sky Law, 25 SEC. REG. L.J. 91, 95-99 (1997).
108. See 15 U.S.C.A. § 780(h)(1).
109. Id. § 780(h)(2)-(3); see Bagnall & Cannon, supra note 6, at 40-41.
110. 15 U.S.C.A. § 780(h)(2)-(3).
111. Id. § 780(h)(3)(A).
112. Id. § 780(h)(3)(B).
113. Id. § 780(h)(3)(B)(ii).
114. Id.
115. Id.
116. Id. § 780(h)(3)(A)(ii)(II).
117. Id. § 780(h)(2)(3).
118. Id. § 77r.
119. Id. § 77r(b).
120. For a discussion of this aspect of NSMIA, see generally Rutheford B Campbell, Jr., Blue Sky Laws and the Recent Congressional Preemption Failure, 22 J. CORP. L. 175, 196-203 (1997). See Sargent, supra note 103, at 91.
121. 15 U.S.C.A. 77r(a).
122. Id. § 77r(c)(1).
123. See SOWARDS & HIRSCH, supra note 35, § 8.10[5][b].
124. 15 U.S.C.A. 77r(a).
125. The investment adviser provisions found in Title III of NSMIA are known as the Investment Advisers Supervision Coordination Act. See 15 U.S.C.A. § 80b-20 note.
126. See generally Mari-Anne Pisarri, The Investment Advisers Supervision Coordination Act, 30 REV. SEC. & COMMODITIES REG. 185 (1997); Paul S. Stevens & Craig S. Tyle, Mutual Funds, Investment Advisers, and the National Securities Markets Improvement Act, 52 BUS. LAW. 419 (1997).
127. See generally Mari-Anne Pisarri, The Investment Advisers Supervision Coordination Act, 30 REV. SEC. & COMMODITIES REG. 185 (1997); Paul S. Stevens & Craig S. Tyle, Mutual Funds, Investment Advisers, and the National Securities Markets Improvement Act, 52 BUS. LAW. 419 (1997).
128. 15 U.S.C.A. § 80b-3a.
129. Id. A state may, however, require registration of an investment adviser representative who has a place of business located in the state even though the representative's employer is only required to register with the SEC. See infra notes 306-348 and accompanying text.
130. Small investment advisers based in one of the few states that lack an investment adviser statute must continue to register with the SEC.
131. 15 U.S.C.A. § 80b-18a.
132. S. REP. No. 104-293, at 2-3 (1996) (citation omitted).
133. H.R. CONF. REP. NO. 104-864, at 39 (1996), reprinted in 1996 U.S.C.C.A.N. 3920, 3920.
134. Originally, the investment adviser provisions were to take effect on April 9, 1997. See 15 U.S.C.A. § 80b-2 note. Congress subsequently postponed the effective date, however, to July 8, 1997. Act of March 31, 1997, Pub. L. No. 105-8, 111 Stat. 15. This was done at the SEC's request in order to give advisers sufficient time to examine the SEC's new rules and consult with counsel, and in order to avoid disruption of state regulatory programs. See SEC Seeks to Extend Effective Date of 1996 Reform Law's Title on Advisers, 29 Sec. Reg. & L. Rep. (BNA) 255 (Feb. 28, 1997).
135. Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Release No. 1633, [Current] Fed. Sec. L. Rep. (CCH) ¶ 85,940, at 89,591 (May 15, 1997) [hereinafter Release No. 1633].
136. See SEC's New Approach to Examinations of Advisers Focuses on Risk to Clients, 27 Sec. Reg. & L. Rep. (BNA) 1704, 1704-05 (Oct. 27, 1995) (statements of Eugene Gohlke, Associate Director, Office of Compliance, Inspections and Examinations, SEC).
137. Id. at 1705.
138. Id.
139. Senate Panel Reports Amended Bill to Strengthen Regulation of Advisers, 25 Sec. Reg. & L. Rep. (BNA) 1423, 1423 (Oct. 22, 1993).
140. Roberts Calls for SEC and States to Split Investment Adviser Oversight, 24 Sec. Reg. & L. Rep. (BNA) 1801, 1801 (Dec. 4, 1992).
141. Certain advisers with less than $25 million under management remain under SEC registration requirements, and certain large advisers remain subject to state registration. See infra notes 199-251 and accompanying text.
142. Release No. 1633, supra note 130, at 89,594.
143. See Humberto Cruz, Smaller Investment Advisers to Be Regulated by States, Not SEC, DES MOINES REG., July 14, 1997, at 9.
144. Investment Advisers Act Rule 203A-5, 62 Fed. Reg. 28,112, 28,134 (1997) (to be codified at 17 C.F.R. § 275.203A-5).
145. Id. In March 1998, the SEC gave notice that it intended to cancel the registrations of 5092 advisers who had not filed Form ADV-T even after the SEC sent them a second notice. Notice of Intention to Cancel Registrations of Certain Investment Advisers, SEC Release No. 1705, 1998 SEC LEXIS 396 (Mar. 9, 1998).
146. 15 U.S.C.A. § 80b-3a(a) (West Supp. 1997).
147. Id. § 80b-3a(b).
148. Investment Advisers Act Rule 203A-1 (a), 62 Fed. Reg. 28,112, 28,133 (1997) (to be codified at 17 C.F.R. § 275.203A-1(a)).
149. Id. § 275.203A-1(b).
150. 15 U.S.C.A. § 80b-3a(a)(2) (emphasis added).
151. Schedule I to Form ADV, 62 Fed. Reg. 28,112, 28,146 (1997) [hereinafter Schedule I].
152. Form ADV-T, 62 Fed. Reg. 28,112, 28,137 (1997) [hereinafter Form ADV-T].
153. Release No. 1633, supra note 130.
154. Schedule I, supranote 146, at 28,143 (Instruction 8(a)); Id. at 28,149 (Instruction 7(a)).
155. Release No. 1633, supra note 130, at 89,595.
156. For a discussion of the differences between state and federal definitions, see SOWARDS & HIRSCH, supra note 35, § 2.01.
157. Implementing Amendments to the Investment Advisers Act, Investment Advisers Act Release No. 1601 [1996-1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,872, at 88,870-71 (Dec. 20, 1996) [hereinafter Release No. 1601].
158. See Release No. 1633, supra note 130, at 89,595.
159. Id.
160. Form ADV-T, supra note 147, at 28,143 (Instruction 8(a)); Schedule I, supra note 146, at 28,149 (Instruction 7(a)).
161. Release No. 1633, supra note 130, at 89,595 n.29.
162. Form ADV-T, supra note 147, at 28,143 (Instruction 8(a)); Schedule I, supra note 146, at 28,149 (Instruction 7(a)).
163. Id.
164. 15 U.S.C.A. § 80b-3a(a)(2) (West Supp. 1997).
165. Form ADV-T, supra note 147, at 28,144 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c));-Release No. 1633, supra note 130, at 89,595.
166. Form ADV-T, supra note 147, at 28,144 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595.
167. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)).
168. Form ADV-T, supra note 147, at 28,145 (Instruction 9); Schedule I, supra note 146, at 28,151 (Instruction 8).
169. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
170. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
171. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
172. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
173. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
174. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
175. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
176. Form ADV-T, supra note 147, at 28,144-45 (Instruction 8(c)); Schedule I, supra note 146, at 28,150 (Instruction 7(c)); Release No. 1633, supra note 130, at 89,595-96.
177. Form ADV-T, supra note 147, at 28,145 (Instruction 8(d)); Schedule I, supra note 146, at 28,151 (Instruction 7(d)); Release No. 1633, supra note 130, at 89,596.
178. Form ADV-T, supra note 147, at 28,145 (Instruction 8(d)); Schedule I, supra note 146, at 28,151 (Instruction 7(d)); Release No. 1633, supra note 130, at 89,596-97.
179. Form ADV-T, supra note 147, at 28,143-44 (Instruction 8(b)); Schedule I, supra note 146, at 28,149-50 (Instruction 7(b)). In November 1997, the SEC proposed an amendment to Schedule I, Instruction 7(d), to make clear that the value of the account includes only those securities portfolios for which the adviser provides continuous and regular supervisory or management services as of the date of filing Schedule I. Exemption for Investment Advisers Operating in Multiple States; Revisions to Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 1681, [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,969, at 89,948 (Nov. 13, 1997) [hereinafter Release No. 1681].
180. Form ADV-T, supra note 147, at 28,143-44 (Instruction 8(b)); Schedule I, supra note 146, at 28,149-50 (Instruction 7(b)); Release No. 1633, supra note 130, at 89,596.
181. Release No. 1633, supra note 130, at 89,596 n.36.
182. Investment Advisers Act Rule 203A-4, 62 Fed. Reg. 28,112, 28,134 (1997) (to be codified at 17 C.F.R. § 275.203A-4).
183. See Release No. 1633, supra note 130, at 89,596. Advisers are not required to register with the SEC until their assets under management total $30 million, even though they are permitted to register with the SEC once their assets under management reach $25 million. See supra notes 139-43 and accompanying text.
184. See supra notes 136-44 and accompanying text.
185. Investment Advisers Act Rule 203A-2(d), 62 Fed. Reg. 28,112, 28,134 (1997) (to be codified at 17 C.F.R. § 275.203A-2(d)).
186. Id.
187. Id; Form ADV-W, 6 Fed. Sec. L. Rep. (CCH) ¶¶ 57,121-22, at 44,551-53 (Oct. 5, 1988) [hereinafter Form ADV-W].
188. Investment Advisers Act Rule 203A-1(b), 62 Fed. Reg. 28,112, 28,133 (1997) (to be codified at 17 C.F.R. § 275.203A-1(b)).
189. Id. § 275.203A-1(d); see supra notes 136-44 and accompanying text.
190. See UNIF. SEC. ACT § 201(d) (amended 1988), 7B U.L.A. 528 (1985).
191. See Release No. 1633, supra note 130, at 89,598.
192. Schedule I is designed to be a uniform form that may be used for both federal and state registration. See Interpretations of Certain Investment Adviser Requirements, Investment Advisers Act Release No. 1000, 6 Fed. Sec. L. Rep. (CCH) ¶ 56,236, at 44,087 (Dec. 3, 1985).
193. Investment Advisers Act Rule 203A-1(d), 62 Fed. Reg. 28,112, 28,133 (1997) (to be codified at 17 C.F.R. § 275.203A-1(d)).
194. Id.; Release No. 1633, supra note 130, at 85,598 n.52.
195. See Release No. 1633, supra note 130, at 85,597 n.42.
196. 62 Fed. Reg. 28,135 (to be codified at 17 C.F.R. § 275.204-1).
197. Schedule I, supra note 146, at 28,151 (Instruction 7(d)); see supra notes 172-76 and accompanying text.
198. For the procedure to withdraw from SEC registration, see 17 C.F.R. § 275.203-2 (1997) and Form ADV-W, supra note 182.
199. Investment Advisers Act Rule 203A-1(c), 62 Fed. Reg. 28,112, 28,133 (1997) (to be codified at 17 C.F.R. § 275.203A-1(c)).
200. Id.
201. See Release No. 1633, supra note 130, at 89,597-98.
202. See id. at 89,598.
203. For discussion of Rule 203A-2(d), which provides for SEC registration of new advisers who expect to reach $25 million in assets under management within 120 days, see supra notes 180-82 and accompanying text.
204. 15 U.S.C.A. § 80b-3(a)(1) (West Supp. 1997).
205. 62 Fed. Reg. at 28,133-34 (to be codified at 17 C.F.R. § 275.203A-2). These investors include, inter alia, pension consultants and nationally recognized statistical ratings organizations (NRSROs). Id.
206. 15 U.S.C. § 80b-3(a)(1)(B).
207. See Release No. 1601, supra note 152, at 88,868 n.11; Release No. 1633, supra note 130, at 85,593 n. 12.
208. See 15 U.S.C. § 80a-2(a)(20).
209. Id. § 80b-2(a)(11).
210. Id.
211. See id. § 80a-2(20)(A).
212. Id. § 80b-2(a)(11).
213. Release No. 1601, supra note 152, at 88,870.
214. Form S-3, 2 Fed. Sec. L. Rep. (CCH) ¶ 7151, at 6247-48 (Sept. 17, 1997).
215. 17 C.F.R. § 240.15c3-1(1997).
216. Id. § 270.2a-7(a)(9), (c)(3).
217. For a discussion of the numerous areas in which NRSRO ratings have important legal consequences, see Amy K. Rhodes, The Role of the SEC in the Regulation of Rating Agencies: Well-Placed Reliance or Free-Market Interference?, 20 SETON HALL LEGIS. J. 293 (1996). See also Francis A. Bottini, Jr., Comment, An Examination of the Current Status of Rating Agencies and Proposals for Limited Oversight of Such Agencies, 30 SAN DIEGO L. REV. 579 (1993).
218. For a discussion of the numerous areas in which NRSRO ratings have important legal consequences, see Amy K. Rhodes, The Role of the SEC in the Regulation of Rating Agencies: Well-Placed Reliance or Free-Market Interference?, 20 SETON HALL LEGIS. J. 293 (1996). See also Francis A. Bottini, Jr., Comment, An Examination of the Current Status of Rating Agencies and Proposals for Limited Oversight of Such Agencies, 30 SAN DIEGO L. REV. 579 (1993).
219. Release No. 1601, supra note 152, at 88,874.
220. See Release No. 1633, supra note 130, at 89,599.
221. Release No. 1601, supra note 152, at 88,874; Release No. 1633, supra note 130, at 89,599.
222. 62 Fed. Reg. 28,112, 28,133 (1997) (to be codified at 17 C.F.R. § 275.203A-2(b)). Each of these types of plans is defined in ERISA. See Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1002(3), (32), (33) (1994).
223. Investment Advisers Act Rule 203A-2(b), 62 Fed. Reg. at 28,133 (to be codified at 17 C.F.R. § 275.203A-2(b)).
224. Id.
225. Id. at 28,133-34 (to be codified at 17 C.F.R. § 275.203A-2(b)).
226. Release No. 1681, supra note 174, at 89,942, 89,955.
227. Id. at 89,948 n.35.
228. See Release No.-1601, supra note 152, at 88,874; Release No. 1633, supra note 130, at 89,600.
229. 62 Fed. Reg. at 28,134 (to be codified at 17 C.F.R. § 275.203A-2(c)).
230. Id.
231. Release No. 1633, supra note 130, at 89,600.
232. 15 U.S.C. § 80b-3(b) (1994). These traditional exemptions were expanded to cover church employee pension plans through an amendment to § 203(b). See infra notes 244-48 and accompanying text.
233. 15 U.S.C. § 80b-3(b)(1).
234. See McCarran-Ferguson Act, 15 U.S.C. §§ 1011-15.
235. Id. § 80b-3(b)(2).
236. UNIF. SEC. ACT, § 201(c)(3) (amended 1988), 7B U.L.A. 528 (1985).
237. 15 U.S.C. § 80b-3(b)(3). An adviser will not be deemed to be holding itself out to the public solely because it participated in a private offering of limited partnership interests. 62 Fed. Reg. 28,112, 28,133 (1997) (to be codified at 17 C.F.R. § 275.203(b)(3)-1(c)).
238. 15 U.S.C. § 80b-3(b)(3).
239. 62 Fed. Reg. at 28,132 (to be codified at 17 C.F.R. § 275.203(b)(3)-1).
240. Id.
241. Id. at 28,132-33.
242. Id. at 28,133.
243. Id.
244. Id.
245. UNIF. SEC. ACT § 401(f)(6)(B) (amended 1988), 7B U.L.A. (1985).
246. 15 U.S.C.A. § 80b-18a(d) (West Supp. 1997).
247. See supra notes 233-34 and accompanying text.
248. Investment Advisers Act Rule 222-1(a)(1), 62 Fed. Reg. 28,112, 28,135 (1997) (to be codified at 17 C.F.R. § 275.222-1(a)(1)).
249. Investment Advisers Act Rule 222-1(a)(2), id. at 28,135 (1997) (to be codified at 17 C.F.R. § 275.222-1(a)(2)). For discussion of die same definitional language in Investment Advisers Act Rule 203A-3(b), see infra notes 334-44 and accompanying text.
250. 15 U.S.C.A. § 80b-3(b)(4) (West Supp. 1997).
251. Pub. L. 104-62, 109 Stat. 682 (codified in scattered sections of 15 U.S.C.).
252. 15 U.S.C.A. § 80a-3a(c) (West Supp. 1997).
253. Id. § 80a-3 note (Protection of Church Employee Benefit Plans Under State Law); id. § 80b-3(b)(5).
254. See In re Arthur Andersen Financial Advisers, Investment Adviser Act Release No. 1642, 1997 SEC LEXIS 1429 (July 8, 1997) (corrected July 10, 1997); In re Ernst & Young Investment Advisers LLP, Investment Advisers Act Release No. 1641, 1997 SEC LEXIS 1430 (July 8, 1997); In re KPMG Investment Advisors, Investment Advisers Act Release No. 1643, 1997 SEC LEXIS 1428 (July 8, 1997).
255. Release No. 1681, supra note 174, at 89,942, 89,955.
256. Id. Under Rule 203A-2(d), a new adviser that reasonably expected that it would be required to register in at least 30 states within 120 days could file an initial registration with the SEC. Within the 120-day period, it would be required to file an amendment to Schedule I with a representation that but for the exemption it would be required to register in at least 25 states. Id.
257. 15 U.S.C.A. § 80b-3a(b).
258. Id. § 80b-3a note (Continued State Authority).
259. Id.
260. Id.
261. Id.
262. Id.
263. Id.
264. Id.
265. Id. § 80b-3a(b)(1).
266. See SOWARDS & HIRSCH, supra note 35, § 8.06 [2] (minimum capital and surety bond requirements), § 8.08 (filing of financial statements), § 8.09 (record-keeping requirements).
267. Release No. 1633, supra note 130, at 89,612.
268. Id. In proposing this interpretation, the SEC made specific reference to several Model Rules under the Uniform Securities Act that it considered to be pre-empted as to SEC-registered advisers. These were rules prescribing minimum financial requirements, bonding, record-keeping, furnishing a disclosure statement to clients (the brochure rule), and requiring financial reporting. See Release No. 1601, supra note 130, at 88,866, 88,869 n.21.
269. See supra notes 251-58 and accompanying text.
270. Release No. 1633, supra note 130, at 89,612; NASAA Comment Letter to Jonathan G. Katz, U.S. Securities and Exchange Commission, Regarding Rules Implementing Amendments to the Investment Advisers Act of 1940, NASAA Rep. (CCH) ¶ 13,039, at 13,070 (Feb. 17, 1997) [hereinafter NASAA Letter]. 265. See In re Spear & Staff, Inc., Investment Advisers Act Release No. 188 [1964-1966 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,216 at 82,304 n. 10 (Mar. 25, 1965) ("It was judicially recognized long prior to the Act that investment advisers stand in a fiduciary relation to their clients."); see also Ridgely v. Keane, 119 N.YS. 451, 453 (App. Div. 1909).
271. By way of contrast, the preemption provisions of ERISA have been read to preempt claims relating to employee benefit plans that are based on an alleged breach of fiduciary duty under state law. See ERISA FIDUCIARY LAW 399-400 (Susan P. Serota ed. & Frederick A. Brodie assoc. ed., BNA 1995).
272. Release No. 1633, supra note 130, at 89,611.
273. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 24 (1979).
274. Private actions for an injunction, rescission, or restitution based on a violation of § 206 are available. Id. at 18-19.
275. Release No. 1633, supra note 130, at 89,612 n.156, 89,613-14.
276. 62 Fed. Reg. 28,112, 28,135 (1997).
277. Id.
278. 15 U.S.C.A. § 80b-3a(b)(2) (West Supp. 1997).
279. Release No. 1633, supra note 130, at 89,611. For additional discussion, see supra text accompanying notes 259-73. The SEC did state, however, that "state private civil liability laws" are not pre-empted. Release No. 1633, supra note 130, at 89,612 n.152.
280. See e.g., UNIF. SEC. ACT. § 102(b),(c) (amended 1988), 7B U.L.A. 525-26 (1985).
281. Release No. 1633, supra note 130, at 89,612.
282. Uniform Securities Act Model Rule 102(a)(4)-1, 1 Blue Sky L. Rep. (CCH) ¶ 5512.65, at 1516.
283. 15 U.S.C.A. § 80b-3a(a) (West Supp. 1997).
284. 62 Fed. Reg. 28,112, 28,134 (1997) (to be codified at 17 C.F.R. § 275.203A-3(c)).
285. Release No. 1633, supra note 130, at 89,602.
286. Id.
287. Id. at 89,593.
288. See NASAA Press Release, State Oversight of Investment Advisers and Employees Will Be Retained by Passage of Securities Reform Legislation, NASAA Rep. (CCH) ¶ 19,004, at 18,010 (Oct. 1996).
289. S. 2325, 77th Leg., 2d Sess. (Iowa 1998) (to be codified in scattered section of IOWA CODE § 502.102).
290. H.R. 1244, 61st Leg., 2d Sess. (Colo. 1998) (to be codified in scattered sections of COLO. REV. STAT. § 11-51-102).
291. H.R. 695, 122d Leg., Reg. Sess. (Ohio 1998) (passed first house).
292. Investment Advisers: Colorado, Iowa, Ohio Working to Pass New Adviser Legislation, 30 Sec. Reg. & L. Rep. 679 (1998).
293. For the definition of "investment manager," see 29 U.S.C. § 1002(38) (1994).
294. 29 U.S.C. § 1105(d)(1), discussed in Bagnall & Cannon, supra note 6, at 17-18; see also Release No. 1633, supra note 130, at 89,601.
295. 29 U.S.C. § 1002(38)(B).
296. The Chairman of the Senate Labor and Human Resources Committee, in introducing legislation to provide a permanent solution, indicated that NSMIA chose a temporary solution so that congressional committees with jurisdiction over ERISA could review and deal with die issue. Bill Would Protect ERISA Status of 'Investment Managers' for Small Firms, 29 Sec. Reg. & L. Rep. (BNA), 1376 (Oct. 3, 1997).
297. 29 U.S.C.A. § 1002(38)(B) and note (Amendment of para. (38)(B)).
298. See Bagnall & Cannon, supra note 6, at 17-18.
299. Release No. 1633, supra note 130, at 89,601-02. The SEC has declined to deal with the problem through its own administrative rule-making. Any administrative solution would have remitted large numbers of small advisers to SEC registration, a result that the SEC thought inconsistent with the intent of Congress. Id. at 89,601.
300. Pub. L. No. 105-72, 111 Stat. 1457 (1997) (to be codified in 29 U.S.C. § 1002(38)(B) and note).
301. Id. at 1457.
302. Id. at 1457-58.
303. For a discussion of the federally imposed de minimis standard, see supra notes 235-39 and accompanying text.
304. SEC-registered advisers are subject only to SEC requirements in these areas. See supra notes 255 and 268 and accompanying text.
305. 15 U.S.C.A. § 80b-18a(b) (West Supp. 1997).
306. See generally Bagnall & Cannon, supra note 6, at 16.
307. Investment Advisers Act Rule 222-1(b), 62 Fed. Reg. 28,112, 28,135 (1997) (to be codified at 17 C.F.R. § 275.222-1(b)).
308. Memorandum of Understanding Concerning Investment Advisers and Investment Adviser Representatives, NASAA Rep. (CCH) ¶ 2353, at 1399-5 to 1400 (Apr. 27, 1997) [hereinafter NASAA Memorandum].
309. Id. The NASAA Memorandum also calls for coordinated enforcement initiatives among multiple regulators. Id. at 1399-4 to -5.
310. Proposed Revisions to Model Rules, NASAA Rep. (CCH) ¶ 4108-09, at 2640-44 (Nov. 19, 1997).
311. Investment Advisers Act § 202(a)(11) excludes from the definition of "investment adviser" banking institutions, various professionals whose advisory activities are solely incidental to the practice of their professions, broker-dealers whose advice is incidental to their other activities and who receive no special compensation for their advice, publishers of certain bona fide financial publications, advisers on government securities, and others designated by SEC rule. 15 U.S.C. 80b-2(a)(11) (1994).
312. 15 U.S.C.A. § 80b-3a(b)(1)(A) (West Supp. 1997); see supra notes 136-44 and accompanying text; see also Release No. 1633, supra note 130, at 89,603.
313. 15 U.S.C.A. § 80b-2(a)(25).
314. Id.
315. Id. § 80b-3a(b)(1)(A); see Bagnall & Cannon, supra note 6, at 15-16.
316. See Release No. 1633, supra note 130, at 89,603.
317. See id. at 89,604-89,605 & n.104.
318. Release No. 1601, supra note 152, at 88,877 (footnotes and citations omitted).
319. NASAA Letter, supra note 264, ¶ 13,039.
320. Release No. 1633, supra note 130, at 89,604.
321. Id. at 89,605.
322. See NASAA Amended Rules (1998), NASAA Rep. (CCH) ¶ 4881, at 3571-2 to -3 (May 3, 1998).
323. Release No. 1633, supra note 130, at 89,606.
324. Although the language of Rule 203A-3(a) might lend itself to a reading suggesting that the 10% applies to clients of the investment adviser rather than clients of the particular employee or agent, the SEC's release adopting the rule makes it clear that the intent is to focus on the clients of the particular agent or employee. See id. at 89,603.
325. Release No. 1681, supra note 174, at 89,947.
326. Investment Advisers Act Rule 203A-3(a)(1), (a)(3)(i), 62 Fed. Reg. 28,112, 28,134 (1997) (to be codified at 17 C.F.R. § 275.203A-3(a)(1)-(a)(3)(i)).
327. Release No. 1633, supra note 130, at 89,606.
328. Release No. 1681, supra note 174, at 89,942, 89,946.
329. Id.
330. Id.
331. Id.
332. Id.
333. See supra notes 233-43 and accompanying text.
334. Investment Advisers Act Rule 203A-3(a)(4), 62 Fed. Reg. 28,112, 28,134 (1997) (to be codified at 17 C.F.R. § 275.203A-3(a)(4)).
335. Id; Release No. 1633, supra note 130, at 89,607 n.117.
336. Investment Advisers Act Rule 203A-3(a)(2), (3)(ii), 62 Fed. Reg. at 28,134 (to be codified at 17 C.F.R. § 275.203A-3(a)(2), (3)(ii)).
337. Release No. 1633, supra note 130, at 89,608.
338. Id. The reader should also note Investment Advisers Act Rule 206(4)-3 relating to cash payments made by SEC-registered advisers for client solicitations. 62 Fed. Reg. at 28,135 (to be codified at 17 C.F.R. § 275.206 (4)-3). This rule applies even when the solicitor for the SEC-registered adviser is subject to state-qualification requirements. Release No. 1633, supra note 130, at 89,608.
339. 62 Fed. Reg. at 28,134 (to be codified at 17 C.ER. § 275.203A-3(b)).
340. Id. (to be codified at 17 C.F.R. § 275.203A-3(b)(1)).
341. 142 CONG. REC. S12095 (daily ed. Oct. 1, 1996). Senator Sarbanes was the ranking Democratic member of the Senate Banking, Housing and Urban Affairs Committee whose Securities Subcommittee had jurisdiction over this legislation. Id; see also Bagnall & Cannon, supra note 6, at 17 n.68.
342. Release No. 1633, supra note 130, at 89,609 n.129.
343. Id.
344. Id.
345. Investment Advisers Act Rule 203A-3(b)(2), 62 Fed. Reg. at 28,134 (to be codified at 17 C.F.R. § 275.203A-3(b)(2)).
346. Release No. 1633, supra note 130, at 89,609.
347. Id.
348. Id.
349. Id.
350. NASAA Memorandum, supra note 303, at 1399-3.
351. Id. at 1399-4; see also NASAA Defends Project to Develop Exams for Investment Adviser Reps, 30 Sec. Reg. & L. Rep. (BNA) 830 (1998).
352. NASAA Memorandum, supra note 303, at 1399-4.
353. Id.
354. For example, broker-dealer firms which were late in renewing their registration in a state have sometimes been required to offer to rescind all transactions carried out during the period in which they were technically unlicensed. See E*Trade Securities, Inc., 2 OHIO SEC. BULL. 12 (1997); Citizens Securities, Inc., 2 OHIO SEC. BULL. 13.