SEC staff no-action letter, Investment Company Institute
Pub. Avail. September 23, 1988
SECURITIES AND EXCHANGE COMMISSION
|(1)||disclosure that the performance figured do not reflect the deduction of investment advisory fees;|
|(2)||disclosure that the client's return will be reduced by the advisory fees and any other expenses it may incur in the management of its investment advisory account;|
|(3)||disclosure that the investment advisory fees are described in Part II of the adviser's Form ADV; and|
|(4)||a representative example (e.g., a cable, chart, graph, or narrative), which shows the effect an investment advisory fee, compounded over a period of years, could have on the total value of a client's portfolio.|
We also would not recommend any enforcement action to the Commission if an investment adviser provides gross performance data to consultants as long as the adviser instructs the consultant to give the performance data to prospective clients of the adviser only on a one-on-one basis and the consultant provides the disclosure in (1) to (4) above.
Finally, because this response is based upon your representations and is expressly conditioned upon an adviser or consultant providing the information set forth above, any different representations or conditions may require a different conclusion. Further, this response only expresses the Division's position on enforcement action and does not purport to express any legal conclusions on the questions presented.
A. Thomas Smith III
1 You state that one of the primary functions of consultants is to actively monitor investment performance of advisers for clients although the services provided may vary from consultant to consultant. Although you have not asked our views about the status of these consultants under the Advisers Act, we wish to point out that the staff takes the position that a person providing advice to a client as to the selection or retention of an investment manager or managers by, for example, monitoring and evaluating the performance of the investment manager, may be advising others within the meaning of section 202(a)(11) under the Advisers Act. See footnote 6 and accompanying text of Investment Advisers Act Rel. No. 1092 (Oct. 8, 1987).
2 Rule 206(4)-1(a)(5) provides that it is a fraudulent, deceptive, or manipulative act for any investment adviser to distribute, directly or indirectly, any advertisement that contains any untrue statement of a material fact or that is otherwise false or misleading.
3 In the Matter of Bond Timing Services, Inc. and Vilis Pasts (Investment Advisers Act Rel. No. 920, July 23, 1984) where the Commission found that an adviser, among other things, willfully violated section 206(4) of, and rule 206(4)-1(a)(5) under, the Advisers Act by distributing advertisements of annualized returns which omitted from the circulation costs relating to advisory fees.
4 As here relevant, paragraph (b) of the generally defines an advertisement to include any notice, circular, letter or other written communication addressed to more than one person that offers any investment advisory service regarding securities. While the one-on-one presentation may vary from client to client, the performance information materials generally do not.
5 In this regard, we understand that a client's ability to negotiate fees with an adviser is directly related to the amount of client assets subject to the adviser's management. To the extent that a client is in a position to bargain with the adviser over the fees that will be paid, information about the impact of fees and expenses associated with the performance results achieved by other clients of the adviser would not be as material to this client.
INVESTMENT COMPANY INSTITUTE
May 3, 1988
Mary Podesta, Esq.
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Advertising of Performance Data by Advisers
Dear Ms. Podesta:
Thank you and your staff for taking the time to meet with us on February 4, 1988 concerning the Clover Capital (publicly available October 28, 1986) prohibition against an investment adviser advertising performance data without the deduction of investment advisory fees.
Pursuant to our discussion, we hereby request assurance from the Division of Investment Management (Division) that it will not recommend enforcement action against Institute investment adviser members and associate members which advertise investment adviser performance results without a deduction of the investment advisory fee that a client would have paid or actually paid, through any communication or presentation made by an adviser to a prospective client that is of a private and confidential nature and that is not made to the public through any print, electronic or other medium, provided certain disclosures, more fully discussed below, are made.
The Institute also requests assurance from the Division that it will not recommend enforcement action against Institute members and associate members which provide performance information without a deduction of the investment advisory fee to consultants to investment advisory clients or prospective clients, provided certain disclosures are made.
On October 28, 1986, the Division made public its response to the Clover Capital no-action request. That response included a statement that Rule 206(4)-1(a)(5) prohibits an advertisement that includes model or actual results that do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid. Many Institute investment adviser members and associate members became concerned about this prohibition because advisers historically have shown their figures on a gross basis without the deduction of advisory fees. As a result, the Investment Company Institute submitted a request that the Division no recommend enforcement action if performance figures for actual accounts are provided to clients and others without reducing the figures by the amount of the investment advisory fee, provided there is adequate disclosure that the figures presented are not reduced by the amount of the advisory fee that a client might incur and of the types of fees that a client might actually incur. The Division rejected the Institute's request in a response that became public on August 24, 1987; however, the Division did state that adviser performance figures may be presented without reflecting custodian fees paid to a bank or other organization for safekeeping client funds and securities.
Also, on August 24, 1987, the Institute and others filed a Formal Petition for Rulemaking Regarding Advertising of Investment Adviser Performance Information (the petition is dated August 18, 1987). The petition was filed so that the public, including investment advisory organizations, investment advisory clients and consultants to such clients, might be afforded the opportunity to comment on a rule proposal that might prohibit an investment adviser from advertising actual investment results without a deduction of advisory fees that a client would have paid or actually paid.
The Institute still believes that advertisements of gross performance data should be permitted without reducing performance figures by the amount of the investment advisory fee, provided adequate disclosure is made that the figures presented are not reduced by the amount of the advisory fee that a client might actually incur and of the types of fees that a client might actually incur. However, if the Division cannot agree with our position, then certain exemptions from the prohibition in Clover Capital should be granted.
A. No-Action Request Concerning Restricted or Private Communications
Because individual presentations by an investment adviser are made to prospective clients that have sufficient assets to justify such an individualized presentation (it would be too costly for an adviser to make an individualized presentation to all of the persons who might be reached through an impersonal communication, such as an advertisement or seminar) and because in a one-on-one presentation, the prospective client has ample opportunity to discuss with the adviser the types of fees that it might pay, the Clover Capital prohibition should not apply to communications of a private nature, specifically, to a one-on-one presentation made by an adviser to a potential client.6 Therefore, we request assurance from the Division that it would not recommend enforcement action if Institute adviser members and associate members provide to prospective clients gross performance data through any communication or presentation that is of a private and confidential nature and that is not made to the public through any print, electronic or other medium, as long as the adviser discloses (a) that the performance figures do not reflect the deduction of investment advisory fees, (b) that the client's return will be reduced by the advisory fees and any other expenses it may incur in the management of its investment advisory account, (c) that the investment advisory fees are described in Part II of the adviser's Form ADV, and (d) a representative example (e.g., table, chart, graph or narrative), which shows the effect an investment advisory fee, compounded over a period of years, could have on the total value of a client's portfolio.
B. No-Action Request Concerning Delivery of Performance Data by Advisers to Consultants
Many investors, including individuals, pension funds, universities and other institutions use the services of third-party investment management consultants. These consultants provide investors an array of services, including recommendations of appropriate investment advisers and continuous performance monitoring. Thus, the investor becomes a client of both the investment management consultant and the investment adviser.
One of the primary functions a consultant provides to clients is the active monitoring of investment performance by advisers. Many consultants simply collect performance data from advisers, compare results, and advise their clients accordingly.7 To the extent that consultants merely provide their clients with performance information supplied by an adviser, the consultant is acting as a conduit or intermediary.
Some consultants interview an investment adviser and collect information from the adviser concerning investment management style, performance data and a brief description of the investment advisory firm. Such consultants then create a data base of the various managers' performance results it monitors and sell it to stockbrokers and others who select investment managers for their customers.
The Institute's no-action request herein does not include relief related to the activities of consultants as described in this footnote, since such consultants do not simply act as a clearinghouse for data developed by advisers, but actually create the performance data which is provided to their clients.
We request the Division's assurance that an adviser may provide gross performance data to consultants as long as the adviser instructs the consultant to give such performance data to prospective clients of the adviser only on a one-on-one basis and the consultant discloses (a) that the performance figures do not reflect the deduction of investment advisory fees, (b) that the client's return will be reduced by the advisory fees and any other expenses it may incur in the management of its investment advisory account, (c) that the investment advisory fees are described in Part II of the adviser's Form ADV, and (d) a representative example (e.g., table, chart, graph or narrative), which shows the effect an investment advisory fee, compounded over a period of years, could have on the total value of a client's portfolio.
We believe that the arrangements described above will insure that the ultimate user of performance information, the prospective client, will receive performance data only on a one-on-one as is from either an adviser or consultant with appropriate disclosures.
We understand that the Division anticipates developing amendments to Rule 206(4)-1 under the Investment Advisers Act of 1940. However, recognizing the industry's need for immediate relief, we recommend that, until such rule amendments are adopted, our no-action request be considered by the Division to provide for exemptions from the Clover Capital prohibition, as outlined above.
* * *
We greatly appreciate your meeting with us and giving consideration to our no-action request. If you have any questions or comments, please do not hesitate to contact me.
Robert L. Bunnen, Jr.
Assistant General Counsel
6 The types of client presentations typically made by a large investment adviser are on a one-on-one basis to institutional clients. The Institute also conducted a survey of approximately ten to fifteen percent of our small and medium-sized investment adviser members concerning their advertising behavior and techniques. The results of that survey indicate that our small and medium-sized investment adviser members communicate with prospective clients primarily, if not exclusively, through one-on-one presentations. In fact, not one of the members we contacted states that it has advertised in any newspaper, magazine or trade journal.
7 Other consultants calculate performance by advisers using certain documents required to be filed with the SEC (Such as Form 13F filings) and other sources. Still others monitor performance through a combination of data provided by the adviser and information provided by the adviser's and consultant's client.
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