Investment Adviser Act of 1940 - Rule 202(a)(11)-1
Application of Rule 202(a)(11)-1 to a Broker-Dealer's Exercise of Investment Discretion over Cash Management Accounts
September 29, 2005
By Facsimile and U.S. Mail
Arthur W. Hahn, Esq.
Dear Mr. Hahn:
In your letter dated August 25, 2005, on behalf of your client, UBS Financial Services, Inc. ("UBSFS"), you request that we confirm your view that the investment discretion granted by a customer to UBSFS for the cash management program described in your letter constitutes "temporary or limited" discretion within the meaning of rule 202(a)(11)-1(d) under the Investment Advisers Act of 1940 ("Advisers Act"), and that the customer accounts in the program may continue to be treated as brokerage accounts and not advisory accounts.
The Advisers Act regulates the activities of certain "investment advisers," as that term is defined in section 202(a)(11). Section 202(a)(11)(C) of the Advisers Act excepts from the definition a broker or dealer whose performance of advisory services is "solely incidental" to its brokerage business and for which it receives no special compensation. Rule 202(a)(11)-1 provides, among other things, that a broker or dealer registered with the Commission provides advisory services that are not "solely incidental" if the broker or dealer exercises investment discretion over a customer account.
The basis for your request is rule 202(a)(11)-1(d), which defines "investment discretion" for purposes of the rule and excludes investment discretion granted by a customer on a temporary or limited basis. As you discuss in your letter, the Commission provided several examples of temporary or limited discretion in its release adopting the rule. You note specifically that the Commission stated in that release that a broker-dealer's investment discretion would be temporary or limited when the investment discretion is given as to cash management, such as to exchange a position in a money market fund for another money market fund or cash equivalent. You argue that the release's example of exchanges between cash equivalents is not exclusive, and does not exclude other discretionary cash management arrangements from the exclusion for temporary or limited discretion.
You state that UBFSF has a cash management service that UBSFS provides to institutional customers only. The discretion granted to UBFSF by these institutional customers is limited in the following ways. The customer's board of directors or authorized senior management set forth written restrictions and requirements concerning the trading and handling of the accounts. These restrictions and requirements can be modified upon instruction from the customer. Pursuant to the written guidelines, discretionary trading in each customer's account is limited to fixed-income and similar instruments, such as U.S. Treasury securities, municipal securities, debt securities, debt obligations issued by U.S. federal agencies or U.S. government sponsored enterprises, interests in money market funds, investment grade corporate debt, commercial paper, variable rate demand obligations, auction rate certificates, auction preferred stock, repurchase and reverse repurchase transactions and certificates of deposits. The fixed income and auction rate preferred securities purchased for a customer account in the cash management program would bear credit ratings of A1/P1 or higher for short-term investments and A2/A or higher for longer-term investments. These instruments would bear maturities of three years or less, and the weighted average maturity of a customer's account would not exceed eighteen months. You believe that the UBFSF cash management program constitutes "temporary or limited" discretion within the meaning of rule 202(a)(11)-1(d) under the Advisers Act, and that the customer accounts in the program may continue to be treated as brokerage accounts and not advisory accounts.
Based on the facts and representations in your letter, and without necessarily agreeing with your analysis, we are of the view that the UBSFS cash management program described in your letter would constitute "temporary or limited" discretion within the meaning of rule 202(a)(11)-1(d) under the Advisers Act, and that the customer accounts in the program may continue to be treated as brokerage accounts and not advisory accounts. Our position is based on the facts and representations in your letter, including your representations that UBSFS:
Our position is based on the facts and representations in your letter. You should note that any different facts or representations may require a different conclusion.
Robert E. Plaze