SEC Staff No-Action Letter, United Missouri Bank of Kansas City, N.A.
Pub. Avail. January 23, 1995
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
January 23, 1995
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Our Ref. No. 92-577-CC
United Missouri Bank of Kansas City, n.a.
File No. 132-3
By letter dated January 23, 1995, you asked the staff to modify the no-action relief provided in United Missouri Bank of Kansas City, n.a. (pub. avail. May 11, 1990) ("Prior Letter"). In that letter, the Division of Investment Management stated that it would not recommend that the Commission take any enforcement action if discretionary investment management accounts for which United Missouri Bank of Kansas City, n.a. ("UMB") provided custodial and recordkeeping services were not registered under the Investment Company Act of 1940 ("1940 Act").1 As described in the Prior Letter, UMB holds clients' securities in nominee name. You state that the discretionary investment management program currently does not make available investment company shares for purchase or sale.2 One of the investment advisers who participates in the program now wants to recommend that its clients invest in shares of investment companies. Accordingly, UMB requests that the staff modify the Prior Letter to permit UMB to hold investment company shares in nominee name.
You state that UMB would reduce custodial costs and improve service by maintaining an omnibus account with each investment company whose shares would be available for purchase through the program. UMB would separately maintain records indicating the beneficial ownership of each client. Clients would retain all indicia of ownership of their investment company shares. Specifically, (1) clients would receive confirmations of each transaction, monthly account statements, and quarterly performance reports; (2) UMB would ensure that clients receive prospectuses and periodic reports; (3) UMB would ensure that clients receive proxy statements in a timely fashion and would be able to vote their shares; and (4) clients would be able to terminate their account(s) at any time and liquidate their holdings.
In Balliet, Blackstock & Stearns, Inc. (pub. avail. Aug. 19, 1987) ("Balliet"), the staff took the view that holding investment company shares in nominee name suggested a pooling, and when coupled with investment discretion and the offering of substantially similar investment advice, it suggested the functional equivalent of a fund of funds.3 You state that UMB's situation is distinguishable from that in Balliet because UMB is an independent third-party custodian and does not have investment discretion with respect to the clients' accounts.
We have reconsidered the Balliet letter, and have determined that the position taken in that letter regarding the holding of investment company shares in nominee name no longer represents the views of the Division. Therefore, we would not consider a discretionary investment management program that makes available for purchase investment company shares to be an investment company solely because those shares are held in nominee name. Our position is based on our acknowledgement that nominee name arrangements generally are administrative mechanisms for recording and facilitating transfer of ownership, and on the Commission's policy of encouraging the holding of securities in nominee name to promote the establishment of centralized clearance and settlement systems and the elimination of certificated securities.4 Further, we believe that this position applies to any discretionary investment management program regardless of which entity holds the investment company shares in nominee name.
Accordingly, we would not recommend enforcement action to the Commission if UMB modifies the arrangement described in the Prior Letter to include the purchase and sale of investment company shares, provided that the arrangement is otherwise operated in accordance with your January 23, 1995 letter and the Prior Letter.
The Division of Corporation Finance has asked us to inform you that, based on the facts presented in the January 23, 1995 letter and the Prior Letter, it would not recommend enforcement action to the Commission if UMB, in reliance on your opinion of counsel that registration is not required, offers the accounts and services described in your letters without compliance with the registration provisions of the Securities Act of 1933.
Jana N. Cayne
1 The Division of Corporation Finance also stated that it would not recommend enforcement action to the Commission if UMB offered the accounts and services as described without registration under the Securities Act of 1933.
2 The only exception is that program clients are permitted to direct their cash balances to be invested in money market funds.
3 The staff subsequently has granted no-action relief to discretionary investment management programs that offer for purchase investment company shares only if the shares are held directly in each client's name. See WestAmerica Investment Company (pub. avail. Nov. 26, 1991); Rushmore Investment Advisers, Ltd. (pub. avail. Feb. 1, 1991).
4 See Final Report of the Securities and Exchange Commission on the Practice of Recording the Ownership of Securities in the Records of the Issuer in Other Than the Name of the Beneficial Owner of Such Securities (December 3, 1976).
WATSON & MARSHALL L.C., ATTORNEYS AT LAW
1010 Grand Avenue
Kansas City, Missouri 64106-2271
January 23, 1995
Jack W. Murphy, Esq.
Washington, D.C. 20549-1004
Office of Chief Counsel
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, Stop 5-2
1940 Act/ Section 3(a)
Re: Ref. No. 89-733-CC
UMB Bank, N.A., formerly known as United Missouri Bank of Kansas City, N.A., File No. 132-3: Requested Amendment
We represent UMB Bank, N.A., formerly known as United Missouri Bank of Kansas City, N.A.., ("UMB"). By letter dated May 11, 1990, the staff of the Divisions of Investment Management and Corporation Finance (the "Divisions") granted certain no-action assurance to UMB with respect to the offering of discretionary investment management accounts, as described more fully in that letter (the "UMB Letter"), without registration of such accounts and the related services under the Investment Company Act of 1940, as amended (the "1940 Act") and without registration of the accounts under the Securities Act of 1933, as amended (the "1933 Act").
On behalf of UMB, we respectfully request a limited amendment of the UMB Letter. To expedite consideration of this request, we have not reiterated herein the information contained in the UMB Letter, but instead attach that letter as Exhibit A hereto and incorporate it herein by reference.5 (We are not unmindful of the fact that in the past applicants have been required to restate in their entirety, no-action letters as to which amendments or clarifications were sought. We ask, however, that you reconsider that approach in this circumstance — a specific, unambiguous and limited amendment -- in the interest of efficiency and economy for your staff and our client.)
Request and Background
The amendment requested hereby is simply that condition (7) of the UMB Letter, appearing on Page 9 thereof, be deleted. That condition states:
Except with respect to the investment of cash balances in client accounts in shares of a money market fund chosen by each client (as more fully described in your letter), the arrangement will not involve recommendations concerning, or the purchase and sale of, shares of investment companies.
The reason for requesting this amendment is that one of the Advisers participating in the program which is the subject of the UMB Letter would like to make available shares of investment companies as investment opportunities for participants in that program.
The description of UMB's services in connection with this program is set forth in Exhibit A. With respect to this amendment request, the following information is offered to supplement and clarify such description:
As custodian, to reduce costs and facilitate expedited service, UMB would maintain an omnibus account at each investment company whose shares would be purchased by clients of the program, but would separately maintain records indicating the beneficial ownership of each client. UMB would take the following steps to ensure that clients retained all indicia of ownership of their investment company shares:
1) Clients would receive transaction by transaction confirmations of each transaction, monthly statements of account and quarterly performance reports, all as described in Exhibit A;
2) UMB would ensure that clients receive the periodic reports to shareholders for each investment company in which the client has an interest;
3) UMB would ensure that clients receive proxy statements in a timely fashion. Neither UMB nor any Adviser would vote client proxies that are not returned to the respective fund by clients;
4) As indicated in Exhibit A, clients could terminate their Account at any time and upon termination, the client could request and obtain liquidation of his or her portfolio or delivery of securities.
We believe that under the facts and circumstances presented, and in light of the prior positions taken by the staff, amendment of the UMB Letter to delete the condition referred to above is not materially inconsistent with the policies expressed and implicit in that letter. We therefore respectfully request that you consent to such an amendment and confirm that this change in the program would not change the "no-action" position stated in the UMB Letter.
The Balliet letter6 is the seminal no-action letter with respect to the offering of mutual fund shares in a discretionary asset management service. In that letter, the staff of the Divisions declined to take a no-action position with respect to the use by an advisory firm of nominee accounts with various mutual funds as discretionary vehicles for the firm's clients where the advisory firm, acting as custodian, also would hold client securities in nominee name. The Balliet letter has spawned a long line of no-action letters in which the applicants successfully distinguished the Balliet letter on one of two bases:
1) The investment adviser had discretionary authority; however, mutual fund shares would not be held in nominee name;7
2) Mutual fund shares were to be held in nominee name; however, the investment adviser would not have discretionary authority.8
It is our view that the offering of investment company shares by the Advisers in the UMB program, who have discretionary authority over the Accounts, is not inconsistent with Balliet and the other letters cited, and does not raise the "fund of funds" concerns that prompted the enactment of the 1970 amendments to Section 12(d)(1) of the 1940 Act so long as the shares are held in nominee name by UMB, an independent third-party custodian, and UMB has no discretion over assets in the Account.
Unlike the Balliet letter, in which the same party that exercised discretion (the adviser) also maintained nominee accounts at various mutual fund complexes, in the UMB situation these functions will be divided between two independent parties. Under no circumstances will participating Advisers hold customers' funds or securities and under no circumstances will UMB have any discretionary authority over any assets in the Account. UMB will hold shares in nominee name solely for administrative purposes. Except for its agreement with the Advisers to provide recordkeeping and custodial services for the Accounts, UMB is not otherwise affiliated with any Adviser.
Perhaps more importantly, the UMB arrangement does not raise any of the concerns that prompted the enactment of the 1970 amendments to Section 12(d)(1) of the 1940 Act. In summary, those concerns were:
1) the acquisition of voting control of the investment adviser;
2) undue influence over portfolio management through the threat of large scale redemptions and loss of advisory fees to the adviser and the disruption of orderly management of the investment company through the maintenance of large cash balances to meet potential redemptions;9
3) structural complexity which makes it difficult for the shareholder to appraise the true value of his security; and
4) duplication of sales charges and advisory fees and administrative costs.10
The proposed arrangement does not raise the first and second concerns because neither UMB nor any Adviser will have the authority to vote fund shares and therefore will not have the ability to influence portfolio management. "Structural complexity" is not a concern because shareholders will receive appropriate disclosures and will receive prospectuses, shareholder reports and proxy materials of each fund. There will be no duplication of costs because the Advisers do not charge sales fees and the fees paid to the Advisers will be for separate, value-added functions -- the selection and timing of mutual fund investments.
Based on the foregoing, we respectfully request that the staff confirm it would not recommend any enforcement action to the Commission if UMB were to proceed under the UMB Letter, amended as described herein to delete the restrictions on the purchase and sale of shares of investment companies.
Please call the undersigned if you have any questions regarding this request.
Very truly yours,
John F. Marvin
5 Capitalized terms used and not defined herein are intended to have the meaning ascribed to them in the UMB Letter.
6 Balliet, Blackstock & Stearns, Incorporated (publicly available August 19, 1987).
7 See, e.g., Rushmore Investment Advisors, Limited (publicly available February 1, 1991); Manning & Napier Advisors, Incorporated (publicly available April 24, 1990); Strategic Advisers, Incorporated (publicly available December 13, 1988); Scudder Fund Management Service (publicly available August 17, 1988).
8 See e.g., Atlantic Bank of New York (publicly available June 7, 1991).
9 See, Phoenix Series Fund (publicly available October 28, 1991). Arguably, any adviser that has discretion over a large number of accounts has the ability to effect large scale redemptions. The fact that shares are held in an omnibus account by a third party custodian does not increase this concern.
10 The 1970 amendments to the 1940 Act, among other things, responded to concerns about the mutual fund industry raised by the Commission in its 1966 report, Public Policy Implications of Investment Company Growth (reprinted in H.R.Rep. No. 2337, 89th Cong., 2d Sess. 314-24 (1966). House Comm. on Interstate & Foreign Commerce, Investment Company Amendments of 1970, H.R.Rep. No. 1382, 91st Cong., 2d Sess. 2-3 & 10-11.