Investment Advisers Act of 1940 - Section 206(4) and Rule 206(4)-3
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
Our Ref. No. 200412101123
In your letter dated March 24, 2006, you request our assurance that we would not recommend enforcement action to the Commission against Ameriprise Financial Services, Inc. ("AFS") under section 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and rule 206(4)-3 thereunder if, in the context of certain mass-mailing solicitations described below, AFS delivers the Adviser's Brochure (defined below) at the initial in-person meetings with prospective clients as described in your letter.
You represent the following: AFS is a registered investment adviser that provides a wide variety of personal financial advisory services to individuals. In marketing AFS's financial advisory services, AFS proposes to enter into written agreements with third-party retailers or service providers ("retailers") to provide, for a fee, access to the retailers' customers ("customers").1 AFS, through a third-party vendor, will contact customers using certain mass mailings called the "co-branding letters." The co-branding letters will be sent to a target audience of customers. AFS will provide the criteria, such as age, marital status and income, to the third-party vendor who will use the criteria to produce the appropriate customer list. The third-party vendor will mail the co-branding letters to the customers.
AFS proposes to solicit customers through the following mass mailings:
- letters offering free financial planning information, such as retirement guides or money management workbooks ("financial planning information");
- letters offering free financial planning information and a free initial in-person meeting with AFS; and
- letters offering a free initial in-person meeting with AFS.
The co-branding letters will be signed by an AFS officer. Each co-branding letter will identify AFS and the retailer (e.g., the logos or names of AFS and the retailer will be included in the co-branding letter). AFS will be identified in the co-branding letters as a financial advisor or provider of financial services. The co-branding letters will not include detailed information on AFS and its services.2 You state that the co-branding letters may offer customers incentives for attending an in-person meeting with AFS, such as discounts or coupons for use at the retailer's business or frequent flyer miles ("incentives").3 In each of the co-branding letters, AFS will include the following disclosure, or substantially similar disclosure, to alert customers that AFS is compensating the retailer in connection with the solicitation (the "compensation disclosure"):
[Retailer] receives compensation from AFS for introducing AFS to its customers. [Retailer] is not providing your name or personal information to AFS. If you choose to meet with an AFS financial advisor, you will receive additional materials from AFS about how AFS's services may benefit you and about the compensation arrangement between [Retailer] and AFS. You should review these additional materials carefully before purchasing a financial advisory service.4
As disclosed in the compensation disclosure, AFS is not given customer names or addresses so AFS cannot directly contact customers. Customers are invited to reply to the co-branding letters by calling the third-party vendor at a toll-free number or returning a reply card to the third-party vendor.
If a reply card or in-bound phone call is received by the third-party vendor requesting the financial planning information, the third-party vendor will send to the customer the financial planning information, a Solicitor's Brochure (defined below), another co-branded cover letter and, in some cases, an offer for a free initial in-person meeting with AFS (with a reply card to the vendor and the vendor's toll-free number for responses). If a reply card or in-bound phone call requests a free initial in-person meeting, the third-party vendor will send to the customer a co-branded cover letter, financial planning information and a Solicitor's Brochure. In addition, the third-party vendor will provide the customer's name, address and phone number to AFS so that an AFS representative can call the customer directly to arrange the in-person meeting.5
Under the written agreement, AFS will compensate the retailer (e.g., pay a fee and/or pay all or a portion of the cost of the incentives) if, as a result of a co-branding letter, a customer responds to the AFS offer, meets with AFS or purchases an AFS financial advisory service. The details of the compensation arrangement vary from retailer to retailer; however, the fee paid by AFS to compensate the retailer in connection with the co-branding letters does not vary based on the amount of the customer's assets that are managed by AFS. In addition, AFS may pay the retailer for other services that do not directly relate to the co-branding letters, such as fees for AFS's advertising banners on the retailer's website.6
The retailers will have no direct involvement in the solicitation of their customers for AFS, other than: (1) providing the customer information to the third-party vendor; (2) having their logo or business identified in the co-branding letters and envelopes; and (3) honoring any incentives received by their customers for responding to the solicitations.
AFS has existing mass-mailing solicitation arrangements under which each customer who returns a reply card receives the Brochure Materials (defined below). You state that it is very expensive to print and mail those materials. You state that, under AFS's existing mass-mailing solicitation arrangements, many of the customers who receive the Brochure Materials do not become clients or must be given new copies of the Brochure Materials at the initial in-person meeting if the customer does not bring the Brochure Materials to the meeting. You estimate that out of 100,000 mass-mailing letters offering an in-person meeting, AFS receives approximately 600 responses, and between 75 and 120 persons attend an in-person meeting. With respect to mass-mailing solicitations offering financial planning information, you estimate that out of 100,000 mass-mailing letters, AFS receives 2,000 requests for the information and, from that number, between 90 and 100 customers attend an in-person meeting. Thus, AFS now sends approximately 2,600 copies of its Brochure Materials yet only 165 to 220 persons (or less than 8% of the customers who are sent the Brochure Materials) attend an in-person meeting with AFS.
AFS proposes in connection with the co-branding letters to deliver the Adviser's Brochure during the initial in-person meeting rather than with the co-branding letter or after the receipt of a reply card. AFS will deliver the Solicitor's Brochure with financial planning information requested by, or sent to, a customer (and the Adviser's Brochure at any initial in-person meeting). Customers who do not attend an initial in-person meeting would not receive the Adviser's Brochure. You are concerned that the delivery of the Adviser's Brochure and the Solicitor's Brochure in that manner may not be consistent with the requirements of rule 206(4)-3 under the Advisers Act for unaffiliated cash solicitation arrangements.
Rule 206(4)-3 under the Advisers Act makes it unlawful for any investment adviser that is required to be registered with the Commission to pay a cash fee to a person who solicits clients for the adviser unless, among other things, the investment adviser and the solictor enter into a written agreement requiring the solicitor to provide certain disclosure to prospective clients. Specifically, if an investment adviser offers personalized advisory services through an unaffiliated solicitor, the solicitor must provide the prospective client at the time of the solicitation with a copy of the adviser's brochure required by rule 204-3 under the Advisers Act (the "Adviser's Brochure") and a separate written statement required by paragraph (b) of rule 206(4)-3 (the "Solicitor's Brochure") describing the compensation arrangement between the adviser and the solicitor (collectively, the "Brochure Materials").7 With respect to unaffiliated solicitation arrangements, the Commission concluded that delivery, at the time of the solicitation, of the Brochure Materials, including the description of the terms of the compensation arrangement, would alert a prospective client to the solicitor's bias in recommending the investment adviser.
In the context of unaffiliated mass-mailing solicitations, the staff, however, has agreed not to recommend enforcement action to the Commission under section 206(4) of the Advisers Act and rule 206(4)-3 thereunder if (a) the mass-mailings disclose that a solicitation agreement exists between the adviser and the solicitor under which the adviser will compensate the solicitor and (b) the adviser delivers the Brochure Materials after receiving a reply card (rather than having the solicitor deliver the Brochure Materials at the time of the solicitation).9 As noted above, AFS would like to deliver the Adviser's Brochure at the time of any initial in-person meeting, rather than delivering it at the time of the solicitation or after receiving the reply card. AFS would deliver the Solicitor's Brochure with the financial planning information that is sent to a customer.
You contend that delivery of the Adviser's Brochure at the time of an initial in-person meeting and delivery of the Solicitor's Brochure to customers receiving the financial planning information would be consistent with the policies and purposes underlying rule 206(4)-3 under the Advisers Act. In particular, you contend that the co-branding letter with the compensation disclosure will alert a retailer's customers to a potential bias on the part of the retailer in recommending AFS (i.e., the retailer is compensated by AFS), at the time of the solicitation, and before the retailer's customers decide whether or not to seek additional information about AFS. You also argue that the identification of both AFS and the retailer in the co-branding letters, together with the compensation disclosure, emphasizes the relationship between the two entities and will ensure that the retailer's customers are aware of the retailer's bias at the time of the solicitation. You also contend that the co-branding letters are more akin to an advertisement by AFS than a solicitation by the retailer because the co-branding letters are signed by an AFS officer, are impersonal communications about AFS, and the retailer's customers have not previously indicated to the retailer any interest in personal advisory services. You also argue that the expense of printing and mailing the Brochure Materials to be sent with the reply card or after receipt of the reply card is unnecessarily burdensome in light of the unique nature of the co-branding letters.
Based upon the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against AFS under section 206(4) of the Advisers Act and rule 206(4)-3 thereunder if, in the context of the co-branding letters, AFS delivers the Adviser's Brochure at the initial in-person meetings with the customers as described in your letter.10 Because our position is based on all of the facts and representations made in your letter, you should note that any different facts or circumstances might require a different conclusion. Further, this position expresses our position only with respect to enforcement action, and does not express any legal conclusion on the issues presented.
Susan M. Olson
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