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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270 and 274
Release No. IC-22579; IA-1623; S7-24-95
RIN 3235-AG07
Status of Investment Advisory Programs under the Investment
Company Act of 1940
AGENCY: Securities and Exchange Commission.
ACTION: Final Rule.
SUMMARY: The Commission is adopting rule 3a-4 under the
Investment Company Act of 1940 to provide a nonexclusive safe
harbor from the definition of investment company for certain
programs under which investment advisory services are provided
on a discretionary basis to a large number of advisory clients
having relatively small amounts to invest. An investment
advisory program that is organized and operated in accordance
with the rule's provisions is not required to register as an
investment company under the Investment Company Act of 1940,
or to comply with the Act's requirements. In addition, such a
program is not subject to the registration requirement under
section 5 of the Securities Act of 1933.
EFFECTIVE DATE: [Insert date of publication in the FEDERAL
REGISTER].
FOR FURTHER INFORMATION CONTACT: Rochelle Kauffman Plesset,
Senior Counsel, (202) 942-0660, Office of Chief Counsel,
Division of Investment Management, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange
Commission ("Commission") is adopting rule 3a-4 under the
Investment Company Act of 1940 [15 U.S.C. 80a-1, et seq.]
("Investment Company Act"). Rule 3a-4 provides a nonexclusive
safe harbor from the definition of investment company for
certain programs under which investment advisory services are
provided to advisory clients ("investment advisory programs").
Table of Contents
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . .
I.BACKGROUND
II. DISCUSSION . . . . . . . . . . . . . . . . . . . . . .
A. Preliminary Matters . . . . . . . . . . . . . . .
B. Definitions
1. The Sponsor . . . . . . . . . . . . . . . .
2. Investment Advisory Program . . . . . . . .
C. Provisions Designed to Ensure that Each Client
Receives Individualized Treatment
1. Individualized Management of Client Accounts
2. Initial and Ongoing Client Contact . . . . .
3. Reasonable Management Restrictions . . . . .
4. Quarterly Account Statements . . . . . . . .
5. Minimum Account Size . . . . . . . . . . . .
D. Client Retention of Ownership of Securities . . .
1. Ability to Withdraw and Pledge Securities .
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2. Right to Vote Securities and Receive
Certain Documents as Securityholders . . . .
3. Right to Receive Trade Confirmations . . . .
4. Legal Rights as Securityholders . . . . . .
E. Policies and Procedures and Form N-3a4 . . . . .
F. Investment Advisers Act Issues Raised by
Investment Advisory Programs . . . . . . . . . .
III. COST/BENEFIT ANALYSIS . . . . . . . . . . . . . . . .
IV. PAPERWORK REDUCTION ACT . . . . . . . . . . . . . . .
V. FINAL REGULATORY FLEXIBILITY ANALYSIS . . . . . . . .
VI. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . .
VII. STATUTORY AUTHORITY . . . . . . . . . . . . . . . . .
TEXT OF RULE . . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE SUMMARY
The Commission is adopting rule 3a-4 under the Investment
Company Act to provide a nonexclusive safe harbor from the
definition of investment company for certain investment
advisory programs. These programs typically are designed by
investment advisers or other money managers seeking to provide
the same or similar professional portfolio management services
on a discretionary basis to a large number of advisory clients
having relatively small amounts to invest. Under rule 3a-4,
any investment advisory program organized and operated in
accordance with the rule's provisions is deemed not to be an
investment company within the meaning of the Investment
Company Act. In addition, a preliminary note to rule 3a-4
states that there is no registration requirement under section
5 of the Securities Act of 1933 ("Securities Act")-[1]-
-[1]- 15 U.S.C. 77a, et seq.
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with respect to investment advisory programs that are
organized and operated in compliance with the provisions of
the rule.
The rule provides that: (i) each client's account must be
managed on the basis of the client's financial situation and
investment objectives, and in accordance with any reasonable
restrictions imposed by the client on the management of the
account; (ii) the sponsor of the program must obtain
sufficient information from each client to be able to provide
individualized investment advice to the client; (iii) the
sponsor and portfolio manager must be reasonably available to
consult with each client; (iv) each client must have the
ability to impose reasonable restrictions on the management of
the client's account; (v) each client must be provided with a
quarterly account statement containing a description of all
activity in the client's account; and (vi) each client must
retain certain indicia of ownership of all securities and
funds in the account. The rule is intended to be a
nonexclusive safe harbor; a program that is not organized and
operated in a manner consistent with the rule does not
necessarily meet the Investment Company Act's definition of
investment company. The rule, as adopted, does not include
provisions regarding written policies and procedures, the
maintenance of records, or the filing of a form with the
Commission that were proposed for comment in 1995.
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I. BACKGROUND
In recent years, the number of investment advisory
programs that are designed to provide professional portfolio
management services on a discretionary basis to a large number
of clients has increased greatly. These programs historically
have been offered typically to clients who are investing
amounts of money less than the minimum investments for
individual accounts otherwise required by participating
investment advisers, but significantly more than the minimum
account sizes of most mutual funds.
These investment advisory programs typically are
organized and administered by a sponsor, which provides, or
arranges for the provision of, asset allocation advice and
administrative services.-[2]- In some programs, the
sponsor or its employees also provide portfolio management
services, including the selection of particular securities, to
the program's clients. In other programs, the sponsor
selects, or provides advice to clients regarding the selection
of, another investment adviser (which may or may not be
affiliated with the sponsor) to act as the client's portfolio
-[2]- The sponsor often is a money management firm, a
broker-dealer, a mutual fund adviser or, in
some instances, a bank. See, e.g., Wall Street
Preferred Money Managers, Inc. (pub. avail.
Apr. 10, 1992) (broker-dealer); United Missouri
Bank of Kansas City, n.a. (pub. avail. May 11,
1990, as modified Jan. 23, 1995) (bank);
Strategic Advisers Inc. (pub. avail. Dec. 13,
1988) (mutual fund adviser). The sponsor or
one of its affiliates also may execute some or
all of the transactions for client accounts.
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manager.-[3]- In these programs, the sponsor generally
is responsible for the ongoing monitoring of the management of
the account by the manager or managers selected. The sponsor,
rather than the portfolio manager, often serves as the primary
contact for the client in connection with the
program.-[4]- Sponsors and portfolio managers usually
meet the definition of "investment adviser" under the
Investment Advisers Act of 1940 ("Advisers Act"),-[5]-
-[3]- More than one portfolio manager may manage the
client's assets, depending on the program, the
client's investment objectives, and the size of
the client's account. See, e.g., Rauscher
Pierce Refsnes, Inc. (pub. avail. Apr. 10,
1992); Wall Street Preferred Money Managers,
Inc., supra note 2; Westfield Consultants Group
(pub. avail. Dec. 13, 1991).
-[4]- Some investment advisory programs, however, are
marketed by the sponsor through unaffiliated
investment advisers, such as financial
planners. In some of these programs, the
unaffiliated investment adviser, rather than
the sponsor, may serve as the primary contact
for its clients that participate in the
program. See, e.g., Westfield Consultants
Group, supra note 3.
-[5]- 15 U.S.C. 80b-1, et seq. Section 202(a)(11) of
the Advisers Act (15 U.S.C. 80b-2(a)(11))
defines "investment adviser" as "any person
who, for compensation, engages in the business
of advising others, either directly or through
publications or writings, as to the value of
securities or as to the advisability of
investing in, purchasing, or selling
securities, or who, for compensation and as
part of a regular business, issues or
promulgates analyses or reports concerning
securities . . . ." A bank generally is
excepted from the definition of investment
adviser under Section 202(a)(11)(A) of the
Advisers Act. A broker-dealer that sponsors an
(continued...)
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and may be required to register under that Act.-[6]-
Included among investment advisory programs developed in the
recent past are those commonly referred to as "wrap fee
programs." In a wrap fee program, the client typically is
provided with portfolio management, execution of transactions,
asset allocation, and administrative services for a single fee
-[5]-(...continued)
investment advisory program generally cannot
rely on the broker-dealer exception from the
definition of investment adviser in Section
202(a)(11)(C) of the Advisers Act. See, e.g.,
Status of Investment Advisory Programs under
the Investment Company Act, Investment Company
Act Release No. 21260 (July 27, 1995), 60 FR
39574 (Aug. 2, 1995) ("July Release"); National
Regulatory Services, Inc. (pub. avail.
Dec. 2, 1992).
-[6]- The National Securities Markets Improvement Act
of 1996 (Pub. L. No. 104-290) amended the
Advisers Act to provide that certain investment
advisers will be subject primarily to the
supervision of the Commission, while other
advisers will be subject primarily to state
regulation. Effective April 9, 1997, if an
investment adviser is regulated or required to
be regulated as an investment adviser in the
state in which it maintains its principal
office and place of business, it may not
register with the Commission unless (1) it has
assets under management of $25 million or more,
or (2) it advises a registered investment
company. Proposed rules published for comment
by the Commission would reallocate regulatory
responsibilities for investment advisers
between the Commission and the states. Rules
Implementing Amendments to the Investment
Advisers Act of 1940, Investment Advisers Act
Release No. 1601 (Dec. 18, 1996), 61 FR 68480
(Dec. 27, 1996).
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based on the size of the account.-[7]- At year-end 1995,
assets in wrap fee programs totaled approximately $101.6
billion, an increase of over 30 percent in one year.-[8]-
Under wrap fee and other investment advisory programs, a
client's account typically is managed on a discretionary basis
in accordance with pre-selected investment objectives.
Clients with similar investment objectives often receive the
same investment advice and may hold the same or substantially
the same securities in their accounts. In light of this
similarity of management, some of these investment advisory
programs may meet the definition of investment company under
the Investment Company Act, and may be issuing securities for
purposes of the Securities Act.-[9]-
-[7]- See paragraph (g)(4) of rule 204-3 under the
Advisers Act (17 CFR 275.204-3(g)(4)) (defining
wrap fee program for purposes of wrap fee
brochure requirement).
-[8]- Cerulli Associates, Inc. and Lipper Analytical
Services, Inc., THE CERULLI-LIPPER ANALYTICAL
REPORT: STATE OF THE WRAP ACCOUNT INDUSTRY 5
(1996). These
figures include assets in mutual fund wrap programs, also
called mutual fund asset allocation programs. Unlike
traditional wrap fee programs, mutual fund wrap programs
contemplate that a client's assets are allocated only
among specified mutual funds. Assets in mutual fund wrap
programs represented 19% of total assets in wrap fee
programs at year-end 1995. Id. at 7.
-[9]- For a detailed discussion of why an investment
advisory program may meet the definition of
investment company and may be deemed to be
issuing securities, see July Release, supra
note 5, at Section I. See also In the Matter
(continued...)
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In 1980, the Commission sought to address certain issues
presented by investment advisory programs by proposing rule
3a-4 under the Investment Company Act, which would have
provided a safe harbor from the definition of investment
company for investment advisory programs operating in the
manner described in the rule.-[10]- Commenters
generally opposed the proposed rule, and it was never
adopted.-[11]- After this proposal, however, the
Commission's Division of Investment Management ("Division")
received numerous requests for assurance that it would not
recommend enforcement action with respect to investment
advisory programs if they operated without registering under
the Investment Company Act. In response to these requests,
the staff issued a series of no-action letters describing
-[9]-(...continued)
of Clarke Lanzen Skalla Investment Firm, Inc.,
Investment Company Act Release No. 21140 (June
16, 1995); SEC v. First National City Bank,
Litigation Release No. 4534 [1969-1970 Transfer
Binder] Fed. Sec. L. Rep. (CCH) 92,592 (Feb.
6, 1970).
-[10]- Individualized Investment Management Services,
Investment Company Act Release No. 11391 (Oct.
10, 1980), 45 FR 69479 (Oct. 21, 1980) ("1980
Release"). The 1980 Release also stated that
the Commission's Division of Corporation
Finance had indicated that if rule 3a-4 were
adopted, that Division would not recommend that
the Commission take enforcement action if
interests in an investment advisory program
operated in accordance with the proposed rule's
requirements were not registered under the
Securities Act. Id. at n.15.
-[11]- See July Release, supra note 5, at n.20 and
accompanying text.
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investment advisory programs that would not be deemed
investment companies for purposes of the Investment Company
Act.-[12]- Many, if not most, of the programs described
in the no-action letters met the terms specified in the
proposed rule.
On July 27, 1995, the Commission proposed for comment a
revised version of rule 3a-4 ("revised proposed rule 3a-4" or
"revised proposed rule," proposed for comment in the "July
Release").-[13]- The objective of the revised proposed
rule was to clarify the Commission's views regarding the
status of investment advisory programs under the federal
securities laws by describing certain basic attributes of an
investment advisory program that differ from those of an
investment company that is required to register under the
Investment Company Act.-[14]- The revised proposed rule
-[12]- See, e.g., Benson White & Company (pub. avail.
June 14, 1995); Wall Street Preferred Money
Managers, Inc., supra note 2; Rauscher Pierce
Refsnes, Inc., supra note 3; Westfield
Consultants Group, supra note 3; WestAmerican
Investment Company (pub. avail. Nov. 26, 1991);
Rushmore Investment Advisers, Ltd. (pub. avail.
Feb. 1, 1991); Qualivest Capital Management,
Inc. (pub. avail. July 30, 1990); United
Missouri Bank of Kansas City, n.a., supra note
2; Manning & Napier Advisors, Inc. (pub. avail.
Apr. 24, 1990); Jeffries & Company (pub. avail.
June 16, 1989); Strategic Advisers, Inc., supra
note 2; Scudder Fund Management Service (pub.
avail. Aug. 17, 1988); Shearson/American
Express, Inc. (pub. avail. July 13, 1983);
Paley & Ganz, Inc. (pub. avail. Dec. 6, 1982).
-[13]- July Release, supra note 5.
-[14]- July Release, supra note 5, at Section I.
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was based largely on the provisions of the rule as originally
proposed, as modified and explained in the subsequent no-
action letters, but also required the creation and maintenance
of certain documents and records. Like the original proposal,
revised proposed rule 3a-4 would have provided a nonexclusive
safe harbor from the definition of investment company for
investment advisory programs that are organized and operated
in the manner described in the rule.-[15]-
The Commission received comments on the revised proposed
rule from 28 commenters, including three law firms, eight
professional and trade associations, and 17 financial firms
(i.e., brokers, banks, investment advisers and
others).-[16]- Commenters generally expressed support
for the Commission's goal of providing a nonexclusive safe
harbor from the definition of investment company for certain
investment advisory programs. A number of commenters,
however, raised concerns about particular aspects of the rule.
Many of these comments are discussed in more detail
below.-[17]-
-[15]- The Note to the revised proposed rule stated
that interests in investment advisory programs
organized and operated in compliance with the
rule would not be required to be registered
under the Securities Act. See July Release,
supra note 5, at n.26 and accompanying text;
Note to revised proposed rule 3a-4.
-[16]- The comment letters and a summary of the
comments prepared by the Commission staff are
included in File No. S7-24-95.
-[17]- See infra Section II.E.
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II. DISCUSSION
The Commission is adopting rule 3a-4 under the Investment
Company Act. Like the proposed and revised proposed rules,
rule 3a-4 provides a nonexclusive safe harbor from the
definition of investment company for investment advisory
programs that are organized and operated in the manner
described in the rule. The rule's provisions have the effect
of ensuring that clients in a program relying on the rule
receive individualized treatment, including the opportunity to
place investment restrictions on the management of their
accounts and the right to receive disclosure documents in
connection with securities held in their accounts. Moreover,
if an advisory program were operated by an investment adviser
registered under the Advisers Act, clients of the program
would receive the protections of that Act. The safe harbor
thus is designed to provide an exemption for certain
investment advisory programs without undermining the
protection of investors who participate in those programs.
A. Preliminary Matters
Several commenters supporting the goals underlying rule
3a-4 asked the Commission to clarify the scope of the rule.
Two commenters, for example, asked the Commission to clarify
that investment advisory programs that contemplate advisers
not having investment discretion over their clients' assets
generally do not need the safe harbor to avoid investment
company status. The Commission notes that rule 3a-4 is
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intended to provide a safe harbor for discretionary investment
advisory programs. A nondiscretionary program (i.e., one in
which the investor has the authority to accept or reject each
recommendation to purchase or sell a security made by the
portfolio manager, and exercises judgment with respect to such
recommendations), generally will not meet the definition of
investment company under the Investment Company Act or issue
securities that are required to be registered under Section 5
of the Securities Act, regardless of whether the program is
operated in accordance with the provisions of rule 3a-
4.-[18]-
One commenter asked the Commission to clarify that a
program's failure to operate in a manner consistent with every
provision of the rule would not preclude the program from
relying on the safe harbor. The rule sets forth circumstances
under which an investment advisory program will not be
considered an investment company, and a program that is not
organized and operated in accordance with the rule's
provisions cannot rely on the safe harbor. The safe harbor
provided by the rule, however, is designed to be nonexclusive.
Failure to operate in the manner described in rule 3a-4 does
not necessarily indicate that a program is an investment
-[18]- Whether a program is nondiscretionary is
inherently a factual determination. A program
designated as "nondiscretionary" in which the
client follows each and every recommendation of
the adviser may raise a question whether the
program in fact is nondiscretionary.
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company. Whether a program that operates outside of rule 3a-4
is an investment company is a factual determination and
depends on whether the program is an issuer of securities
under the Investment Company Act and the Securities
Act.-[19]-
Commenters suggested that, rather than addressing the
status of investment advisory programs under the Securities
Act in a note to rule 3a-4, the rule itself should provide
that interests in the programs do not constitute "securities"
within the meaning of the Securities Act.-[20]- While
-[19]- In the July Release, the Commission noted that
an investment advisory program could be
considered to be an issuer because the client
accounts in the program, taken together, could
be considered to be an organized group of
persons. See July Release, supra note 5, at
nn.11-15 and accompanying text; see also
ADVISORY COMMITTEE ON INVESTMENT MANAGEMENT
SERVICES FOR INDIVIDUAL INVESTORS: SMALL
ACCOUNT INVESTMENT MANAGEMENT SERVICES at 23
(Jan. 1973) ("An investment service which is
operated on a discretionary basis and does not
afford investors individual attention would
appear to be offering an investment contract or
security, if substantially the same investment
advice is given to all clients or to
discernable groups of clients. . . .")
-[20]- In letters issued by the Division of Investment
Management granting no-action assurances to
investment advisory programs, the Division of
Corporation Finance also gave assurances that
it would not recommend enforcement action to
the Commission if the requestor relied on an
opinion of counsel stating that interests in
the investment advisory program were not
"securities" within the meaning of the
Securities Act. See, e.g., Morgan Keegan &
Company, Inc., supra note 12; Westfield
Consultants Group, supra note 3; Rauscher
Pierce Refsnes, Inc., supra note 3.
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the Commission has not revised the rule in this regard, it has
revised the Note so that it does not imply that investment
advisory programs organized and operated in accordance with
the rule may result in the issuance of securities under the
Securities Act.-[21]-
The Commission noted in the July Release that the
adoption of rule 3a-4 would not affect the status of no-action
letters previously issued by the Division with respect to
investment advisory programs. Therefore, investment advisory
programs operated in a manner consistent with those letters
would continue not to be required to register under the
Investment Company Act, and interests in the programs would
not be required to be registered as securities under the
Securities Act. The Commission also stated in the July
Release that the Division, as a general matter, would not
consider requests for no-action or exemptive relief with
respect to programs that do not rely on the rule.-[22]-
In making this statement, the Commission sought to indicate
that in the future, the staff ordinarily will not respond to
no-action requests or support applications for exemptive
relief regarding investment advisory programs that are similar
to those programs that have been the subject of the no-action
-[21]- The Note to rule 3a-4 states, in part, that
there is no registration requirement under
section 5 of the Securities Act with respect to
programs that are organized and operated in the
manner described in the rule.
-[22]- July Release, supra note 5, at n.27.
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letters issued by the Division, but that are not operated in
accordance with all the provisions of rule 3a-4. The staff,
however, will in the future consider requests raising
interpretive issues under rule 3a-4, and will continue to
entertain no-action requests with respect to programs that
raise unique or novel issues.-[23]-
B. Definitions
1. The Sponsor
A number of the terms of the revised proposed rule
provided that the "sponsor" of a program or another person
designated by the sponsor must perform the duties and
responsibilities set forth in the rule. Under paragraph (b)
of revised proposed rule 3a-4, "sponsor" would have been
defined as any person who receives compensation for
sponsoring, organizing or administering the program, or for
selecting, or providing advice to clients regarding the
selection of, persons responsible for managing the client's
account in the program. Revised proposed rule 3a-4 would have
provided that, if a program had more than one sponsor, one
person would need to be designated as the principal sponsor,
and that person would be responsible for carrying out the
-[23]- The staff previously has indicated that it will
no longer entertain requests for no-action
relief regarding investment advisory programs
unless they present novel or unusual issues.
See, e.g., Wall Street Preferred Money
Managers, Inc., supra note 2.
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sponsor's duties and responsibilities under the
rule.-[24]- The July Release noted that this definition
and approach was the same as that used in paragraph (f) of
rule 204-3 under the Advisers Act, which sets forth a separate
brochure requirement for sponsors of wrap fee
programs.-[25]-
Some commenters were critical of the broad scope of the
proposed definition of sponsor, noting that a program could
have multiple sponsors under the definition, and asserting
that the existence of multiple sponsors would serve no purpose
in assuring that clients in a program receive individualized
management services or that the program operates in the manner
specified in the rule. One commenter suggested that the
definition should be modified to reach only the manager that
sponsors the program and participates in the management of the
client's investment portfolio (or selects another person
designated to perform such management services). The
Commission notes that the structure of programs may vary
-[24]- July Release, supra note 5, at Section II.A.1.
-[25]- The sponsor of an investment advisory program
usually is an investment adviser under Section
202(a)(11) of the Advisers Act, and may be
required to register under the Act. See July
Release, supra note 5, at nn.5-8 and
accompanying text and note 6 of this Release.
Nonetheless, the rule is available to any
investment advisory program, regardless of
whether the sponsor is excepted from the
definition of investment adviser (e.g., a
bank), or is required to be registered under
the Act.
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widely, and that the broad definition of the term sponsor is
intended to anticipate such variations and to provide persons
involved in a program with the flexibility to designate the
person in the best position to fulfill the rule's provisions.
The Commission thus has determined to adopt the definition as
proposed in order to preserve this flexibility.-[26]-
2. Investment Advisory Program
The safe harbor described in revised proposed rule 3a-4
would have been available to a "program under which investment
advisory services are provided to clients." The revised
proposed rule, however, did not specifically define the term
"program." Certain commenters requested that the Commission
provide further guidance as to what constitutes a program.
The Commission notes that the use of the term "program" in the
rule is intended to describe the types of advisory services
that potentially could be subject to the Investment Company
Act and the Securities Act. The Commission does not believe
that it is necessary or advisable to include a definition of
program in the rule, because such a definition could result
inadvertently in the exclusion from the scope of the rule of
an entity that otherwise would be entitled to rely on it.
-[26]- Paragraph (b) of rule 3a-4, as adopted.
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C. Provisions Designed to Ensure that Each Client
Receives Individualized Treatment
Revised proposed rule 3a-4 contained four provisions
relating to the individualized treatment received by clients
in investment advisory programs covered by the rule. The July
Release stated that these provisions were based on the terms
of rule 3a-4 as originally proposed, as those provisions were
applied in the no-action letters.-[27]- The rule as
adopted includes these four provisions, with certain
modifications discussed below.
1. Individualized Management of Client Accounts
Paragraph (a)(1) of the revised proposed rule provided
that a client's account must be managed on the basis of the
client's financial situation, investment objectives and
instructions. The July Release noted that this provision was
designed to delineate a key difference between clients of
investment advisers and investors in investment companies. A
client of an investment adviser typically is provided with
individualized advice that is based on the client's financial
situation and investment objectives. In contrast, the
investment adviser of an investment company need not consider
the individual needs of the company's shareholders when making
investment decisions, and thus has no obligation to ensure
that each security purchased for the company's portfolio is an
-[27]- July Release, supra note 5, at Section II.A.2.
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appropriate investment for each shareholder.-[28]- The
Commission is adopting paragraph (a)(1) without substantive
modification.-[29]-
In the July Release, the Commission noted that clients of
an investment advisory program with similar investment
objectives may hold substantially the same securities in their
accounts in accordance with a portfolio manager's model, and
that this does not necessarily indicate that clients in the
program have not received individualized treatment for
purposes of the rule.-[30]- The Commission is
-[28]- July Release, supra note 5, at Section
II.A.2.i.
-[29]- As noted above, paragraph (a)(1) of the revised
proposed rule provided that a client's account
must be managed on the basis of the client's
financial situation, investment objectives and
instructions (emphasis added). The Commission
has determined that individualized treatment
does not require that the client be entitled to
give instructions to the adviser with respect
to the management of the account other than
those reasonable restrictions referenced in
paragraph (a)(3). Therefore, the Commission
has clarified the rule text by replacing the
word "instructions" with the word
"restrictions." Nonetheless, the rule
contemplates that a client's investment
objective will be formulated with appropriate
input from the client regarding the client's
financial goals and risk tolerance.
-[30]- July Release, supra note 5, at n.34 and
accompanying text.
==========================================START OF PAGE 20======
reaffirming this position in connection with the adopted
rule.-[31]-
The Commission also stated in the July Release that it
would not be necessary under the rule for a portfolio manager
to make separate determinations regarding the appropriateness
of each transaction for each client prior to effecting the
transaction. One commenter supporting the Commission's
position with respect to model portfolios nonetheless urged
the Commission to require the sponsor or program manager
specifically to evaluate the suitability of each transaction
for each client. This commenter maintained that, without such
individualized determinations, clients of an investment
advisory program would not receive individualized advice.
Investment advisers under the Advisers Act owe their
clients the duty to provide only suitable investment advice,
whether or not the advice is provided to clients through an
investment advisory program.-[32]- To fulfill this
-[31]- As indicated in the July Release, this position
is consistent with no-action letters issued
concerning programs that allocate client assets
in accordance with computerized investment
models. July Release, supra note 5, at n.34
and accompanying text; see, e.g., Qualivest
Capital Management Inc., supra note 12 (sponsor
proposed to use computerized investment
allocation model to allocate client assets
among money managers).
-[32]- See Suitability of Investment Advice Provided
by Investment Advisers: Custodial Account
Statements for Certain Advisory Clients,
Investment Advisers Act Release No. 1406 (Mar.
16, 1994), 59 FR 13464 (Mar. 22, 1994) at nn.2-
(continued...)
==========================================START OF PAGE 21======
suitability obligation, an investment adviser must make a
reasonable determination that the investment advice provided
is suitable for the client based on the client's financial
situation and investment objectives. The adviser's use of a
model to manage client accounts would not alter this
obligation in any way.
2. Initial and Ongoing Client Contact
Paragraph (a)(2) of revised proposed rule 3a-4 reflects
the view that providing individualized investment advice
contemplates an adviser having sufficient contact with a
client to elicit the information necessary to provide the
advice. In particular, under paragraph (a)(2), a program
relying on the rule must provide that the sponsor or a person
designated by the sponsor ("designated person") contact and
solicit information from the client. Such a program also must
provide for the sponsor and the portfolio manager to be
reasonably available to consult with the client concerning the
management of the client's account.
Under paragraph (a)(2) of the revised proposed rule, an
advisory program intended to qualify for the safe harbor set
out in the rule would have needed to require that the sponsor
-[32]-(...continued)
5 and accompanying text ("Investment advisers
are fiduciaries who owe their clients a series
of duties, one of which is the duty to provide
only suitable investment advice. This duty is
enforceable under the antifraud provisions of
the Advisers Act, section 206, and the
Commission has sanctioned advisers for
violating this duty.").
==========================================START OF PAGE 22======
or a designated person: (1) obtain information from the client
concerning the client's financial situation and investment
objectives (including any restrictions that the client may
wish to impose regarding the management of the account) at the
time the client opens the account;-[33]- (2) contact the
client at least annually to determine whether there have been
any changes in the client's financial situation or investment
objectives, or whether the client wishes to impose any
reasonable restrictions on the management of the account or
modify an existing restriction in a reasonable manner; and
(3) notify the client in writing at least quarterly that the
sponsor or designated person should be contacted if there have
been any changes in the client's financial situation or
investment objectives, or if the client wishes to impose or
modify any restrictions on the management of the account. The
Commission is adopting these three provisions as proposed,
with minor modifications to clarify their meaning.-[34]-
-[33]- A sponsor or designated person seeking to rely
on the rule as adopted could obtain this
information through interviews (either in
person or by telephone) and/or through
questionnaires that clients must complete and
return prior to the opening of the account.
This position is consistent with no-action
letters previously issued by the staff. See,
e.g., Rauscher Pierce Refsnes, Inc., supra note
3 (prospective client will be interviewed over
the telephone); Manning & Napier Advisors,
Inc., supra note 12 (prospective client
initially submits written questionnaire and
later is interviewed by telephone).
-[34]- Paragraphs (a)(2)(i), (a)(2)(ii) and
(a)(2)(iii) of rule 3a-4, as adopted.
==========================================START OF PAGE 23======
In the July Release, the Commission noted that the
provision regarding annual client contact was designed to
ensure that sponsors have current information about clients in
the program, which, in the Commission's view, is critical to
the provision of individually tailored advice.-[35]-
Like the revised proposed rule, the rule as adopted does not
dictate the manner in which a sponsor contacts its clients
annually.-[36]- Contact can be made, for example, in
person, by telephone, or by letter or electronic mail that
includes a questionnaire requesting the client to provide or
update relevant information.-[37]-
-[35]- July Release, supra note 5, at Section
II.A.2.ii.
-[36]- Paragraph (a)(2)(ii) of rule 3a-4, as adopted.
One commenter asked whether the rule permits a
sponsor or designated person to contact a
client by electronic mail. Under appropriate
circumstances, an electronic mail message
requesting information from clients in the
program would constitute annual client contact
within the meaning of rule 3a-4. See Use of
Electronic Media by Broker-Dealers, Transfer
Agents, and Investment Advisers for Delivery of
Information; Additional Examples under the
Securities Act of 1933, Securities Exchange Act
of 1934, and Investment Company Act of 1940,
Securities Exchange Act Release No. 37182
(May 9, 1996), 61 FR 24644 (May 15, 1996)
(interpretive release in which the Commission,
among other things, provided general guidance
to investment advisers that contemplate using
electronic media to fulfill their disclosure
obligations under the Advisers Act).
-[37]- This provision of the rule contemplates a
reasonable attempt by the sponsor or designated
person to reach and obtain information from the
client. A sponsor or designated person that is
(continued...)
==========================================START OF PAGE 24======
The rule, as adopted, provides that the sponsor or a
designated person seeking to rely on the rule must notify the
client in writing at least quarterly that the sponsor or
designated person should be contacted if there have been any
changes in the client's financial situation or investment
objectives, or if the client wishes to impose or modify
restrictions concerning the management of the
account.-[38]- This provision contemplates only that
notice will be given to an investor, while the annual contact
provision described above contemplates that the sponsor (or
the designated person) will actively attempt to contact the
client to obtain information in order to be covered by the
rule.-[39]-
In the July Release, the Commission noted that, if the
sponsor did not provide the portfolio manager with information
-[37]-(...continued)
unable to obtain information from a client
after pursuing all reasonable means to contact
the client would not be precluded from relying
on the safe harbor.
-[38]- Paragraph (a)(2)(iii) of rule 3a-4, as adopted.
This notice could be included as part of or
with another mailing sent to the client. For
example, the notification could be included as
part of the quarterly account statement
described in paragraph (a)(4) of the rule. For
a discussion of the provisions of rule 3a-4
stating that quarterly account statements must
be sent to investment advisory clients, see
infra Section II.C.4.
-[39]- For this reason, the Commission disagrees with
those commenters who asserted that the annual
contact and quarterly notification provisions
are duplicative.
==========================================START OF PAGE 25======
obtained from the client, the manager might be unable to
manage the client's account on the basis of the client's
financial situation and investment objectives and in
accordance with any reasonable restrictions imposed by the
client. The Commission requested comment whether the rule
should state explicitly that the sponsor or designated person
must convey to the portfolio manager the information obtained
from the client.-[40]- Some commenters stated that the
rule should contain an explicit provision to that effect,
while others suggested that such a provision was unnecessary.
It would appear unlikely that the provision of paragraph
(a)(1) providing that the account be managed based on the
client's financial situation and investment objectives and in
accordance with reasonable restrictions imposed by the client
could be satisfied if the sponsor failed to transmit the
client's financial information to the portfolio manager. The
Commission therefore has determined not to include in rule 3a-
4 an explicit requirement that the information must be
provided to the portfolio manager.
Paragraph (a)(2) of the revised proposed rule would have
provided that the sponsor and persons authorized to make
investment decisions for the client's account be reasonably
available to consult with the client concerning the management
of the account. In the July Release, the Commission indicated
-[40]- July Release, supra note 5, at Section
II.A.2.ii.
==========================================START OF PAGE 26======
that this provision contemplated a client's having reasonable
access to the sponsor and the portfolio manager to ask
questions or to seek additional information about the
investment advisory program or the client's
account.-[41]- The Commission recognizes that a
program's sponsor may serve as the primary contact for clients
in the program, and that direct client contact with the
portfolio manager may not occur until after the sponsor and
others have attempted to address the client's questions or
concerns. Nonetheless, in the Commission's view, a program
seeking to rely on the rule must provide a procedure by which
each client has reasonable access to personnel of the manager
who are knowledgeable about the management of the client's
account, as necessary to respond to the client's
inquiry.-[42]- Therefore, the Commission is adopting
-[41]- Id.
-[42]- This view is reflected in staff no-action
letters. See, e.g., Rauscher Pierce Refsnes,
Inc., supra note 3 (the portfolio manager, when
necessary, will be available to discuss more
complex questions regarding the client's
account); Westfield Consultants Group, supra
note 3 (client will be furnished the name and
direct telephone number of manager, who will be
reasonably available during business hours).
In one no-action request, a representation was
made that the client would be able to contact
his or her financial planner or the portfolio
manager to obtain information or assistance
during normal business hours, but the client
might be charged hourly fees whenever the
client requested that certain investment
officers of the portfolio manager answer
specific questions regarding investment
(continued...)
==========================================START OF PAGE 27======
this provision of the revised proposed rule with the
modification discussed below.
Several commenters suggested that the rule should permit
delegation of the client consultation responsibilities to an
employee of the advisory firm managing the client's account
who is knowledgeable about investment and other matters
relevant to the account. The rule has been revised to state
that "the sponsor and personnel of the manager of the client's
account who are knowledgeable about the account and its
management" must be reasonably available to the client for
consultation.-[43]- In accordance with this provision,
the contact person need not be the individual primarily
responsible for managing the account, but must be sufficiently
knowledgeable to discuss and explain investment decisions that
were made.
-[42]-(...continued)
strategies with respect to the client's
account. Manning & Napier Advisors, Inc.,
supra note 12. Rule 3a-4 does not preclude a
sponsor from charging reasonable fees for this
or other services. However, such fees must be
adequately disclosed to the client. See Item
7(f) of Schedule H of Form ADV (requiring
disclosure of any fees in addition to the wrap
fee that a client in a wrap fee program may
pay).
-[43]- Paragraph (a)(2)(iv) of rule 3a-4, as adopted.
==========================================START OF PAGE 28======
3. Reasonable Management Restrictions
The Commission stated in the July Release that the
ability of a client in an investment advisory program to place
reasonable restrictions on the management of his or her
account is a critical factor in determining whether
individualized treatment is provided under the
program.-[44]- Paragraph (a)(3) of the revised
proposed rule, therefore, would have provided that a program
relying on the rule must include a requirement that each
client have the ability to impose reasonable restrictions on
the management of his or her account. Such restrictions were
described to include, for example, prohibitions with respect
to the purchase of particular securities or types of
securities. This provision of the rule is being adopted as
reproposed, except that language has been added to the
provision to clarify that a program relying on rule 3a-4 need
not provide clients with the right to direct the manager to
purchase specific securities or types of
securities.-[45]-
Some of the commenters addressing this aspect of the
proposal asked the Commission to provide additional guidance
as to what constitutes a reasonable management restriction.
As noted in the July Release, whether a particular restriction
-[44]- July Release, supra note 5, at Section
II.A.2.iii.
-[45]- Paragraph (a)(3) of rule 3a-4, as adopted.
==========================================START OF PAGE 29======
would be reasonable depends on an analysis of the relevant
facts and circumstances.-[46]- In general, a
restriction would be unreasonable if it is clearly
inconsistent with the portfolio manager's stated investment
strategy or philosophy or the client's stated investment
objective,-[47]- or is fundamentally inconsistent with
the nature or operation of the program.-[48]- Other
-[46]- July Release, supra note 5, at Section
II.A.2.iii.
-[47]- July Release, supra note 5, at Section
II.A.2.iii. The exclusion of individual stocks
or stocks from a particular country, for
example, would appear to be a reasonable
restriction under ordinary facts and
circumstances. A general restriction on the
purchase of the securities of foreign issuers
may be unreasonable, however, if the manager's
investment strategy is to invest exclusively or
primarily in foreign securities. Under those
circumstances, it may be necessary for the
client and the sponsor to reassess the choice
of manager or the client's investment objective
or strategy.
-[48]- July Release, supra note 5, at Section
II.A.2.iii. While rule 3a-4 generally
contemplates that clients in mutual fund asset
allocation programs should have the ability to
exclude specific funds from their accounts,
under some circumstances a restriction on the
purchase of a fund included in the program may
be inconsistent with the operation of the
program. This could be the case, for example,
when there is only a single fund with a
specified investment objective available in the
program, and that fund plays a necessary role
in the overall investment strategy determined
to be appropriate for the client. See Benson
White & Company, supra note 12 (program under
which client assets are allocated among four
mutual funds based upon the client's age need
not give clients the opportunity to place
(continued...)
==========================================START OF PAGE 30======
factors that bear on whether a particular restriction is
reasonable are the difficulty in complying with the
restriction,-[49]- the specificity of the restriction
and the number of other restrictions imposed by the
client.-[50]- A restriction would not be unreasonable,
however, simply because it placed administrative burdens on
the manager, or could affect the performance of the account.
The Commission stated in the July Release that if the
sponsor or portfolio manager of a program concluded that a
particular restriction sought to be imposed by a client was
unreasonable, the client should be notified and given an
-[48]-(...continued)
restrictions on the purchase of any of the
funds).
-[49]- In the context of a mutual fund asset
allocation program, for example, compliance
with restrictions based on the securities held
by a fund in which program assets are invested
(i.e., a restriction that would require a
manager to monitor the fund's portfolio
securities) may be so burdensome as to be
unreasonable.
-[50]- The restrictions that a client seeks to impose
on his or her account could be unreasonable
when considered in the aggregate, even though
each restriction may be reasonable when
considered separately, or if the client alters
them or imposes new restrictions with excessive
frequency. Paragraph (a)(2)(iii) of the rule,
which contemplates that a sponsor notify each
client at least quarterly to contact the
sponsor if the client wishes to modify
restrictions concerning the management of the
account, is not intended to imply that it
necessarily would be reasonable for a client to
change his or her investment restrictions on a
quarterly basis.
==========================================START OF PAGE 31======
opportunity to restate the restriction more reasonably. The
Commission also noted that if a client was unable or unwilling
to modify an unreasonable restriction, then the client could
be removed from the program without jeopardizing reliance on
the safe harbor.-[51]- The Commission is also of the
view that if a sponsor or portfolio manager is informed in
advance that a client wants to impose a restriction the
sponsor or portfolio manager deems unreasonable, and the
client refuses to modify the restriction, then the sponsor or
portfolio manager may refuse to accept the client. The
Commission, however, does not agree with the suggestion of
some commenters that a sponsor or portfolio manager should be
permitted to refuse to accept a client without giving the
client an opportunity to modify or withdraw the restriction.
4. Quarterly Account Statements
Paragraph (a)(4) of the revised proposed rule stated that
each client in a program covered by the rule must be provided
quarterly with a statement describing all activity in the
client's account during the preceding quarter, including all
transactions made on behalf of the account, all contributions
and withdrawals made by the client, and all fees and expenses
charged to the account. The statement also would have
included the value of the account at both the beginning and
end of the quarter. Some commenters asserted that the rule
-[51]- July Release, supra note 5, at Section
II.A.2.iii.
==========================================START OF PAGE 32======
should not specify the contents of quarterly statements. The
Commission is not persuaded by this argument. This provision,
which is consistent with several no-action letters that had
specified the contents of the quarterly reports,-[52]-
reflects the view that a key element of individualized
advisory services is an individualized report about a client's
account. The Commission therefore is adopting this provision
substantially as proposed, with one modification clarifying
that statements may be sent more often than
quarterly.-[53]-
5. Minimum Account Size
The revised proposed rule would not have specified a
minimum size for client accounts in a program.-[54]-
While the Commission acknowledged in the July Release that
providing individualized advice to a large number of
relatively small accounts may be so costly and time-consuming
as to render individualized treatment impracticable, it noted
-[52]- See Westfield Consultants Group, supra note 3
(quarterly statements will contain a review and
analysis of client account); Strategic
Advisers, Inc., supra note 2 (quarterly
statements will contain a description of
investments).
-[53]- Paragraph (a)(4) of rule 3a-4, as adopted.
-[54]- The Division has granted no-action relief to
investment advisory programs with varying
minimum account sizes. See, e.g., Qualivest
Capital Management, Inc., supra note 12
($5 million); Wall Street Preferred Money
Managers, Inc., supra note 2 ($100,000);
Strategic Advisers, Inc., supra note 2
($50,000).
==========================================START OF PAGE 33======
that the provisions of the revised proposed rule should be
sufficient to ensure individualized treatment, and that
innovations in computer technology may allow portfolio
managers to render individualized treatment to relatively
small accounts on a cost-effective basis.-[55]-
Nonetheless, the Commission requested comment whether the rule
should include a provision specifying a minimum account size.
All but one of the commenters responding to the request
for comment opposed the inclusion of a minimum account size
provision in rule 3a-4. These commenters asserted that the
sponsor and the portfolio manager are in the best position to
determine the appropriate minimum account size for a program
based upon the nature of the program. The Commission has
concluded that a particular account size is not a necessary
element to ensure that clients are provided with
individualized investment management services. The Commission
recognizes, however, that the smaller the minimum account size
of an investment advisory program, the more likely that
clients would not have the ability to demand and receive
individualized treatment in the program. In assessing the
status under the Investment Company Act of a program that does
not qualify for the safe harbor under rule 3a-4, therefore,
the Commission will consider a relatively large minimum
-[55]- July Release, supra note 5, at Section
II.A.2.v.
==========================================START OF PAGE 34======
account size as evidence that individualized treatment is
being provided to clients of the program.
D. Client Retention of Ownership of Securities
Under paragraph (a)(5) of the revised proposed rule, a
program covered by the rule would have been characterized by
each client retaining certain specified indicia of ownership
of all securities and funds in that client's
account.-[56]- The Commission stated in the July
Release that the indicia of ownership specified in revised
proposed rule 3a-4 are those that provide clients with the
ability to act as owners of the securities in their
accounts.-[57]-
A number of commenters addressing this aspect of the
revised proposed rule noted circumstances in which the
-[56]- Rule 3a-4, as originally proposed, would have
provided that clients maintain to the extent
reasonably practicable all indicia of ownership
of the funds in their accounts, and specified
certain requisite attributes of ownership.
1980 Release, supra note 10; paragraph (c) of
rule 3a-4 as originally proposed.
-[57]- Like the revised proposed rule, rule 3a-4 as
adopted does not provide that the client be the
record owner of the securities held in its
account. The Division has taken the position
that an investment advisory program would not
be deemed to be an investment company solely
because securities of clients participating in
the program are held in nominee or street name.
United Missouri Bank of Kansas City, n.a.,
supra note 2 (investment company securities
held in nominee name). See, e.g., Manning &
Napier Advisors, Inc., supra note 12 (non-
investment company securities held in nominee
name).
==========================================START OF PAGE 35======
client's ability to exercise ownership rights over securities
in his or her account could be restricted for reasons external
to the program. One commenter pointed out, for example, that
the assets in the account of a self-directed retirement plan
may be subject to restrictions imposed by the terms of the
plan or by federal tax law.-[58]- These commenters were
concerned that such restrictions may preclude the program from
relying on the safe harbor.
Paragraph (a)(5) of rule 3a-4 contemplates only that the
program does not impose additional restrictions or limitations
on client ownership of securities held in program accounts,
and that a client's participation in the program will not
alter his or her ability to exercise the ownership rights
-[58]- This commenter suggested that providing the
right to pledge securities in the account of a
retirement plan could cause the plan to lose
its status as a qualified plan under the
Internal Revenue Code. In general, a qualified
plan must provide that benefits under the plan
may not be anticipated, assigned, alienated, or
subject to attachment, garnishment, levy,
execution, or other legal process. See
Internal Revenue Code ("IRC") Section
401(a)(13) [26 U.S.C. 401(a)(13)]; Treas. Reg.
1.401(a)-13 (as amended by T.D. 8219, 53 FR
31837 (Aug. 22, 1988)). In addition, the IRC
imposes an additional tax of 10% on early
distributions from a qualified retirement plan.
See IRC Section 72(t)(1) [26 U.S.C. 72(t)(1)].
==========================================START OF PAGE 36======
enumerated in the rule.-[59]- The language of the rule
has been modified to clarify this standard.-[60]-
1. Ability to Withdraw and Pledge Securities
The revised proposed rule would have provided that
clients be able to withdraw securities or cash from their
accounts. In addition, revised proposed rule 3a-4 also would
have specified that clients be able to pledge the securities
in their accounts. The July Release stated that investment
advisory programs relying on the safe harbor could require a
client to withdraw securities from his or her account before
using them as collateral.-[61]-
A number of commenters maintained that the retention by
clients of the right to pledge securities should be eliminated
from the final rule. One of these commenters asserted that,
-[59]- Similarly, paragraph (a)(5) would not prohibit
a client from being charged reasonable fees for
services in connection with the ownership of
securities held in the program, provided such
fees could be charged if the client held the
securities outside the program. Of course, all
fees must be permissible under applicable state
and federal law and must be adequately
disclosed. See Item 7 of Schedule H of Form
ADV.
-[60]- Paragraph (a)(5) of rule 3a-4, as adopted. The
rule's text also has been changed to clarify
that the rule provides for the retention of
only the rights of ownership specified in the
rule. Of course, nothing in the rule is
intended to prevent clients from retaining
other rights of ownership, if permitted by the
program.
-[61]- July Release, supra note 5, at Section
II.A.3.i.
==========================================START OF PAGE 37======
because clients may be forced to withdraw their securities
before pledging them, the provision of the revised proposed
rule regarding the right to pledge securities is unnecessary
if the client has the right to withdraw them. The Commission
agrees, and has modified the rule text to remove this
provision.-[62]-
2. Right to Vote Securities and Receive Certain
Documents as Securityholders
The revised proposed rule would have provided that the
client have the right to vote the securities in his or her
account. This provision would have permitted clients to
delegate the authority to vote securities to another person,
such as the portfolio manager or other fiduciary, so long as
the client retained the right to revoke the delegation at any
time. The Commission indicated that the right to vote proxies
implied that the client would receive proxy materials in
sufficient time to permit the client to consider how to vote
and to submit the proxies.-[63]- The Commission is
clarifying that, if a client delegates voting rights to
-[62]- The Commission regards a client's ability to
pledge securities in his or her account
directly without first withdrawing them as an
additional attribute of the client's ownership
of the securities. While the absence of a
right to pledge would not cause a program to
fall outside of rule 3a-4, a client's right to
pledge securities may be relevant to
determining whether a program that is not
relying on the safe harbor would be considered
to be an investment company.
-[63]- July Release, supra note 5, at Section
II.A.3.ii.
==========================================START OF PAGE 38======
another person, the proxies, proxy materials, and, if
applicable, annual reports, need be furnished only to the
party exercising the delegated voting authority.-[64]-
Revised proposed rule 3a-4 contemplated that the client
(or the client's agent) would be provided with documents that
-[64]- See infra Section II.D.3. Rule 3a-4, as
adopted, is in no way intended to indicate the
instances under which a client's right to vote
proxies may be delegated to another person.
Whether the right can be delegated depends on
applicable state and federal law. An employee
benefit plan subject to the Employee Retirement
Income Security Act of 1974 ("ERISA"), for
example, may provide that the plan's named
fiduciary may delegate asset management,
including the authority to vote proxies, to an
"investment manager" for the plan, as that term
is defined in Section 3(38) of ERISA. See,
e.g., Sections 402-405 of ERISA [29 U.S.C.
1102-1105]; Letter from Alan D. Lebowitz,
Deputy Assistant Secretary for Program
Operations, U.S. Department of Labor, to Robert
A.G. Monks, Institutional Shareholder Services,
Inc. (Jan. 23, 1990), 1990 ERISA LEXIS 66.
Certain provisions of the federal securities
laws also contemplate that clients can delegate
their right to vote proxies. Under the
Commission's proxy rules, the term "beneficial
owner," the person who must receive proxy
materials, includes an investment adviser that
has the power to vote, or to direct the voting
of, a security pursuant to an agreement with
the client. See Securities Exchange Act Rule
14b-2(a)(2) [17 CFR 240.14b-2]. Rules
adopted by the New York Stock Exchange
("NYSE"), the National Association of
Securities Dealers, Inc. ("NASD") and the
American Stock Exchange, Inc. ("AMEX") permit a
securityholder to designate a registered
investment adviser who has discretion over the
management of the client's account to receive
and vote proxies on his or her behalf. See
NYSE Guide, Rules of Board, Rules 450, 451, 452
and 465; NASD Conduct Rules, Rule 2260; AMEX
Rules 575, 576, 577 and 585.
==========================================START OF PAGE 39======
the client (or agent) would have received had the same
securities been owned by the client outside the program.
These documents may include prospectuses, periodic shareholder
reports, proxy materials, and any other information and
disclosure required by applicable laws or regulations.
Some commenters suggested that clients be permitted to
waive receipt of the documents generally required to be
provided to securityholders, as they could have waived receipt
of immediate confirmations under the revised proposed
rule.-[65]- Rule 3a-4 does not limit a client's right
to waive receipt of these documents. Nor does rule 3a-4
prohibit a client from making an informed designation of
another person, including a financial planner or registered
broker-dealer, to receive such documents on the client's
behalf.-[66]- Whether a client in an investment
advisory program may waive receipt of documents or designate
another person to receive documents depends upon whether the
-[65]- See infra Section II.D.3.
-[66]- In the revised proposed rule, the paragraph
regarding receipt of documents specifically
referred to receipt by the client's agent.
Paragraph (a)(5)(iv) of revised proposed rule
3a-4; July Release, supra note 5, at Section
II.A.3.iii. In connection with modifying the
rule text to effect the changes discussed
above, supra Section II.D, the reference to the
client's agent has been deleted as a conforming
change. These changes in the rule text are not
intended to indicate that a client in an
investment advisory program may not designate
another person to receive documents that must
be provided to securityholders by law.
==========================================START OF PAGE 40======
client would have been able to do so under applicable federal
or state law if the securities were owned directly.
3. Right to Receive Trade Confirmations
The revised proposed rule contained a provision under
which a client would have the right to receive in a timely
manner confirmations of securities transactions of the type
required by rule 10b-10 under the Securities Exchange Act of
1934.-[67]- Two commenters objected to the provision of
the rule that the confirmations be "of the type required by
rule 10b-10." These commenters asserted that this provision
was burdensome, particularly with respect to banks and trust
companies that are not subject to rule 10b-10. The Commission
has decided that the confirmation provision, like the other
indicia of ownership specified in the rule, should apply only
to the extent that the client would have a right to receive
confirmations from the person executing the transaction if he
or she traded the securities through that person outside the
program. Therefore, the Commission has revised the provision
of the rule addressing confirmations to delete the reference
to rule 10b-10. As revised, this provision would state that a
client in an investment advisory program must receive
confirmations that the person executing the transaction is
required to send under the laws regulating that person's
activities. This provision of the rule also provides that the
-[67]- 17 CFR 240.10b-10.
==========================================START OF PAGE 41======
confirmations must include the information specified by the
applicable law governing such content.-[68]-
As discussed in the July Release, rule 10b-10 permits
customers of registered broker-dealers to waive receipt of
individual confirmations in certain circumstances.-[69]-
A client in an investment advisory program whose transactions
are executed by a registered broker-dealer effectively has the
option to receive either individual confirmations for each
transaction or periodic statements, delivered no less
frequently than quarterly, that include the information
required by rule 10b-10 with respect to all transactions that
-[68]- Paragraph (a)(6) of rule 3a-4, as adopted.
Banks that execute securities transactions for
customers generally are subject to confirmation
requirements under the banking laws. See,
e.g., 12 CFR 12.4-12.5 (Office of the
Comptroller of the Currency ("OCC")
confirmation requirements for national banks).
The OCC recently proposed amendments to these
rules that would make their confirmation
requirements more closely reflect the
requirements of rule 10b-10. OCC,
Recordkeeping and Confirmation Requirements for
Securities Transactions (Dec. 7, 1995), 60 FR
66517 (Dec. 22, 1995). In addition, the
Federal Deposit Insurance Corporation ("FDIC")
recently considered when and how to amend its
regulations governing recordkeeping and
confirmation requirements for securities
transactions by state nonmember banks (12 CFR
part 344). FDIC, Recordkeeping and
Confirmation Requirements for Securities
Transactions (May 14, 1996), 61 FR 26135 (May
24, 1996).
-[69]- July Release, supra note 5, at n.60 and
accompanying text, citing Securities Exchange
Act Release No. 34962 (Nov. 10, 1994), 59 FR
59612 (Nov. 17, 1994) ("Exchange Act Release
34962").
==========================================START OF PAGE 42======
occurred within the period covered by the
statement.-[70]- Two commenters suggested that the
Commission clarify that an entity that is not required to be
registered with the Commission as a broker-dealer could rely
on the safe harbor if it sent quarterly statements to clients
who waived their rights to receive individual confirmations.
As discussed above, the confirmation provision in rule 3a-4
applies only to the extent that the client would have a right
to receive confirmations if he or she traded the securities
outside the program. A client's ability to waive receipt of
confirmations will not be altered because securities are held
in a program account. Whether a client whose transactions are
not executed by a registered broker-dealer may waive receipt
of confirmations or other transaction notifications must be
determined by reference to the laws that govern the
relationship.-[71]-
-[70]- Although a client may waive his or her right to
receive the immediate confirmation, the client
may not waive his or her right to receive the
periodic statement. Exchange Act Release
34962, supra note 68, at nn.34-36 and
accompanying text.
-[71]- One commenter observed that a person executing
transactions on behalf of a client whose shares
are held in nominee name may not know the
identity of the client, and asked the
Commission to clarify how a program relying on
the safe harbor could comply with the
confirmation provision with respect to such a
client. In the case of transactions effected
by a registered broker-dealer, the Division of
Market Regulation has expressed the view that a
good faith effort should be made in these
(continued...)
==========================================START OF PAGE 43======
4. Legal Rights as Securityholders
Revised proposed rule 3a-4 would have provided that the
client retain the right to proceed directly against an issuer
of securities in a client's account without joining any other
person involved in the program. The July Release indicated
that underlying this provision (which was based on
representations made in several no-action letters)-[72]-
was the view that a key element of providing individualized
advisory services is that a client have the same rights as a
person holding the securities outside an investment advisory
program.
Certain commenters suggested that this provision of the
revised proposed rule may be problematic with respect to
client securities that are held in nominee or street name, or
by a trustee. These commenters stated that the nominee or
trustee might be considered an indispensable party in any
-[71]-(...continued)
circumstances to obtain the information
necessary to send the confirmation required by
rule 10b-10 directly to the client. If these
efforts are not successful, then the
confirmation should be sent, in accordance with
certain procedures, to the client's custodian
or a fiduciary authorized to manage the
account. See Letter from Catherine McGuire,
Chief Counsel, Division of Market Regulation,
U.S. Securities and Exchange Commission, to
George P. Miller, Vice President and Associate
General Counsel, Public Securities Association
(Sept. 29, 1995).
-[72]- See, e.g., Westfield Consultants Group, supra
note 3; Manning & Napier Advisors, Inc., supra
note 12; Jeffries & Company, supra note 12;
Rauscher Pierce Refsnes, Inc., supra note 3.
==========================================START OF PAGE 44======
action against the issuer, and that nominal joinder of the
nominee or trustee might be required. These comments have
been addressed by the revision discussed above regarding
restrictions on the exercise of ownership rights that are
external to the program.-[73]- Otherwise, the
Commission is adopting this provision as proposed.-[74]-
E. Policies and Procedures and Form N-3a4
Paragraph (a)(6) of revised proposed rule 3a-4
contemplated the establishment by a program's sponsor of
written procedures and agreements governing the operation of
the program, and the maintenance of records relating to the
program. Paragraph (a)(6) would have provided that the
sponsor must: (1) establish and effect written policies and
procedures that are reasonably designed to ensure that each of
the provisions of the rule are implemented; (2) maintain and
preserve all written policies, procedures and certain other
documents relating to the program for specified periods of
time; (3) enter into written agreements with other persons
that the sponsor designates to retain records pertaining to
the program; and (4) furnish to the Commission upon demand
copies of the policies, procedures and other documents created
pursuant to these policies and procedures. Paragraph (a)(7)
of the revised proposed rule would have provided that the
-[73]- See supra Section II.D.
-[74]- Paragraph (a)(5)(iv) of rule 3a-4, as adopted.
==========================================START OF PAGE 45======
sponsor of an investment advisory program intending to rely on
the safe harbor file Form N-3a4 with the Commission.
In the July Release, the Commission specifically
requested comment whether any of the provisions under
paragraph (a)(6) of the rule could be "eliminated,
consolidated, or otherwise made less burdensome without
compromising investor protection."-[75]- Most
commenters addressing this aspect of the revised proposed rule
viewed the provisions as unnecessary, unduly burdensome,
irrelevant to determining whether an investment advisory
program is an investment company under the Investment Company
Act, or as an improper attempt by the Commission to regulate
entities -- principally banks -- that are excepted from the
definition of investment adviser under the Advisers Act. A
few commenters also suggested that provisions setting forth
written policies and procedures would discourage sponsors from
relying on the safe harbor. For similar reasons, most
commenters also opposed any filing provision under the rule.
Although the Commission does not agree with many of the
comments pertaining to the proposed recordkeeping and other
operational provisions, the Commission has reevaluated these
provisions and determined not to adopt them for a number of
reasons. First, the Commission agrees that compliance with
these types of formal procedural provisions generally should
not be determinative of an entity's status under the
-[75]- July Release, supra note 5, at Section II.A.4.
==========================================START OF PAGE 46======
Investment Company Act. As one commenter noted, none of the
other rules under the Investment Company Act exempting certain
entities from investment company regulation contain similar
procedural provisions.-[76]-
Second, with respect to programs sponsored by registered
investment advisers, the recordkeeping requirements under the
Advisers Act and the Commission's authority to examine
registered investment advisers should be sufficient to enable
the Commission to detect violations of the Investment Company
Act. Most, if not all, of the records that would have been
covered by the revised proposed rule currently are required to
be maintained under rule 204-2 under the Advisers
Act.-[77]-
With respect to those investment advisory programs
sponsored by banks that are not subject to the Advisers Act,
-[76]- See rule 3a-1 (certain prima facie investment
companies); rule 3a-2 (transient investment
companies); rule 3a-3 (certain investment
companies owned by companies that are not
investment companies); rule 3a-5 (exemption for
subsidiaries organized to finance the
operations of domestic or foreign companies);
rule 3a-6 (foreign banks and foreign insurance
companies); and rule 3a-7 (issuers of asset-
backed securities).
-[77]- For instance, paragraph (a)(7) of rule 204-2
[17 CFR 275.204-2(a)(7)] generally requires a
registered adviser to maintain originals of all
written communications received and copies of
all written communication sent by the adviser
relating to the adviser's advice or
recommendations. Under section 204 of the
Advisers Act, records maintained under rule
204-2 must be made available to Commission
examiners.
==========================================START OF PAGE 47======
the Commission staff intends to consult and work closely with
the relevant banking agencies so that these programs will be
subject to oversight designed to determine whether the
programs are being operated as unregistered investment
companies. Further, to the extent these programs include
registered investment companies as investment vehicles for
their clients, or that registered investment advisers serve as
subadvisers in a program sponsored by a bank, the Commission
will have access to certain records relating to the programs
through its authority to examine such registered entities.
Despite its determination not to include in rule 3a-4 a
provision pertaining to written policies and procedures, the
Commission continues to believe that it is important for the
sponsor of an investment advisory program to monitor the
program's compliance with the rule. Each person relying on
rule 3a-4 is responsible for demonstrating its compliance with
the rule's provisions. A sponsor that establishes and
implements written policies and procedures designed to ensure
adherence to the provisions of rule 3a-4 would greatly reduce
the chance that the program will fail to operate in the manner
specified in the rule. Moreover, the implementation of such
procedures by an investment adviser may serve to protect the
adviser in certain instances from liability for violating, or
aiding and abetting violations of, the Investment Company Act
and/or the Securities Act, or failing to supervise a person
==========================================START OF PAGE 48======
under the adviser's supervision who violates those
Acts.-[78]- The Commission, therefore, strongly
recommends that a sponsor of an advisory program seeking to
rely on rule 3a-4 establish and implement written policies and
procedures, and a system for applying such procedures, that
are reasonably designed to ensure that the program operates in
the manner contemplated by the rule.
The Commission also believes that it would be advisable
for a person seeking to rely on rule 3a-4 to maintain the
records necessary to evidence compliance with the rule, even
if the person is not subject to rule 204-2 under the Advisers
Act or certain of the records are not required by that rule.
As noted above, a person seeking to rely on rule 3a-4 must be
able to establish compliance with each of the rule's
provisions. Compliance with many of these provisions,
including those relating to client contact, the delivery of
documents to clients, and the opportunity of clients to place
reasonable restrictions on the management of their accounts,
-[78]- Section 203(e)(5) of the Advisers Act [15
U.S.C. 80b-3(e)(5)] provides that no person
will be deemed to have failed to supervise
another person subject to his or her
supervision if: (1) the person has established
procedures that would reasonably be expected to
prevent or detect the other person's violation,
and a system for applying such procedures; and
(2) the supervisor reasonably discharged his or
her duties under the procedures and system and
did not have reasonable cause to believe that
such procedures were not being complied with.
==========================================START OF PAGE 49======
would be difficult, if not impossible, to demonstrate without
contemporaneous recordkeeping.
F. Investment Advisers Act Issues Raised by Investment
Advisory Programs
The Commission noted in the July Release that wrap fee
and other investment advisory programs raise, in addition to
the Investment Company Act issues addressed in the release, a
number of issues under the Advisers Act. The Commission
requested comment on certain of these issues and indicated the
possible publication of an interpretive release that would
address them.-[79]- The Commission received few
comments in response to this request, and the comments that
were received suggested that investment advisory programs did
not raise unique issues under the Advisers Act, but simply
presented issues under the Act in a specific factual context.
The Commission, therefore, has decided not to publish an
interpretive release at this time. The staff of the Division
will entertain requests for no-action or interpretive guidance
with respect to the application of the Advisers Act in the
context of investment advisory programs.
III. COST/BENEFIT ANALYSIS
Rule 3a-4 under the Investment Company Act provides a
nonexclusive safe harbor from the definition of investment
company for investment advisory programs. Programs that are
organized and operated in the manner described in the rule are
-[79]- July Release, supra note 5, at Section II.C.
==========================================START OF PAGE 50======
not required to register under the Investment Company Act or
to comply with the Act's substantive provisions. The rule is
intended to provide guidance to persons operating investment
advisory programs regarding the status of these programs under
the Investment Company Act, and help to ensure that such
programs do not operate as investment companies without
clients of the programs benefitting from the Act's
protections.
The Commission anticipates that the cost of compliance
with rule 3a-4 will be small. In addition, the Commission
does not believe that compliance with any of the provisions
will be unduly burdensome. Furthermore, because the rule is
based principally on long-standing staff positions, the
Commission believes that it will not substantially alter
current industry practice or the costs associated therewith.
Section 2(c) of the Investment Company Act provides that
whenever the Commission is engaged in rulemaking under the
Investment Company Act and is required to consider or
determine whether an action is consistent with the public
interest, the Commission also must consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation. The
Commission has considered rule 3a-4 in light of these
standards and believes that, by removing uncertainty with
respect to the status of certain investment advisory programs
under the Investment Company Act, the rule is consistent with
==========================================START OF PAGE 51======
the public interest, and will promote efficiency and the
competition among sponsors of such programs. In addition, the
rule will have no adverse effect on capital formation, nor be
unduly burdensome to those sponsors wishing to comply with the
rule.
IV. PAPERWORK REDUCTION ACT
An investment advisory program structured to take
advantage of the safe harbor contained in rule 3a-4 will
provide for each client in the program receiving a statement
quarterly describing all activities in the client's account
during the preceding quarter. Such a provision constitutes a
"collection of information" requirement within the meaning of
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et
seq.),-[80]- because providing the quarterly statements
is necessary to meet the provisions of the safe harbor. An
agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information without
display of a valid OMB control number. Accordingly, the
Commission submitted the revised proposed rule to the Office
of Management and Budget ("OMB") pursuant to 44 U.S.C. 3507
and received approval of the rule's "collection of
information" requirement (OMB control number 3235-0459).
Because the collection of information requires disclosure to
third parties (the client accountholders), assurance of
confidentiality is not an issue.
-[80]- See supra Section II.C.4.
==========================================START OF PAGE 52======
As noted above, the Commission has determined not to
adopt the other collection of information requirements it
proposed, including the establishment of written procedures
and agreements governing the operation of the program, the
maintenance of records relating to the program, and the filing
of Form N-3a4 with the Commission.-[81]- Due to this
decision, as well as a revision to the Commission's estimate
of the amount of assets presently in investment advisory
programs, the Commission has revised its estimate of the
paperwork burden. The total aggregate estimated annual
reporting burden associated with the rule's requirements has
been reduced by 152,724.5 hours. The potential respondents
are the approximately 53 sponsors of investment advisory
programs. The Commission now estimates that there are
1,016,000 clients of investment advisory programs, and the
reporting burden imposed by rule 3a-4 is one hour per client,
for a total aggregate annual reporting burden of 1,016,000
hours. On average, the annual reporting burden for each
respondent is estimated to be 19,169.8 hours. The Commission
notes that many sponsors already may provide quarterly
statements to clients and the burden under paragraph (a)(4) of
rule 3a-4 is likely to be less for such sponsors.
-[81]- See supra Section II.E.
==========================================START OF PAGE 53======
V. FINAL REGULATORY FLEXIBILITY ANALYSIS
A summary of the Initial Regulatory Flexibility Analysis
regarding revised proposed rule 3a-4 was published in the July
Release. No comments were received on the Initial Regulatory
Flexibility Analysis, and no comments were received with
respect to the effect of the rule on small entities. The
Commission has prepared a Final Regulatory Flexibility
Analysis in accordance with 5 U.S.C. 604 regarding rule 3a-4.
The analysis states that the rule is intended to provide
a nonexclusive safe harbor from the definition of investment
company for certain programs under which investment advisory
services are provided to clients. The analysis notes that the
objective of rule 3a-4 is to help ensure that investment
advisory programs do not operate as de facto investment
companies by clarifying the Commission's views regarding the
status of investment advisory programs under the federal
securities laws. The conditions of the rule are designed to
describe certain basic attributes that can differentiate an
investment advisory program from an investment company. As
discussed more fully in the analysis, because the rule is a
nonexclusive safe harbor, no entity, either large or small, is
required to operate in accordance with its terms, and notes
that a program that is a small entity and that does not
operate in the manner contemplated by the rule is not presumed
to be an investment company.
==========================================START OF PAGE 54======
As discussed in the analysis, the Commission estimates
that of the 53 sponsors offering investment advisory programs
in 1995, approximately 6 programs met the Commission's
definition of small entity for purposes of the Investment
Company Act (i.e., an investment company with net assets of
$50 million or less as of its most recent fiscal year [17 CFR
270.0-10]).
The analysis states that the rule does not impose any
reporting or recordkeeping requirements with the exception of
one condition which requires programs relying on the rule to
furnish its clients a statement, at least quarterly,
describing activity in the client's account. This condition
reflects representations in several no-action letters and is
consistent with industry practice. In addition, the analysis
notes that the Commission has attempted to minimize the rule's
burden on all persons, not just small entities, particularly
by eliminating provisions included in the Revised Proposed
Rule relating to the creation and maintenance of books and
records to facilitate and support a program's reliance on with
the rule, and to the filing of a form with the Commission.
The analysis also notes that alternatives for providing
different means of compliance for small entities were
considered, but that the rule is crafted in a manner designed
to permit program sponsors considerable flexibility as to how
they comply with the safe harbor's conditions. Furthermore,
the analysis states that exempting small entities from the
==========================================START OF PAGE 55======
conditions of the rule would be inconsistent with the
Commission's statutory authority to protect investors.
Cost/benefit information reflected in the "Cost/Benefit
Analysis" section of this Release also is reflected in the
analysis.
A copy of the Final Regulatory Flexibility Analysis may
be obtained by contacting Rochelle Kauffman Plesset,
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Mail Stop 10-6, Washington, D.C. 20549.
VI. EFFECTIVE DATE
Rule 3a-4 is effective upon publication in the Federal
Register. Pursuant to 5 U.S.C. 553(d)(1), immediate
effectiveness is appropriate because rule 3a-4 is purely
exemptive in nature. It provides a nonexclusive safe harbor
from the definition of investment company for certain programs
under which investment advisory services are provided to
advisory clients. Under the rule, programs that are organized
and operated in the manner described in the rule are not
required to register under the Investment Company Act or to
comply with the Act's requirements. The benefits of the rule
should be available at the earliest possible time.
VII. STATUTORY AUTHORITY
The Commission is adopting rule 3a-4 pursuant to the
authority set forth in sections 6(c) and 38(a) of the
Investment Company Act [15 U.S.C. 80a-6(c), -37(a)].
==========================================START OF PAGE 56======
TEXT OF RULE
List of Subjects in 17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, title 17,
chapter II of the Code of Federal Regulations is amended as
follows:
PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF
1940
1. The authority citation for Part 270 continues to
read, in part, as follows:
AUTHORITY: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39
unless otherwise noted;
* * * * *
2. By adding 270.3a-4 to read as follows:
270.3a-4 Status of Investment Advisory Programs.
Note
This section is a nonexclusive safe harbor from the
definition of investment company for programs that provide
discretionary investment advisory services to clients. There
is no registration requirement under section 5 of the
Securities Act of 1933 [15 U.S.C. 77e] with respect to
programs that are organized and operated in the manner
described in 270.3a-4. The section is not intended,
however, to create any presumption about a program that is not
==========================================START OF PAGE 57======
organized and operated in the manner contemplated by the
section.
(a) Any program under which discretionary investment
advisory services are provided to clients that has the
following characteristics will not be deemed to be an
investment company within the meaning of the Act [15 U.S.C.
80a, et seq.]:
(1) Each client's account in the program is managed
on the basis of the client's financial situation and
investment objectives and in accordance with any reasonable
restrictions imposed by the client on the management of the
account.
(2)(i) At the opening of the account, the sponsor
or another person designated by the sponsor obtains
information from the client regarding the client's financial
situation and investment objectives, and gives the client the
opportunity to impose reasonable restrictions on the
management of the account;
(ii) At least annually, the sponsor or another
person designated by the sponsor contacts the client to
determine whether there have been any changes in the client's
financial situation or investment objectives, and whether the
client wishes to impose any reasonable restrictions on the
management of the account or reasonably modify existing
restrictions;
==========================================START OF PAGE 58======
(iii) At least quarterly, the sponsor or another
person designated by the sponsor notifies the client in
writing to contact the sponsor or such other person if there
have been any changes in the client's financial situation or
investment objectives, or if the client wishes to impose any
reasonable restrictions on the management of the client's
account or reasonably modify existing restrictions, and
provides the client with a means through which such contact
may be made; and
(iv) The sponsor and personnel of the manager of
the client's account who are knowledgeable about the account
and its management are reasonably available to the client for
consultation.
(3) Each client has the ability to impose
reasonable restrictions on the management of the client's
account, including the designation of particular securities or
types of securities that should not be purchased for the
account, or that should be sold if held in the account;
Provided, however, that nothing in this section requires that
a client have the ability to require that particular
securities or types of securities be purchased for the
account.
(4) The sponsor or person designated by the sponsor
provides each client with a statement, at least quarterly,
containing a description of all activity in the client's
account during the preceding period, including all
==========================================START OF PAGE 59======
transactions made on behalf of the account, all contributions
and withdrawals made by the client, all fees and expenses
charged to the account, and the value of the account at the
beginning and end of the period.
(5) Each client retains, with respect to all
securities and funds in the account, to the same extent as if
the client held the securities and funds outside the program,
the right to:
(i) Withdraw securities or cash;
(ii) Vote securities, or delegate the authority
to vote securities to another person;
(iii) Be provided in a timely manner with a
written confirmation or other notification of each securities
transaction, and all other documents required by law to be
provided to security holders; and
(iv) Proceed directly as a security holder
against the issuer of any security in the client's account and
not be obligated to join any person involved in the operation
of the program, or any other client of the program, as a
condition precedent to initiating such proceeding.
(b) As used in this section, the term sponsor refers to
any person who receives compensation for sponsoring,
organizing or administering the program, or for selecting, or
providing advice to clients regarding the selection of,
persons responsible for managing the client's account in the
program. If a program has more than one sponsor, one person
==========================================START OF PAGE 60======
shall be designated the principal sponsor, and such person
shall be considered the sponsor of the program under this
section.
By the Commission
Jonathan G. Katz
Secretary
March 24, 1997