June 6, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Mr. Jonathan Katz
RE: File No. S7-10-02/Comment Letter on Proposed Rule Regarding Exemption for Certain Investment Advisers Operating Through the Internet
Ladies and Gentlemen:
As a federally registered investment adviser and a leading provider of investment advisory services delivered electronically, Financial Engines Advisors L.L.C. ("Financial Engines") wishes to comment on proposed rule amendments under the Investment Advisers Act of 1940, as amended (the "Act"), that would exempt certain investment advisers that provide advisory services through the Internet from the prohibition on Commission registration set out in section 203A of the Act.1
We understand that proposed rule 203A-2(f) would exempt an adviser from the prohibition on Commission registration if the adviser conducts "substantially all" of its adviser business "through" an "interactive website" on the Internet and can demonstrate through records that it satisfies the conditions of the rule. We applaud the efforts of the Commission to remove prohibitions on federal registration for advisers who might otherwise face significant barriers to market entry presented by the cost and burden of multiple state registration. It is appropriate to alleviate the unfair burdens of multi-state registration for investment advisers who may have little physical presence in a community or state, who may have little or no in-person contact with clients, and whose activities by their nature are not confined to one or only a few states that have a distinct regulatory interest in the advisers' operations. We believe that there may be additional investment advisers offering their services electronically that should be eligible for federal registration but that may not satisfy the conditions of the rule as currently proposed; accordingly, we suggest certain changes to the proposed rule to include these advisers within its scope.
The proposed rule would apply to investment advisers conducting substantially all of their business through an interactive website on the Internet. To satisfy this condition, an investment adviser would be required to demonstrate that 90% of its clients obtain investment advice from the adviser exclusively through the website. It is our understanding that financial firms that provide extensive Internet-based services do not necessarily rely exclusively on Internet websites to engage in advisory relationships. Investors and financial firms may interact with each other through many different service delivery channels that can range from such methods as paper and the U.S. Mail, to E-mail, to telephone call centers, to face-to-face meetings. These delivery channels usually are not mutually exclusive. Consequently, investment advisers who use multiple service delivery channels, including interactive Internet websites and other electronic facilities, may not meet the requirement that 90% of their clients obtain advice exclusively through an "interactive website."
We suggest that proposed rule 203A-2(f) be revised to provide for federal registration by an investment adviser that conducts a substantial portion of its advisory business through electronic delivery. Under this revised standard, a "substantial portion" would be defined to mean that at least 20% of the investment adviser's clients can obtain their investment advice from the adviser through electronic means. We suggest that electronic delivery be defined to include not only an interactive Internet website in which computer software-based models or applications provide investment advice to clients based on information each client supplies through the website, but other forms and technologies, including E-mail and wireless technologies.
We now turn to the following specific comments requested by the Staff:
Does the proposed rule differentiate adequately between advisers that merely use the Internet to market their business and those that conduct substantially all of their advisory business through the Internet?
The proposed rule effectively distinguishes between such advisers. The alternative we propose still allows the Commission to differentiate between advisers who use electronic delivery as a substantial part of their business from advisers who merely use websites for marketing purposes or other media to communicate with clients .
Will the test of "substantially all" appropriately limit the use of the rule or, are there other alternative tests that we should consider?
We urge the Staff to consider other alternatives that serve the purpose of removing undue burdens on investment advisers utilizing electronic technologies to reach clients nationwide, yet would not provide new grounds for federal registration for advisers who merely use the electronic channels for marketing purposes only.
The rule would require that 90% of the adviser's clients obtain their investment advice exclusively through the interactive website. Is 90% of clients the appropriate percentage? If not, what higher or lower percentage should we consider?
Investment advisers may use multiple delivery channels to provide advisory services to their clients. An investment adviser that offers alternative delivery channels to meet the needs of its clients and that conducts a substantial portion of its business through electronic means should be eligible for federal registration under the proposed rule. We suggest that 20% of an investment adviser's clients is a substantial portion.
Should we require that these clients obtain all of their advice from the adviser through the interactive website? Alternatively, should we consider permitting an adviser to use the rule even if these clients obtain less than all of their advice through the website? If so, what proportion should we require? How would the adviser measure that proportion? What burden would this measurement place on the adviser?
We do not believe it is necessary to require that an investment adviser's clients obtain their advice exclusively through the electronic means; rather, it should be sufficient if a substantial portion can obtain the adviser's services electronically. Moreover, clients, not advisers, will ultimately determine how they want to receive advice.
We estimate that as many as 20 advisers may currently be eligible for the exemption provided by the proposed rule amendments. Is this estimate reasonable?
We are not aware of this many advisers who provide services exclusively through the Internet. We would anticipate under our proposed alternative that an estimate of 20 or more firms is reasonable.
We believe that demand for Internet Investment Advisers' services may grow in the next several years, perhaps as part of the growing demand for advice to pension plan participants. Is this expectation reasonable? How many new Internet Investment Advisers are likely to form to meet any increases in demand?
We agree that the demand for high quality advisory services delivered electronically will grow in the next several years. As the Staff is likely aware, more that 40 million participants in defined contribution plans need advice, and public policy continues to create new populations of self-directed investors who need help on various investment alternatives such as individual retirement accounts, college savings plans and the like.
At this time, it is unclear how many new advisers will be formed to serve this need. We believe that the market will be competitive between current market incumbents and new market entrants to serve these investors needs.
Are there other types of investment advisers - without assets under management but operating in many states - that face similar burdens? How many of these advisers are there? In how many states do they typically register? Should we also consider exempting them from section 203A?
We believe that investment advisers that may provide services electronically through means other than interactive Internet websites face burdens similar to those facing Internet Investment Advisers as contemplated in the proposing release, and the Commission should also consider exempting them from section 203A.
We hope that the Commission finds these comments helpful and are available to discuss these comments at the Commission's convenience.
Very truly yours,
Scott W. Campbell
Executive Vice President and General Counsel
cc Ms. Marilyn Barker, SEC Senior Counsel
Ms. Jennifer L. Sawin, Assistant Director, Office of Investment Adviser Regulation, Division of Investment Management
|1||Financial Engines is a wholly owned subsidiary of Financial Engines, Inc. ("FEI"). William F. Sharpe, a 1990 Nobel Prize Laureate in Economics, and Joseph A. Grundfest, a former Commissioner of the U.S. Securities and Exchange Commission, founded FEI in 1996. Financial Engines provides investment advisory services to individuals through employers, retirement plan providers and financial firms. To date, more than 737 plan sponsors have contracted with Financial Engines to provide advice to more than 2.4 million plan participants. In addition, Financial Engines provides pension-consulting services to defined benefit pension plans representing more than $175 billion in assets as of December 31, 2001. Financial Engines is registered as an investment adviser with the Commission pursuant to rule 203A-2(b) under the Act.|