Investment Management Industry News Summary - January 2005

Investment Management Industry News Summary - January 2005

Publications

This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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The ICI’s Independent Directors Council (“IDC”) issued a Task Force Report on “Implementing the Independent Chairperson Requirements”

January 28, 2005 10:57 AM

The IDC convened a task force to study the implications of the SEC’s new independent chairperson requirements. The task force’s report outlines recommendations on how to comply with the new requirements. Certain of the issues identified by the task force are described below:

  • The task force noted that naming an independent director as chairperson will not necessarily generate a host of new responsibilities for that person. The task force explained that one of the chairperson’s primary responsibilities will be to provide leadership to the board and advance the principle that all decisions made by the board are in the best interest of the shareholders. In addition, the chairperson may serve as the primary contact for management executives and other members of the adviser’s staff that wish to communicate with the board and/or for the board to communicate with third parties.
  • The task force indicated that selection of the chairperson will require consideration of a number of factors. In particular, the report stated that the individual selected to serve as chairperson should (i) be willing and able to devote the additional time and energy necessary to adequately perform the functions of chairperson; (ii) be able to work well with others and have exhibited the ability to act in a leadership capacity; (iii) have a working knowledge of the investment management industry; and (iv) promote communication between board members and encourage members to stay abreast of industry developments.
  • The task force asserted that the compensation to be provided to the chairperson should be set based on an evaluation of a number of factors. In particular, the task force explained that (i) the individual selected as chairperson may be devoting a considerable amount of time to the position; (ii) as a result of the time commitment, the chairperson may be giving up other professional opportunities; and (iii) to the extent the chairperson is involved in other activities that enhance his or her abilities, he or she may be gaining skill sets that may benefit the board and fund shareholders.
  • Finally, the task force asserted that a chairperson should serve a term of several years and that there should not be any established term limits. However, the task force recognized that there may be circumstances under which a chairperson should be removed and identified a few ways this could be addressed. The task force suggested that a fund could include removal procedures in its by-laws, along with selection criteria, or removal procedures could be set forth in a separate document and approved with selection criteria by the fund’s board of directors. As an alternative, the task force suggested that a fund’s by-laws could provide for the annual election of all officers, including officers of the fund and the chairperson and other officers of the board. Under this process, the chairperson would be appointed with the understanding that he or she will be re-elected for several years, but the need to stand for re-election would serve as a tactful way to provide for the replacement of a chairperson who was not meeting expectations. Finally, the task force said that boards could decide to include a provision in their annual self-assessment that specifically addresses chairperson performance. The task force said that this would be helpful in identifying situations where the chairperson may have lost the confidence of the board.

Implementing the Independent Chairperson Requirement, Independent Directors Council of the ICI Task Force Report, dated January 2005.

 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

SEC and United States Chamber of Commerce filed briefs in connection with the Chamber of Commerce’s lawsuit challenging the SEC’s mutual fund governance rules

January 28, 2005 10:55 AM
In a response brief filed January 12, 2005, the SEC defended its authority to impose conditions on mutual funds seeking to rely on certain exemptions under the Investment Company Act of 1940 (the “1940 Act”). The SEC argued that the corporate governance provisions of the 1940 Act have always emphasized the importance of independent director oversight of mutual funds. The SEC further argued that its adoption of the new mutual fund governance rules was entirely consistent with Congressional intent that the SEC have authority to grant exemptions under the 1940 Act when those exemptions are consistent with the purposes of the 1940 Act. The SEC also challenged the Chamber of Commerce’s standing to bring suit against the SEC on this matter, arguing that the Chamber had not shown that any of its members have been harmed by the new rules.

The Chamber of Commerce filed a reply brief on January 26, 2005, in which it defended its standing to file suit by arguing that its members include mutual fund advisers and investors, both of which be affected by the SEC’s new rules. The Chamber of Commerce also argued that the SEC failed to adequately justify the new mutual fund governance provisions and reiterated its argument that the provisions should be vacated.

Oral argument in this case is set for April 15, 2005.

Chamber of Commerce of the United States of America v. SEC, D.C. Cir., No. 04-1300.
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

SEC’s routine examination document request list gets longer

January 28, 2005 10:53 AM
The latest version of the SEC’s document request list being used for routine investment adviser and investment company examinations is now fully 78 items long. The list includes a number of new documents, and investment advisers will search the SEC’s recordkeeping rules in vain to find any references to some of them. This means investment advisers are being asked to create documents in connection with their examinations. Among the documents requested are the adviser’s current inventory of risks, the adviser’s standard operating procedures for creating and maintaining the firm’s compliance policies and procedures, and of course, e-mails for specified officers, including the chief compliance officer. The request also includes a questionnaire that the adviser’s chief compliance officer is asked to complete.
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

No-action letter allows investment advisers to guarantee “satisfaction” in marketing materials

January 28, 2005 10:44 AM
The SEC staff has granted no-action to a group of affiliated investment advisers that proposed to guarantee unconditionally to clients that they would be entitled to a full refund of all advisory fees paid within the first twelve months of establishing an advisory account if the clients for any reason were not satisfied with the advisers.

Section 205(a)(1) of the Advisers Act provides that, unless exempt from registration under Section 203(b), no investment adviser shall enter into an advisory contract that provides for “compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.” The SEC staff has taken the position that this provision prohibits registered investment advisers from entering into advisory contracts having a contingent fee (i.e. , an advisory fee that will be waived or refunded, in whole or in part, if a client’s account does not meet a specified level of performance). The staff has argued that such contingent fees provide incentives for an adviser to take undue risks, speculate, or engage in over-trading because the adviser knows that its fee could be reduced or eliminated if performance does not reach an agreed-upon level.

In its response, the staff took the view that, although the proposed guarantee technically would be considered a contingent fee, the guarantee was not structured so as to create the sort of incentives that the staff’s position regarding contingent fees was intended to address. In particular, the staff based its decision granting no-action relief on the following facts:

  • (1)Participating clients would be entitled to a refund of advisory fees for any reason;
  • There would be no explicit or tacit understanding or agreements between the investment advisers and participating clients regarding a maximum, minimum, or other target level of investment performance for those clients’ investment accounts; and
  • The proposed guarantee would be available only for the initial twelve-month period of an advisory relationship.

Trainer, Wortham & Co., Froley, Revy Investment Co., Starbuck, Tisdale & Assoc., SEC No-Action Letter (December 6, 2004).

 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The NASD and NYSE Propose Rules For Allocation and Distribution of Offerring Shares That Complement the SEC’s Proposed Amendments to Regulation M

January 21, 2005 2:21 PM
In December 2004, the SEC published six proposed amendments to Regulation M, largely in order to prevent some abuses that occurred during IPOs in the 1990’s. The most major proposed amendment prohibits any distribution participants, issuers, and their affilated purchasers from directly or indirectly demanding, soliciting, attempting to induce, or accepting from their customers, any form of consideration in addition to the stated offering price of a security.

Also in December, the SEC announced that the NASD had proposed Rule 470 and the NYSE had proposed Rule 2712 in order to prevent certain practices in the allocation and distribution of IPO shares. Substantially similar, the Rules both would proscribe a number of arrangements, including “quid pro quo” arrangements: the NASD’s and NYSE’s respective members, as well as persons associated therewith, would be prohibited from offering or threatening to withhold an allocation of IPO shares in order to induce or receive excessive compensation. Both Rules also prohibit “spinning” arrangements: the NASD’s and NYSE’s respective members, as well as persons associated therewith, are prohibited from allocating IPO shares in exchange for past or future investment banking business. The Rules address certain IPO pricing issues, the practice of a broker-dealer passing on to customers the costs of penalty bids, and how members should treat secondary-market orders for IPO shares that they receive on the first day that such shares on traded on the secondary markets.

Together, the SEC, NASD, and NYSE are attempting to create reforms that conform to many of the recommendations of the IPO Advisory Committee, established in August of 2002 by SEC request to consider what reforms were necessary after many of the IPO practices of the 1990’s came to light.

Securities Exchange Act Release No. 38067, Investment Company Act Release No. 22412, Amendments to Regulation M: Anti-manipulation Rules Concerning Securities Offerings, December 9, 2004; Securities Exchange Act Release No. 50896, December 20, 2004 (SRO Proposing Release).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

NASD Issues Notice to Members in Response to the Securities and Exchange Commission’s (“SEC”) Recent Prohibition of Directed Brokerage

January 21, 2005 11:01 AM
In October 2004, the SEC amended Rule 12b-1, promulgated under the Investment Company Act of 1940, to prohibit investment companies from using brokerage commissions to finance the distribution of their shares. In response, the NASD has issued a Notice to Members to describe amendments to NASD Rule 2830(k) that will conform that Rule to the new SEC Rule.

Rule 2380(k) generally prohibits NASD members from favoring the sale of any particular investment company’s shares based on brokerage comissions received from that investment company. Current Rule 2830(k)(7)(B), however, explicitly permits a member to sell shares of an investment company that takes sales of fund shares into consideration in determining the selection of brokers for portfolio transactions, so long as the investment company’s directed brokerage practices are disclosed in its prospectus.

Effective as of February 14, 2005, NASD Rule 2830(k)(7)(B), described above, whereby a NASD member could sell or underwrite the shares of an investment company that permitted directed brokerage will be deleted. Further, the amended Rule explicitly prohibits a NASD member from selling such shares or acting as an underwriter of such shares if the member knows or has reason to know that the investment company directs brokerage in consideration of fund sales, even if that the brokerage is actually directed at another member-broker.

NASD Notice to Members 05-04 - January 2005, SEC Approves Amendments to NASD Rule 2830(k) to Strengthen Prohibitions on Investment Company Directed Brokerage Arrangements, available at www.NASD.com.
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.
IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Investment Counsel Association of America (“ICAA”) Objects to Proposal by CFA Institute On Wrap Fee Account Performance Standards

January 14, 2005 2:27 PM
In a comment letter to the CFA Institute and the CFA Centre for Financial Market Integrity dated December 30, 2004, the Investment Counsel Association of America (“ICAA”) expressed opposition to proposed guidance by the CFA Institute and the Investment Performance Council on the application of Global Investment Performance Standards (“GIPS”) to wrap fee/separately managed accounts (SMAs).

GIPS provides guidance on how investment firms should calculate and report their investment results. The standards were established by CFA Institute's predecessor Association for Investment Management and Research (“AIMR”). While conformance to GIPS is voluntary, any investment manager who claims it is compliant when it is not is subject to regulatory action.

In the letter, the ICAA expressed concern that advisers will not be able to comply with the proposed (1) recordkeeping requirements and (2) compliance date.

Recordkeeping Requirements

The ICAA’s principal concerns regarding the proposed recordkeeping requirements centered on the proposed three "options" for satisfying GIPS Standard 1.A.1, which requires that, "All data and information necessary to support a firm's performance presentation and to perform the required calculations must be captured and maintained." ICAA rejected each of the three proposed options as follows:

  • Option one – to rely on the performance calculated and reported by sponsors: The ICAA stated that this option is unreasonable because sponsors generally do not provide managers with access to individual account information that may be necessary for the manager to satisfy itself regarding the sponsors' performance calculations.
  • Option two – to use a "shadow accounting" system to track the SMA portfolios on the adviser's in-house performance measurement systems: The ICAA noted that this option is beyond what is technologically feasible at present. In particular, the ICAA stated that it would be prohibitively expensive and time-consuming to manually reconcile the “literally thousands of accounts” within the numerous wrap fee/SMA programs in which manager may participate. Further, the ICAA argued, that a manager's good faith attempt to obtain the required data to perform shadow accounting has been, and will continue to be, frustrated by the state of the systems in the wrap fee industry and the lack of connectivity among wrap fee sponsors and managers.
  • Option three – redefining the firm to exclude the SMA division from the definition of firm: The ICAA asserted that this option is too burdensome and time-consuming to work for firms wanting to implement new wrap products. Among other things, this option would entail the cost of recalculating the firm's assets under management, restructuring the firm's composites, and rebranding the firm and the SMA division.

Compliance Date

Finally, the ICAA stated that the January 1, 2006, compliance date proposed for the guidance, which is six months after the proposed June 2005 adoption date, is impractical and burdensome. The ICAA sought to extend the compliance period for at least two years from the date of the statement's adoption.

BNA Securities Regulation & Law Report, Vol. 37, No. 3, January 17, 2005 

 

 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

SEC extends comment period for proposed rule relating to self-regulatory organizations (SROs)

January 14, 2005 2:23 PM
On January 11, 2005, the SEC voted to extend for 45 days the comment period on the proposed rulemaking relating to SROs. These proposed new rules and amendments to existing rules relate to the governance, administration, transparency, and ownership of SROs that are national securities exchanges or registered securities associations, and the periodic reporting of information by these SROs regarding their regulatory programs. The proposals also relate to the listing and trading by SROs of their own or affiliated securities. The SEC received requests from interested persons to extend the comment period for this release to March 8, 2005, to coincide with the comment period for the related concept release concerning self-regulation. In extending the comment period, the SEC stated that it believes the extension is appropriate given the length and complexity of the proposals.

The comment period for Release No. 34-50699 will now end on March 8, 2005. The scope and comment process for this release remains as stated in the original release.

For a more detailed discussion of the proposed rulemaking and the concept release, see the WilmerHale Investment Management News Summary for the week of December 17, 2004.

SEC Press Release 2005-5.
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

SEC issues temporary rule and reproposes rule for comment regarding broker-dealer exemption from registration under the Investment Advisers Act of 1940 (the “Advisers Act”)

January 7, 2005 2:30 PM

In November 1999, the SEC issued a release (the “Proposing Release”) proposing a new rule under the Advisers Act. The Proposing Release included:

  • a proposed rule that would exclude from the definition of “investment adviser” a broker-dealer providing investment advice to customers, regardless of the form that its compensation takes, as long as: (1) the advice is provided on a nondiscretionary basis; (2) the advice is solely incidental to the brokerage services; and (3) the broker-dealer discloses to its customers that their accounts are brokerage accounts.
  • a provision in the proposed rule that a broker-dealer would not be deemed to have received “special compensation” solely because the broker-dealer charges a commission, mark-up, mark-down, or similar fee for brokerage services that is greater than or less than one it charges another customer.
  • a statement granting temporary no-action relief to broker-dealers that fail to treat accounts over which they do not exercise investment discretion as subject to the Advisers Act, effective until the SEC takes final action on the proposed rule.

The proposed rule was intended to responded to the introduction of two new types of brokerage programs offered by full-service broker-dealers – “fee-based brokerage programs” and “discount brokerage programs.” The release also addressed concerns that the SEC had long held about the incentives that commission-based compensation provides to churn accounts, recommend unsuitable securities, and engage in aggressive marketing of brokerage services.

When the SEC re-opened the comment period on the proposed rule in August 2004, it received comments that raised complicated and significant issues, including what is solely incidental to brokerage and how a broker-dealer can hold itself and its services out to the public. The SEC noted that these issues extend beyond those originally contemplated by the Proposing Release, and suggest the need to repropose the rule in the full context of what is “solely incidental” to brokerage.

Accordingly, the SEC:

  • adopted a temporary rule providing that a registered broker-dealer will not be deemed to be an investment adviser required to register under the Advisers Act based solely on its receipt of special compensation, provided that certain conditions are satisfied; and
  • reproposed the rule addressing the application of the Advisers Act to broker-dealers offering certain types of brokerage programs, and released a statement of interpretive position that would clarify when certain broker-dealer advisory services, including financial planning, are solely incidental to brokerage business.

Temporary Rule

Under temporary rule 202(a)(11)T, a registered broker-dealer providing investment advice to its brokerage customers is not required to treat those customers as advisory clients solely because of the form of the broker-dealer's compensation, provided that :

  • the broker-dealer does not exercise investment discretion over the account from which it receives special compensation; and
  • any investment advice is solely incidental to the brokerage services provided to the account.

The accompanying reproposing release described below sets out certain proposed interpretations of what services the SEC views as “solely incidental” to brokerage and, as noted above, seeks comment on other issues related to this topic.

The temporary rule differs from the rule proposed in the Proposing Release in that the temporary rule does not include a requirement that broker-dealers disclose to customers that their accounts are brokerage accounts. The SEC noted that it nevertheless encourages broker-dealers to make that disclosure.

The temporary rule also contains a provision that a broker-dealer will not be considered to have received special compensation solely because the broker-dealer charges a commission, mark-up, mark-down or similar fee for brokerage services that is greater than or less than one it charges another customer. The SEC stated that this provision is intended to keep a full-service broker-dealer from being subject to the Advisers Act solely because it also offers electronic trading or other forms of discount brokerage. Conversely, a discount broker will not be subject to Advisers Act registration solely because it introduces a full-service brokerage program.

The SEC also confirmed that a dually registered entity, (i.e., that is registered as a broker-dealer and as an investment adviser) is an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subject the broker-dealer to Advisers Act registration.

The temporary rule will expire on April 15, 2005. The SEC stated that it intends to act on the accompanying reproposal before that time. While the temporary rule is in effect, a broker-dealer receiving special compensation for advisory services provided to customers must satisfy each of the requirements of the temporary rule to avoid registration under the Advisers Act. The SEC noted that unless another exception is available, the failure of a broker-dealer to meet any one of the requirements of the temporary rule will result in the loss of the exception, and the likely violation by the broker-dealer of one or more provisions of the Advisers Act.

The SEC stated that the temporary rule was adopted in order to avoid the disruption to broker-dealers offering these programs and to their customers who invest through them, and to provide time for further consideration of the rule reproposal described below. As a result of the adoption of this temporary rule, the staff no-action position announced in the Proposing Release was withdrawn.

Certain Broker-Dealers Deemed Not To Be Investment Advisers SEC Release Nos. 34-50979; IA-2339; File No. S7-25-99 (January 6, 2005)

Rule Reproposal

Under the reproposed rule, a broker-dealer providing nondiscretionary advice that is solely incidental to its brokerage services is excepted from the Advisers Act regardless of whether it charges an asset-based or fixed fee (rather than commissions, mark-ups, or mark-downs) for its services. The rule would be available to any broker-dealer registered under the Securities Exchange Act of 1934 that satisfies three conditions:

  • the broker-dealer must not exercise investment discretion over the account from which it receives special compensation;
  • any investment advice must be solely incidental to the brokerage services provided to the account; and
  • advertisements for and contracts, agreements, applications and other forms governing the account must contain certain prominent disclosures, including a statement that the account is a brokerage account and not an advisory account.

These requirements are similar to those included in the proposed rule, except that the SEC would expand the required customer disclosure. The original proposal would have required broker-dealers to disclose only that the fee-based accounts are brokerage accounts. The SEC sought comment on this aspect of the reproposed rule.

Under the reproposed rule, exercising investment discretion is not solely incidental to brokerage business, and thus, a broker-dealer providing discretionary advice would be deemed to be an investment adviser under the Advisers Act. The SEC sought comment on whether “discretionary authority” is a workable “bright line” test and whether there alternate tests that would be more appropriate.

The reproposed rule would supersede the existing SEC staff interpretation, under which a discretionary account is subject to the Advisers Act only if the broker-dealer has enough other discretionary accounts to trigger the Act. Under the reproposed rule, the exception would be unavailable for any account over which a broker-dealer exercises investment discretion, without regard to how the broker-dealer handles other accounts.

The reproposed rule also includes a provision that broker-dealers would not be subject to the Advisers Act solely because they offer full-service brokerage and discount brokerage services, including electronic brokerage, for reduced commission rates. It would also codify the SEC’s interpretation that, if a broker-dealer is dually registered as a broker-dealer and an investment adviser, it would be treated as an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subject the broker or dealer to the Advisers Act. The SEC would also interpret the broker-dealer exception as being available not only to a broker-dealer, but also to its registered representatives.

In addition, the SEC provided a statement of interpretive position that would clarify when certain broker-dealer advisory services, including financial planning, are “solely incidental” to brokerage business. Among other things:

  • the SEC would address concerns regarding broker-dealers “holding out” as investment advisers by requiring prominent disclosures putting investors on inquiry as to the differences between these types of accounts (as described above);
  • broker-dealers holding themselves out as financial planners would be deemed advisers subject to the Advisers Act with respect to their financial planning clients; and
  • the SEC would re-affirm its current interpretation regarding wrap program sponsorship.

Certain Broker-Dealers Deemed Not To Be Investment Advisers, SEC Release Nos. 34-50980; IA-2340; File No. S7-25-99 (January 6, 2005).

 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.