September 18, 2000
TO: BOARD OF GOVERNORS No. 54-00
INVESTMENT ADVISERS COMMITTEE No. 21-00
SEC RULES COMMITTEE No. 114-00
RE: INSTITUTE SUBMISSION TO SEC CONCERNING WEB-BASED INVESTMENT
PROGRAMS
The Institute has submitted the attached letter and memorandum to the Securities and
Exchange Commission regarding the status under the federal securities laws of an investment
program being offered by Folio[fn] Investments, Inc. and other similar web-based programs.
The submission asserts that such programs involve the offer and sale of a separate security
under the Securities Act of 1933 and an investment company under the Investment Company
Act of 1940, and requests that the SEC staff examine these issues carefully.
Folio[fn] offers through its website investment products called “Folios,” which are
baskets of stocks that the investor purchases in a single transaction. Investors can choose from
various “Ready-to-go” Folios created by Folio[fn], which the investor can customize. The
shares in each Folio will consist primarily of odd lots and fractional shares, recorded on
Folio[fn]’s books as belonging to the individual investor. Folio[fn] will effect investors’
transactions by grouping them in each of two daily time windows and executing them by
matching and/or bunching them. Folio[fn] is registered with the SEC as a broker-dealer, but
not as an investment adviser, and its products are not registered under either the Securities Act
or the Investment Company Act.
The submission concludes that Folio[fn] is issuing, offering, and selling securities that
are separate from the underlying securities in investors’ portfolios because of investors’ reliance
on the investment expertise built into the “Ready-to-go” Folios and periodic changes in the
Folio compositions, as well as the continuing need for Folio[fn] to maintain a market in odd-lot
and fractional shares if the program is to be economically viable. Accordingly, the submission
asserts that the Folios should be registered under the Securities Act. Furthermore, the
submission states that the program and the Folios constitute investment companies under the
Investment Company Act and that the policies underlying that Act and the Securities Act –
especially the anti-self-dealing provisions, constraints on management fee increases,
independent director oversight, and disclosure and advertising requirements – justify
regulation of this and similar programs.
Amy B.R. Lancellotta
Senior Counsel
Attachment
2Attachment (in .pdf format)