September 27, 1989
TO: INVESTMENT ADVISER MEMBERS NO. 48-89
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 50-89
RE: SEC DIVISION DIRECTOR ISSUES LETTER ON WRAP-FEE ARRANGEMENTS
__________________________________________________________
On September 20, 1989, Kathryn McGrath, the Director of the
Division of Investment Management at the Securities and Exchange
Commission, issued a response letter to a request for advice
concerning wrap-fee arrangements. In her letter, she made
several points about advisers' fiduciary duties in wrap-fee
arrangements. A copy of the request and response letters are
attached.
Specifically, McGrath stated that although inspections of
advisers participating in wrap-fee arrangements have not
uncovered any significant abuses, wrap-fee arrangements have the
potential for abuse. She said that an adviser with discretion
over client assets owes its client a duty to provide advice
suitable for the client, not only regarding types of investments
but also regarding types of brokerage fee arrangements. Further,
she stated that advisers have a duty to obtain best execution
pursuant to Rule 206(3)-2(c) under the Investment Advisers Act of
1940. She cited the Bailey case as evidence of the fact that the
SEC will censure advisers which are not obtaining best execution
for its clients.
The letter also stated that an adviser must carefully
consider whether a wrap-fee arrangement is suitable and
appropriate for its clients prior to entering into such an
arrangement and that an adviser must disclose in its brochure the
terms of its practice regarding brokerage transactions and the
effects of such practices on its clients.
Robert L. Bunnen, Jr.
Assistant General Counsel
Attachment