December 11, 1989
TO: INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 59-89
INVESTMENT ADVISER MEMBERS NO. 59-89
RE: SEC DIVISION PERMITS DEDUCTION OF MODEL FEE IN PERFORMANCE
DATA ADVERTISEMENTS
__________________________________________________________
On November 27, 1989, the SEC's Division of Investment
Management, in response to the Securities Industry Association's
request for no-action assurance concerning investment adviser
advertising, stated that the Division would not recommend
enforcement action under Rule 206(4)-1(a)(5) of the Advisers Act
if investment advisers advertise historical net performance
results by deducting a "model fee" rather than the actual fee
charged during the time period portrayed. The Division's
response permits the use of a model fee, subject to certain
conditions and only until May 27, 1990. A copy of the SIA's no-
action request and the Division's response are attached.
As we previously informed you, the Division of Investment
Management in 1986 issued a no-action response to the Clover
Capital letter in which the Division stated that investment
advisory performance data must be provided net of investment
advisory fees. (See Memorandum to Investment Adviser Members
No. 33-86 and Investment Adviser Associate Members No. 36-86,
dated November 24, 1986). In 1988, the Institute was successful
in obtaining an exemption from the Clover Capital no-action
response provided that gross performance data is presented on a
one-on-one basis, through a confidential and private
communication, and that certain disclosures are made, including a
discussion of the effect over a period of years that compounding
could have on investment advisory fees. (See Memorandum to
Investment Adviser Members No. 42-88 and Investment Adviser
Associate Members No. 43-88, dated October 3, 1988). The
Division's recent no-action response does not affect the
Division's 1988 response.
The SIA's November 7, 1989 letter recommended that a model
fee be used in place of an actual fee in calculating net
performance results because many advisers found it difficult or
impossible to reconstruct past performance data in a way that
reflected the fees actually charged to specific accounts. The
SIA proposed including a legend indicating that "the performance
figures do not reflect the deduction of investment advisory fees
actually charged the account. However, the performance figures
do reflect the deduction of model advisory fees."
In the Division's response letter to the SIA, the Division
permitted the use of a model fee until May 27, 1990, provided the
following two principles are met. First, if the adviser offered
more than one fee schedule for a given size account during the
periods portrayed, the appropriate fee for each period is the fee
for the given account size derived from the schedule most often
selected by clients. Second, if the adviser includes performance
from different size accounts, the appropriate fee for each period
is the highest fee charged during that period to any account
included in the performance portrayal.
Through the no-action position, the Division has granted
advisers a six-month grace period, until May 27, 1990, to
advertise historical net performance data by deducting a "model
fee" as described above, instead of the actual advisory fee.
Beginning not later than May 27, 1990, however, any advertisement
that includes data concerning performance after that date must
reflect deduction of an adviser's actual fees. Thus, if the
period advertised includes performance data before and after May
27, 1990, the adviser should include appropriate disclosure
explaining that the results reflect both the deduction of a
"model fee" and the deduction of the adviser's actual fee.
Robert L. Bunnen, Jr.
Assistant General Counsel
Attachment