February 23, 1994
TO: INVESTMENT ADVISERS COMMITTEE NO. 13-94
SEC RULES COMMITTEE NO. 17-94
RE: DRAFT COMMENT LETTER ON SEC WRAP FEE PROPOSAL
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As we previously informed you, the Securities and Exchange Commission (the
"Commission") issued for comment proposed revisions to Form ADV and the
disclosure rules under the Investment Advisers Act of 1940 to define the
disclosures that should be made to investors by sponsors of wrap fee programs.
(See Memorandum to Commission Rules Committee No. 3-94, Investment Adviser
Members No. 4-94, and Investment Adviser Associate Members No. 4-94, dated
January 19, 1994.) Attached is a copy of the Institute's draft comment letter
on the Commission's proposal.
The Institute generally supports the Commission's proposed amendments to
Form ADV to require disclosure about wrap fee programs. The Institute strongly
encourages the Commission to follow these amendments with a review of the legal
issues associated with these accounts, including the criteria for distinguishing
such account programs from unregistered investment companies. The Institute's
comments on specific aspects of the proposed amendments to Form ADV are
summarized below.
1. Requirement that advisers publish separate brochure
The Commission's proposal would require sponsors of wrap fee programs to
publish separate brochures relating solely to such programs. The Institute's
letter recommends that an adviser be permitted the flexibility, which it has
under current law, to determine whether to incorporate the required wrap fee
disclosures into an existing brochure or publish a separate brochure. To the
extent the Commission is concerned that the wrap fee disclosures may become
obscured if incorporated into an existing brochure, the Institute recommends that
the Commission: (1) require a table of contents be included at the front of any
brochure used by the adviser; (2) encourage advisers to use a separate brochure
when offering only a wrap fee program to particular clients; and (3) require that
the wrap fee information be placed at the front of the brochure.
2. Definition of wrap fee proposal
The Commission's proposal would apply to wrap fee programs and mutual fund
asset allocation programs in which the sponsor is affiliated with the funds. The
Institute's letter recommends, based upon the differences in these two types of
programs, that the proposal be amended to exclude mutual fund asset allocation
programs. In support of this recommendation, the Institute states that the
disclosures that are relevant to a client of a wrap fee program are either
inappropriate for or inapplicable to a client of an asset allocation program or
currently provided through Part II of Form ADV.
3. Disclosure of Fees and Compensation Arrangements
The Commission has requested comment on: whether the range within which a
wrap fee may be negotiated should be disclosed; whether disclosure about the
compensation paid to a portfolio manager is relevant to an investor; and whether
the compensation paid to a registered representative should be disclosed. The
Institute recommends that none of this information be required. The Institute
asserts that this information is irrelevant to investors. The Institute further
asserts that information on a portfolio manager's compensation is available
through such manager's independent compliance with Rule 204-3 under the
Investment Advisers Act (the "brochure rule"). With respect to a registered
representative's compensation, the Institute's letter notes that: this is not
information that is required in transactions not involving wrap fees; the pay-out
schedules may vary among representatives; and several factors, which may not be
easily explainable, may influence the compensation paid to individal
representatives.
4. Performance Information
The Commission's Release requests comment on whether the Commission should
consider proposing the use of standardized formulas for the calculation of
performance information. The Institute recommends that, should the Commission
be interested in pursuing this matter, it be undertaken separate and apart from
the wrap fee proposal.
5. A Client's Access to the Portfolio Manager
Under the Commission's proposal, the sponsor of a wrap fee program would
have to disclose any limitations on a client's access to the portfolio manager.
The Institute questions whether this disclosure is intended to signal a change
in the position of the Commission and its staff that any such limitations could
cause the program to be deemed an unregistered investment company under the
Investment Company Act. If so, the Institute recommends that such change be
dealt with in a separate release.
* * * * *
Please contact me with any comments you may have no later than Wednesday,
March 2, 1994. My direct number is 202/326-5825. Alternatively, you may fax
your comments to me at 202/326-5828.
Tamara K. Cain
Assistant Counsel
Attachment