March 7, 1994
TO: INVESTMENT ADVISERS COMMITTEE NO. 20-94
SEC RULES COMMITTEE NO. 29-94
RE: INSTITUTE LETTER ON SEC WRAP FEE PROPOSAL
__________________________________________________________
As we previously informed you, the Securities and Exchange Commission
recently proposed revisions to Form ADV and rules under the Investment Advisers
Act of 1940 to define the disclosure that should be made to investors by sponsors
of wrap fee programs. (See Memorandum to Investment Advisers Committee No. 4-94
and SEC Rules Committee No. 9-94, dated January 19, 1994.) The Institute
recently submitted to the Commission the attached comment letter on the proposal,
which is summarized below.
1. Proposed Separate Brochure Requirement
The Commission's proposal would require sponsors of wrap fee programs to
provide clients with a separate brochure containing the disclosures specified on
proposed Schedule H to Form ADV. The Institute recommended that the proposal be
amended to provide advisers the flexibility they have under current law to
determine whether to incorporate the requisite wrap fee program disclosure into
an existing brochure or to provide a separate brochure. To the extent the
Commission is concerned that material information concerning wrap fee programs
may be obscured if advisers are permitted to incorporate the disclosures into an
existing brochure, the Institute further recommended that the Commission (1)
require a table of contents be included at the front of the brochure, and (2)
encourage advisers to use a separate brochure when offering only a wrap fee
program to particular clients.
2. Proposed Definition of "Wrap Fee Program"
The proposed definition of "wrap fee program" would include mutual fund
asset allocation programs. The Institute recommended that such programs be
deleted from the definition inasmuch as most of the Schedule H disclosure would
be either inappropriate for or inapplicable to such programs. Accordingly,
requiring such programs to provide Schedule H disclosure may result in investors
receiving less meaningful disclosure than they do under current law.
3. The Proposed Schedule H Disclosures
The Commission specifically requested comment on the various disclosure
items included in Schedule H. In response, the Institute commented on, among
other things, the proposed disclosure of: (1) the range within which the
adviser's fees may be negotiated; (2) the portion of the wrap fee paid to the
portfolio manager; and (3) the compensation paid to registered representatives.
With respect to (1), the Institute recommended that the range within which the
adviser's fee may be negotiated not be required disclosure because for the
disclosure to be meaningful, the factors that influence negotiability, which may
not be easily discernable or describable, also would have to be disclosed. In
addition, such disclosure would be inappropriate and potentially meaningless to
investors. With respect to (2), inasmuch as the advice to be provided by the
portfolio manager is a highly significant service under the wrap fee account, the
Institute concurred that a sponsor should disclose the portion of the wrap fee
paid to the portfolio manager. Finally, the Institute recommended that the
Commission not require disclosure of the compensation paid to the registered
representative because this may be proprietary information and is not generally
required of other persons in the securities or investment advisory business.
In response to the Commission's request for comment on whether it should
consider proposing the use of standardized formulas for the calculation of
performance information for portfolio managers in wrap fee programs or for
investment advisers generally, the Institute recommended that any consideration
of this issue be undertaken separate and apart from the Commission's consideraion
of the standards relating to wrap fees as it would require further extensive
study.
4. The Continuing Need for Uniformity
The Institute's letter noted that, although the Commission's wrap fee
proposal was developed in conjunction with the North American Securities
Administrators Association ("NASAA"), who also issued its own proposal, there
remain differences between the two proposals. The Institute recommended that the
Commission and NASAA continue to work together to ensure that the final product
of their collective efforts provides for fully consistent regulation.
Tamara K. Cain
Assistant Counsel
Attachment