August 1, 1995
TO: INVESTMENT ADVISERS COMMITTEE No. 33-95
SEC RULES COMMITTEE No. 89-95
RE: SEC REPROPOSES RULE 3a-4 UNDER THE INVESTMENT COMPANY ACT
______________________________________________________________________________
The Securities and Exchange Commission recently reproposed Rule 3a-4 under the
Investment Company Act of 1940, to provide a nonexclusive safe harbor from the definition of
"investment company" for certain investment advisory programs, and proposed Form N-3a4,
which sponsors of these programs would have to file in order to notify the Commission of their
reliance on Rule 3a-4. Interests in these programs also would not require registration under the
Securities Act of 1933. A copy of the proposing release is attached.
The comment period for the proposal ends 60 days from Federal Register publication. A
meeting has been scheduled for Wednesday, September 6, 1995, at 10 a.m. at the Institute to
discuss the proposal. Please return the attached form by August 14th if you plan to attend.
Please return the attached form by August 14th if you plan to attend. If you are unable to
attend, please direct your comments to the undersigned (at 202/326-5819) by Septmember 6th.
1. Conditions of Proposed Rule 3a-4
Proposed Rule 3a-4 would impose the following conditions on any investment advisory
program intending to rely upon the rule:
each clients account must be managed on the basis of the clients financial situation,
investment objectives, and instructions;
if a program has more than one sponsor, one person would have to be designated as the
principal sponsor to carry out the sponsors duties under the rule;
the programs sponsor must obtain, and maintain, information from each client that is
necessary to manage the clients account individually;
the sponsor and portfolio manager must be reasonably available to consult with clients;
each client must be able to impose reasonable restrictions on the management of the
account;
each client must receive a quarterly statement of all activity in the clients account;
each client must retain certain specific indicia of ownership over the account;
the sponsor must establish and effect written procedures that are reasonably designed to
ensure that each of the conditions of the rule is met, must maintain the documents relating
to the program as set forth in the rule, and must furnish to the Commission upon demand
copies of specified documents, even if the sponsor is excepted from the definition of
"investment adviser" under the Investment Advisers Act. (The release asks whether any of
the conditions concerning written procedures and agreements imposes an undue burden
and whether the burden of any condition outweighs its benefits (p. 25).); and
if the sponsor designates another person to perform certain obligations under the rule, the
sponsor must obtain from that person a written agreement to perform those obligations.
2. The Commissions 1980 Proposal
In 1980, the Commission had proposed (but never adopted) an earlier version of Rule
3a-4. The revised proposal differs from the original proposal in several respects. Most notably,
revised proposed Rule 3a-4, unlike the original proposal, would not require a portfolio manager
to make separate determinations regarding the appropriateness of each transaction for each
client prior to effecting the transaction, and would permit the use of model portfolios.
3. Specific Requests for Comment
The Commission requests comment on the following specific issues:
Should the rule specifically require that client information obtained under the rule be
conveyed to the portfolio manager that is managing the clients account? (p. 17)
The rule would not impose a minimum account size. Should a minimum account size be
required and, if so, what size should it be and should it be required to be met only when the
account is opened? Should clients be removed from the program if the account size fell
below the initial minimum due to investment loss rather than withdrawal? Should a
minimum account size apply to the clients aggregate investment in the program or to each
account managed by a portfolio manager? Would any other proposed condition be
rendered unnecessary by a minimum account size requirement? Should programs with
small account minimums be subject to additional conditions? (pp. 20-21)
What are the costs and benefits of the proposed rule and form?
4. The Commissions Future Interpretive Release
The proposing release notes that wrap fee and other investment advisory programs
raise issues under the Investment Advisers Act, including those concerning suitability, best
execution, principal and agency cross-transactions, and disclosure regarding various fees
associated with mutual fund wrap programs. The Commission requests comment on these
issues. The proposing release states that the Commission will publish an interpretive release
addressing many of these issues after the comment period on proposed Rule 3a-4 has expired.
Thomas M. Selman
Associate Counsel
Attachments