* We have not included the issue regarding the Commission*s interpretation in the Piper Capital enforcement action of the phrase "completion of the transaction" in connection with principal
transactions under Section 206(3) of the Advisers Act because we have been advised by SEC staff that the Office of Chief Counsel in the Division of Investment Management is handling this matter rather
than the Task Force.
July 10, 1997
TO: INVESTMENT ADVISERS COMMITTEE No. 24-97
RE: PROPOSED REGULATORY INITIATIVES
_____________________________________________________________________________
As most of you are aware, the Securities and Exchange Commission has established a
Task Force on Investment Adviser Regulation. The Task Force is charged with implementing
the investment adviser provisions of the National Securities Markets Improvement Act of 1996
(NSMIA). In this regard, we have learned that one of the Task Forces first projects will be to
consider whether to amend new Rule 203A-3(a) to allow investment adviser representatives to
accept more clients on an accommodation basis than they may be able to accept under the rule.
Set forth below in Section I is a proposal regarding this matter.
In addition, the Task Force will review existing Commission adviser regulations and
forms and develop recommendations to modernize them in light of changes in the marketplace
and the advisory industry. The creation of the Task Force presents an opportunity for the
industry to recommend changes to the rules under the Advisers Act to enhance the
effectiveness and efficiency of investment adviser regulation. Set forth below in Section II is a
preliminary list of recommended changes and issues for your consideration.* In addition to
your general comments on these recommendations and whether there are any other changes
that should be considered, we are particularly interested in your thoughts on the issues
highlighted below in bold print.
Please provide your comments on the items set forth below to the undersigned (at
202/326-5824 or by e-mail at amy@ici.org) by July 30, 1997. After we receive your comments,
we will draft more detailed submissions on the items below and circulate them for your review.
I. Accommodation Clients
In the Release adopting rules under the Advisers Act to implement NSMIA, the
Commission expressed concern that, by not adopting an asset test as alternative criterion to a
client test for determining whether a supervised person is an "investment adviser
2representative" under new Rule 203A-3(a), an adviser representative who works on
institutional or business client accounts may be limited as to the number of accommodation
clients it may accept. To address this concern, we are considering recommending that the
Commission amend the rule to exclude persons affiliated with non-natural clients (i.e.,
directors, officers, trustees or employees of institutional and business clients) from treatment as
natural persons for purposes of the definition of "investment adviser representative." Further,
to ensure that such clients are being accepted only on an accommodation basis, we would
recommend that an adviser representative be prohibited from soliciting them. Thus, an adviser
representative, for example, would be prohibited from sending out a mass mailing to all
employees of a bank client. Do members agree with this proposal?
II. Proposed Regulatory Initiatives
A. Advertisements. Seek clarification, preferably in an interpretive release rather than
in a rule under the Act, of the requirements for advertising an investment advisers
performance data. In addition, are there any modifications to Rule 206(4)-1 that we should
seek (e.g., is the definition of "advertisement" appropriate? should advertisements tailored
for the institutional market be subject to different standards? should testimonials be
permitted under certain circumstances?)?
B. Performance Fees. Under NSMIA, the Commission was granted authority to
exempt from the Advisers Acts general prohibition on performance fees an advisory contract
with any person that the Commission determines does not need to be protected against
performance fees on the basis of such factors as, among other things, financial sophistication,
net worth, and knowledge of and experience in financial matters. Are there any such persons
that we should recommend be exempt? Should any of the requirements in Rule 205-3
permitting performance fees in certain instances be modified?
C. Custody Requirements. The staffs positions as to what constitutes "custody" under
the Advisers Act are expressed in a number of different no-action letters. It would be useful to
the industry if these positions were consolidated and set forth in a comprehensive interpretive
release on this issue. Should any of the provisions in Rule 206(4)-2 regarding custody of
client assets be modified?
D. Proxy Voting. In 1994, the Department of Labor issued an interpretive bulletin
summarizing its previous statements about the proxy voting duties of ERISA fiduciaries. Is
any additional guidance needed regarding an advisers proxy voting responsibilities? What
about for advisers to non-ERISA accounts?
E. Solicitors. The staff should provide interpretive guidance regarding the payment of
referral fees by investment advisers to clear up some of the general confusion that currently
exists. In addition, Rule 206(4)-3 applies only to registered investment advisers. Therefore,
persons excluded from the definition of an investment adviser (e.g., banks) are not subject to the
rule. Should the rule should be modified to cover all investment advisers, regardless of
3whether they are registered under the Act? Finally, the rule only covers the payment of cash
referral fees. Should the rule be expanded to cover non-cash referral fees?
F. Codes of Ethics. Paragraphs (a)(12) and (a)(13) of Rule 204-2 under the Advisers Act
require every investment adviser to keep records of the personal securities transactions of the
adviser and its "advisory representatives" (as defined in the rule). There is no requirement that
advisers adopt a written code of ethics comparable to the requirement in Rule 17j-1 under the
Investment Company Act. Should the Commission adopt such a requirement?
G. Foreign Advisers to U.S. clients/U.S. Advisers to Foreign Clients. Are there any
issues regarding the activities of foreign advisers to U.S. clients or of U.S. advisers to foreign
clients that should be addressed by the Commission? Specifically, should the Unibanco and
subsequent related no-action letters be summarized in a comprehensive interpretive release?
H. Form ADV. Do members have any suggestions for revising Form ADV or the
schedules thereto? Instead of a check-the-box approach, should the form allow registrants
greater flexibility in disclosing the information in a different format (e.g., a narrative
format)? Should any of the requirements in Part II be eliminated or simplified consistent
with the Commissions overall objective of improving disclosure provided to investors? On
a related matter, should the "brochure rule" be revised to require that a brochure be written
in "plain English"?
I. Wrap Fee Programs. Are there any issues raised by wrap fee programs on which
the Commission staff should provide interpretive guidance (e.g., what are the suitability
obligations of a programs portfolio managers?). Should any of the disclosure requirements
for wrap fees programs contained in Schedule H to Form ADV be modified?
J. Recordkeeping Requirements. Should any of the requirements in Rule 204-2
setting forth an advisers recordkeeping obligations be modified? Should advisers be
permitted to store records on medium other than those already permitted (i.e., computer,
magnetic disk or tape)?
Amy B.R. Lancellotta
Associate Counsel