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|  |  | Investment Advisers Act of 1940 - Section 205(a)(1)Amerivest Investment Management, LLC
**August 19, 2014**

Response of the Chief Counsel's OfficeDivision Of Investment Management

IM Ref. No. 20144101037

Your letter dated August 18, 2014 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the "Commission" or "SEC") under Section 205(a)(1) of the Investment Advisers Act of 1940 (the "Advisers Act") against Amerivest Investment Management, LLC ("Amerivest"), an investment adviser that is an affiliate of TD Ameritrade, Inc. ("TD Ameritrade") and is registered with the Commission under the Advisers Act, if Amerivest offers to certain clients an advisory fee rebate (the "Proposed Fee Arrangement") in the manner described in your letter and summarized below.
Background
You state the following:

Amerivest currently offers a discretionary advisory service known as Amerivest Portfolios, which is made available to retail brokerage clients of TD Ameritrade (the "Service").  Under the Service, Amerivest serves as the investment adviser to the clients and is responsible for implementing the asset allocation models and corresponding mutual fund and exchange-traded fund investment recommendations provided by Morningstar Associates, LLC ("Morningstar Associates").  Morningstar Associates serves as an investment adviser and independent consultant to Amerivest with respect to the Service, but does not enter into an investment advisory agreement with Amerivest's clients.  Amerivest vets and implements Morningstar Associates' investment recommendations in their entirety, subject to non-investment related factors such as tax considerations and any reasonable restrictions a client may impose.1   Morningstar Associates is compensated by Amerivest based on a fee schedule that includes an asset-based fee component and a licensing fee component.  Accordingly, Morningstar Associates does not receive performance-based compensation.

Under the Proposed Fee Arrangement, Amerivest would continue to charge a quarterly asset-based advisory fee in advance.  However, Amerivest would rebate investment advisory fees for eligible clients who are invested in a model portfolio that experiences two consecutive discrete calendar quarters of negative performance (before advisory fees) during a twelve-month period (a "Term").  The amount of the rebate would be equal to 100% of the advisory fees paid by each eligible client for the two calendar quarters in which the performance composite for the model portfolio corresponding to the client's account experienced negative performance.  To determine whether performance was negative, each calendar quarter would be measured independently; the performance for multiple quarters would not be aggregated.  Amerivest will fully and clearly disclose the rules governing eligibility for the Proposed Fee Arrangement and the methodology for calculating the composite performance (together, the "Rebate Terms") to all clients participating in the Service.  Amerivest will follow the Rebate Terms and apply them fairly and consistently.  In the event that Amerivest decides to change the Rebate Terms in a manner that would disadvantage participating clients, Amerivest will notify participating clients of the change, and no such change will become effective prior to the commencement of the next subsequent Term.

The Proposed Fee Arrangement will not contain any "catch up" or other provision that would allow Amerivest to recapture foregone fees through future appreciation.  Amerivest will not deviate from or otherwise seek to influence Morningstar Associates' investment recommendations for the purpose of avoiding payment of any fee rebate under the Proposed Fee Arrangement.  Amerivest may deviate from Morningstar Associates' recommendations solely: (i) for non-investment and non-performance related reasons such as tax considerations or reasonable client restrictions; or (ii) to the extent so required to fulfill its fiduciary duty to clients.  Amerivest will make and keep true, accurate and current records detailing any such deviation and explaining why such deviation was necessary.  There will be no contract, arrangement, or other understanding, explicit or tacit, by and between Amerivest and Morningstar Associates or any principals thereof, such that Morningstar Associates' compensation or continued engagement would be affected by the payment or non-payment by Amerivest of any fee rebate pursuant to the Proposed Fee Arrangement.

The Proposed Fee Arrangement would be implemented for (i) all new discretionary client accounts, and (ii) all existing discretionary client accounts with a new deposit of $25,000 or higher, provided that the new deposit represents net new assets to Amerivest.  Clients would not have to elect to participate in the Proposed Fee Arrangement or request a fee rebate.  The fee rebate would automatically apply in the event of two consecutive calendar quarters of negative performance.  To be eligible for the Proposed Fee Arrangement, an account must participate in the Service for a minimum of two consecutive calendar quarters during the Term, and during such participation the client must not withdraw more than the required deposit of $25,000 to remain eligible for subsequent quarters.  Amerivest would reserve the right to extend the Term for additional twelve-month periods or to discontinue the Proposed Fee Arrangement upon ninety (90) days advance written notice to clients.

Subject to enforcing the requirements set forth in the preceding paragraph, Amerivest will not take any action for the purpose of negating or compromising a client's eligibility for the rebate, including, without limitation, any action that would result in a client no longer participating in the Service.
Analysis
Section 205(a)(1) of the Advisers Act generally prohibits registered investment advisers from entering into, extending, renewing or performing any investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains or capital appreciation in a client's account or any portion thereof.  Section 205(a)(1) is designed, among other things, to eliminate "profit sharing contracts [that] are nothing more than 'heads I win, tails you lose' arrangements," and that "encourage advisers to take undue risks with the funds of clients," to speculate, or to overtrade.2

You argue that Section 205(a)(1) does not, on its face, extend to fee waivers or rebates that are contingent on negative performance.  You acknowledge, however, that the SEC staff in Investment Advisers Act Release No. 721 (May 16, 1980) ("Release 721")3   stated that the concerns animating the performance fee ban "are as apposite to advisory fees which are contingent upon an advisory account obtaining a certain level of performance as they are to fees which vary directly with capital gains or appreciation."4

You note that the SEC staff has nonetheless provided no-action assurances in situations where fees are contingent on performance, but the conflicts of interest associated with performance fees are not present or are substantially mitigated.5   In particular, you state that in Trainer the SEC staff took the position that although a general satisfaction guarantee supported by the offer of a full refund was a contingent fee arrangement squarely within the scope of Release 721, it was "structured in a manner that would greatly reduce any incentive on the part of the [a]dvisers to take undue risks, speculate, or overtrade[]" and "could serve to encourage the [a]dvisers to develop a strong culture of client service and responsiveness."6

While you acknowledge that the Proposed Fee Arrangement represents a contingent fee arrangement of the kind prohibited by Section 205(a)(1) for the reasons discussed in Release 721, you argue that several aspects of the Proposed Fee Arrangement make it highly unlikely that Amerivest would attempt to avoid the rebate by taking undue risks, timing transactions in a client's account or over-trading.  In particular, you argue that Amerivest would not be in a position to directly affect the value of a client's account because Morningstar Associates, an investment adviser that is independent from Amerivest, would be responsible for security selection and asset allocation recommendations with respect to the model portfolios.  Moreover, you believe that any incentive that Amerivest might have to override Morningstar Associates' asset allocation recommendations in order to invest in more speculative investments is mitigated by the inability to recapture waived or rebated fees.  You argue that the Proposed Fee Arrangement is designed to further align Amerivest's interests with those of its clients because Amerivest does not make money if an eligible client does not make money.  You contend that the Proposed Fee Arrangement is the opposite of the "heads I win, tails you lose" approach that Section 205(a)(1) was designed to prevent.

We believe that certain aspects of the Proposed Fee Arrangement - particularly the role of Morningstar Associates in selecting securities and making asset allocation recommendations and the limited discretion Amerivest would have to deviate from such recommendations - help to alleviate the concerns that form the basis of Section 205(a)(1).  Based on the facts and representations in your letter, we would not recommend enforcement action to the Commission under Section 205(a)(1) of the Advisers Act against Amerivest if Amerivest enters into the Proposed Fee Arrangement as described in your letter and summarized above.

Our position is based particularly on your representations that:  (1) Amerivest will fully and clearly disclose the Rebate Terms to all clients participating in the Service, and will follow the Rebate Terms and apply them fairly and consistently; (2) in the event that Amerivest decides to change the Rebate Terms in a manner that may disadvantage participating clients, Amerivest will notify participating clients of the change, and no such change will become effective prior to the commencement of the next subsequent Term; (3) the Proposed Fee Arrangement will not contain any "catch up" or other provision that would allow Amerivest to recapture foregone fees through future appreciation; (4) Amerivest will not deviate from or otherwise seek to influence Morningstar Associates' investment recommendations for the purpose of avoiding payment of any fee rebate under the Proposed Fee Arrangement; (5) Amerivest may deviate from Morningstar Associates' recommendations solely: (i) for non-investment and non-performance related reasons such as tax considerations or reasonable client restrictions; or (ii) to the extent so required to fulfill its fiduciary duty to clients; (6) Amerivest will make and keep true, accurate and current records detailing any such deviation and explaining why such deviation was necessary; (7) the mere fact that Amerivest has deviated from or declined to implement a recommendation of Morningstar Associates will not - in and of itself - result in a loss of eligibility for the rebate; (8) there will be no contract, arrangement, or other understanding, explicit or tacit, by and between Amerivest and Morningstar Associates or any principals thereof, such that Morningstar Associates' compensation or continued engagement would be affected by the payment or non-payment by Amerivest of any fee rebate pursuant to the Proposed Fee Arrangement; and (9) subject to enforcing certain eligibility requirements, Amerivest will not take any action for the purpose of negating or compromising a client's eligibility for the rebate including, without limitation, any action that would result in a client no longer participating in the Service.

Because our position is based on the facts and representations made in your letter, you should note that any different facts or circumstances might require a different conclusion.

Kyle R. Ahlgren Senior Counsel

1 You state that Amerivest's vetting process is designed to consider whether the asset allocations and securities recommendations provided by Morningstar Associates are reasonable in relation to the investment mandate and risk/return characteristics of each model portfolio and the overall operation of the Service.  You state further that Amerivest may choose not to implement a recommendation provided by Morningstar Associates based on non-investment related considerations that might adversely impact client accounts (e.g., the tax ramifications of substituting one ETF for another).  You represent that the mere fact that Amerivest has deviated from or declined to implement a recommendation of Morningstar Associates will not - in and of itself - cause a client to be ineligible for the rebate.

2 Trainer, Wortham & Co., et al., SEC Staff No-Action Letter (Dec. 6, 2004) (*"Trainer"*) at 7, *citing* S. Rep. No. 1775, 76th Cong., 3d Sess. 22 (1940), H.R. Rep. No. 2639, 76th Cong., 3d Sess. 29 (1940), and Securities and Exchange Commission, *Investment Counsel, Investment Management, Investment Supervisor and Investment Advisory Services*, H.R. Doc. 477, 76th Cong., 2nd Sess. at 30 (1939).

3*Contingent Advisory Compensation Arrangements*, Investment Advisers Act Release No. 721 (May 16, 1980).

4*Id.* at 4.

5 In addition, the SEC staff has stated that Section 205(a)(1) does not prohibit a voluntary refund of advisory fees by an investment adviser, provided that there is no contractual provision or other understanding between the adviser and the client regarding a fee refund or waiver related to investment performance.  Investment Advisers, Interpretive Matters (George Coleman), SEC Staff No-Action Letter (Jul. 18, 1995).

6*Trainer* at 9-10.
Incoming Letter
The Incoming Letter is in Acrobat format.

*http://www.sec.gov/divisions/investment/noaction/2014/amerivest-081914-205a1.htm*Home | Previous PageModified: 8/19/2014 |
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