i NOV 1~~4
 

p Our Ref. No. 94-333-CC
 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Linsco/Private Ledger Corp.
 

DIVISION OF INVESTMNT MAAGEMENT File No. 801-10970
 

Your letter of June 6, 1994 requests our assurance that we 

would not recommend enforcement action to the Commission under 

Section 22 (d) of the Investment Company Act of 1940 (" 1940 Act") 

if Linsco/Private Ledger Corp. ("LPL") charges its customers a
 

support services fee for transactions in investment company
 

securities while also receiving Rule 12b-1 fees from those
 

investment companies.
 

LPL is registered as a broker-dealer under the Securities
 

Exchange Act of 1934 and as an investment adviser under the
 

Investment Advisers Act of 1940. Through its Strategic Asset
 

Management ("SAM") accounts, LPL, acting as agent, makes
 

available to customers over 800 no-load and load-waived
 

investment companies, i/ as well as other securities. LPL
 

provides SAM account customers with investment advisory,
 

educational, in-house trade processing, and administrative
 

services. Customers receive periodic account statements that
 

reflect account activity and positions, and quarterly performnce
 reports consolidating income, gain, and performnce informtion. 

LPL uses a third party, Pershing, ~/ to prepare these reports for
 

SAM account customers, as well as to provide clearing, custodial,
 

and customer- level accounting services.
 

Currently, customers pay LPL an asset -based management fee
 

of up to 2.2 percent, depending on the size of the account, and
 

pay no commissions for the purchase or sale of securities in
 

their SAM accounts. LPL also charges customers a transaction fee
 

for in-house trade processing services. ~/ LPL pays a portion of
 

this fee to Pershing. SAM account customers pay no other fees to
 

LPL. 

i/ Load-waived investment companies are open-end funds that


waive their regular sales loads for SAM account customers.
 

Telephone conversation with Alice Pellegrino on
 

September 12, 1994.
 

~/ Pershing is a division of Donaldson, Lufkin & Jenrette


Corporation which is not affiliated with LPL. Telephone
 

conversation with Alice Pellegrino on September 12, 1994.
 

~/ The fee is $20 for each purchase or redemption of no-load or
 

load-waived investment company shares, or for each
 

redemption of load investment company.shares that have been
 

transferred by customers from other LPL brokerage accounts
 

into their SAM accounts.
 
.:¡ 

-..	 - -:2 '­

LPL proposes to eliminate the transaction fee for investment
 

company share purchases and redemptions and to enter into Rule
 

12b-1 agreements with certain investment companies that are
 

available through the SAM accounts. 4/ The Rule 12b-1 fee will
 

compensate LPL for the administrative, in-house trade processing,
 

and educational services provided to its customers. LPL also
 

proposes to charge customers a support services fee with each
 

purchase or redemption of no-load or load-waived investment
 

company shares, and with each redemption of load investment
 

company shares. Pershing will receive this support services fee
 

as compensation for providing clearing, custodial, 'and customer-


level accounting services.
 

Section 22 (d) of the 1940 Act prohibits an investment
 

company from selling its redeemable securities except at "a
 

current public offering price described in the prospectus" to any
 

person other than to or through a principal underwriter for
 

distribution. It further states that "if such class of security
 

is being currently offered to the public by or through an
 

underwriter, no principal underwriter of such security and no
 

dealer shall sell any such security to any person except a
 

dealer, a principal underwriter, or the issuer, except at a
 

current public offering price described in the prospectus."
 Section 22 (d) , s restrictions do not apply to a broker, as that 

term is defined in the 1940 Act. á/ Because LPL purchases and
 

redeems investment company shares as agent for its customers,
 

Section 22 (d) does not apply to LPL's involvement in these
 

transactions and, therefore, does not prohibit the support
 

services fee. ~/ This response is based on the representations
 

made to the Division. Any different facts or circumstances might
 

require a different conclusion.
 

DCtOv~ o.~~-~~­

Barbara Chretien-Dar 

Senior Counsel
 

~/ The Rule 12b-1 fees will be calculated as àpercentage of


assets held by SAM account customers in each investment
 

company. 

á/ United States v. National Ass'n of Sec. Dealers, 422 U.S.


694 (1975). See also Charles Schwab & Co. (pub. avail.
 

Aug. 6, 1992); A. WaYne Harrison (pub. avail. Sept. 20,


1977) . 

~/	 Although LPL may have selling dealer agreements with funds 

that are available to both its SAM aceount customers and to 

"	 its other brokerage customers, you state that LPL acts 

solely in an agency capacity when it sells these funds to 

SAM account customers. Telephone conversation with Robert 

C. Hacker on October 4, 1994.
 
,-. --r__-.
 

KIRKPATRICK & LOCKHART 

SOUT LOBBY - 9TH FLOOR 

1800 M STET N~. BOSTON, MA 

WASHINGIN, D.c. 20036-5891 HARISBURG, PA 

MIAMI, FL
 TELEPHONE (202) 778-90 

NEW YORK, NY TELEX 440209 KL DC UI 

PITfBURGH, PA
 FACSIMILE (202) 778-9100 ROBERT C. HACKER 

(202) 778-9016 

1940 Act/22 (d) 

June 6, 1994
 

ACT rl Ai - 4-0 

SECTION ~a Cd') 

Dorothy M. Donohue
 RULE Assistant Chief Counsel 

Division of Investment Management PUBLIC 

Securities and Exchange Commission AVAILABILIT l (- I ~ q4 

450 Fifth Street, N.W. 

Washington, D.C. 20549 

Re: Linsco/Private Ledger Corp.
 

Dear Ms. Donohue:
 

We are writing to you on behalf of our client, Linsco/
 

Private Ledger Corp. ("LPL"), to request that the staff of the
 

Division of Investment Management of the Securities and Exchange
 

Commission ("Commission") advise LPL that it would not recommend
 

any enforcement action based on Section 22 (d) of the Investment
 

Company Act of 1940 ("1940 Act") if LPL charges its customers a
 

per transaction charge to cover clearing, custodial, and
 

customer- level accounting services provided by Pershing, a
 

division of Donaldson, Lufkin & Jenrette Securities Corporation
 

("Pershing"), in connection with investments in certain mutual


funds and receives Rule 12b-1 fees from those mutual funds" all
 

as described below.
 

STATEMENT OF FACTS
 

LPL is a broker-dealer registered under the Securities
 

Exchange Act of 1934 and is a member of the National Association
 

of Securities Dealers, Inc. and the Boston Stock Exchange. LPL
 

is also an investment adviser registered under the Investment
 Advisers Act of 1940. Pershing provides execution, clearance, 

and back office services for LPL, including services in
 

connection with the purchase and sale of mutual fund shares.
 

DC-145091.1 
KIRKATRICK & LOCKHRT 

SOUT LOBBY. 9TH FLOOR 

180 M ST N~. BOON, MA 

WASHINGIN, D.C. 20036-5891 HASBURG, PA 

TEHONE (202) 778-90 

MII, FL 

NE YORK, NY 1E +4209 K1 DC UI 

ROBERT C. HACK 

EAIMIL (202) 778-9100 

PITBURGH, PA 

(202) 778-9016 1940 Act/22 (d) 

June 6, 1994
 

Dorothy M. Donohue
 

Assistant Chief Counsel
 

Division of Investment Management
 

Securities and Exchange Commission
 

450 Fifth Street, N.W.
 

Washington, D. C. 20549
 

Re: Linsco/private Ledger Corp.
 

Dear Ms. Donohue:
 

We are writing to you on behalf of our client, Linsco/ 

Private Ledger Corp. ("LPL"), to request that the staff of the 

Division of Investment Management of the Securities and Exchange 

Commission ("commission") advise LPL that it would not recommend

any enforcement action based on section 22 (d) of the Investment 

Company Act of 1940 ("1940 Act") if LPL charges its customers a 

per transaction charge to cover clearing, custodial, and

customer-level accounting services provided by Pershing, a 

division of Donaldson, Lufkin & Jenrette Securities corporation 

("Pershing"), in connection with investments in certain mutual


funds and receives Rule 12b-1 fees from those mutual funds, all
 

as described below.
 

STATEMENT OF FACTS
 

LPL is a broker-dealer registered under the Securities
 

Exchange Act of 1934 and is a member of the National Association
 

of Securities Dealers, Inc. and the Boston Stock Exchange. LPL
 

is also an investment adviser registered under the Investment
 Advisers Act of 1940. Pershing provides execution, clearance, 

and back office services for LPL, inCluding services in
 

connection with the purchase and sale of mutual fund shares.
 

DC-145091.1 
KIRKATRCK & LOKHT 

Dorothy M. Donohue
 

June 6, 1994
 

Page 2
 

The LPL strategic Asset Management Program
 

LPL's strategic Asset Management ("SAM") account is a
 

flexible fee-based asset management account available to
 

investors with a minimum investment of $25,000. Through the SAM
 

account, investors may invest in no-load and load waived mutual
 

funds, individual stocks and bonds, and options (buying puts and
 writing covered calls only). Subject to certain restrictions, 

investors may bring existing mutual fund and individual security
 

holdings into the SAM account to be consolidated with new
 

purchases. In the case of individual security holdings and
 

mutual funds purchased wi thin the previous two years in an LPL
 

brokerage account that are transferred to the SAM account, the
 

customer may be entitled to a credit for a portion of the SAM
 

Account Fee if an LPL investment representative earned
 

commissions on the securities or if the securities might
 

otherwise be liquidated prematurely.
 

Under the SAM program, LPL acts for its customers as an
 

agent through which they may purchase or sell shares of over
 

eight hundred no-load and load waived mutual funds. LPL provides
 

its customers with investment advisory services, periodic account
 

statements, quarterly performance reports consolidating their
 

income, gain and performance information, recordkeeping, and
 

other services. It also provides in-house trade processing
 

through a trade desk and a centralized computer linkage to its
 

network of investment representatives, who are primarily
 

responsible for accepting and placing their customers' orders.
 

No commissions are paid for the purchase and sale of securities


in the SAM accounts. 
 currently , LPL receives no 12b-1 fees in

connection with mutual fund shares purchased in the SAM accounts.
 

LPL clears SAM account transactions through pershing.
 

Pershing provides LPL's customers with clearing, custodial, and
 

customer- level accounting services in connection with
 

transactions in their SAM accounts. In addition, during any
 month that there is acti vi ty wi thin their account, investors will 

recei ve from pershing a monthly account statement showing account
 acti vi ty as well as positions held in the account at the month 

end, and any required conf irmations of transactions that occur
 within the account. Investors with inactive accounts will

recei ve quarterly account statements. 

In order to cover the costs of the clearing, custodial, and


customer-level accounting services provided by Pershing in 

connection with investments by SAM account customers, including
 

purchases and sales of mutual fund shares, LPL pays Pershing a
 
KIRKATRICK & LOCKHT 

Dorothy M. Donohue
 

June 6, 1994
 

Page 3
 

service fee on each transaction executed on behalf of SAM account
 

investors. 

current fee arrangement
 

LPL currently charges SAM account customers a standard
 

asset-based management fee in return for advisory, research and
 

related analytical services provided to SAM account customers.
 

The amount of this fee varies, up to a maximum of 2.2 %, depending
 

on the dollar value of assets under management in each account in
 

accordance with a fee schedule set forth in LPL's Form ADV. LPL
 

pays a substantial portion of this fee to its investment
 

representatives that are responsible for managing the customer
 

accounts affected. LPL also imposes a charge for processing
 

transactions in the SAM accounts. In the case of mutual fund
 

transactions, the charge is $20 for each purchase or redemption
 

of no-load and load-waived fund shares, and for each redemption
 

of load fund shares transferred by customers into their SAM
 

accounts. LPL pays a portion of this charge to Pershing for each
 

purchase or redemption of no-load and load-waived fund shares,
 

and for each redemption of load fund shares to compensate
 

Pershing for its clearing, custodial, and customer- level
 

accounting services to the SAM accounts. LPL retains the balance
 

of the fee to compensate it for reporting, recordkeeping, and inhouse trade processing services in connection with SAM account
 

transactions and its development of promotional and educational
 

materials for use by its investment representatives in connection
 

wi th the servicing of their customer accounts.
 

proposed fee arrangement
 

LPL proposes to continue its asset-based management fee for
 

the SAM accounts at its current level, but to eliminate the
 

transaction charge for mutual fund transactions. To compensate
 

LPL for its various administrative, in-house trade processing,
 

and promotional and educational services, which previously were
 

covered by a portion of the transaction charge, LPL proposes to
 

enter into agreements with certain mutual funds, shares of which
 

are available through LPL's SAM accounts, pursuant to which LPL
 

will provide such services in return for fees paid by those funds
 

under Rule 12b-1 plans ("12b-1 Fees"). The 12b-1 Fee as to each
 

fund would be calculated as a percentage of assets held by SAM
 

account customers in the fund, and it would be up to the funds to
 

determine whether payments would be made by the fund, its
 

manager, or its distributor.
 

To compensate Pershing for its clearing, custodial, and
 

customer- level accounting services in connection with the SAM
 
KIRKATRCK & LOCKHT 

Dorothy M. Donohue
 

June 6, 1994
 

Page 4
 

accounts, LPL. proposes to charge SAM account customers a per
 

transaction services charge ("Support Services Fee") for each
 

purchase or redemption of no-load and load-waived fund shares,
 

and each redemption of load fund shares. LPL intends to
 

negotiate a Support Services Fee with Pershing that will be
 

comparable to rates charged by other providers of similar
 

services. LPL will not receive any portion of the support
 

Services Fee. The proposed support Services Fee will be fully
 

disclosed to SAM account customers.
 

DISCUSSION 

LPL believes that its proposal to collect 12b-1 Fees and
 

charge a Support Services Fee on the purchase and redemption of
 

mutual fund shares in the SAM accounts would comply with the
 

terms of section 22 (d) of the Act. LPL also believes that the
 

proposed fee arrangement with respect to the SAM accounts is in
 

accord with the prior no-action letters issued by the Commission
 

staff granting favorable relief to brokers that charge
 

transaction fees in connection with the purchase and sale of no-


load and low load mutual fund shares.
 

Background
 

section 22 (d) of the 1940 Act generally prohibits mutual
 

funds, underwriters, and dealers from selling fund shares to the
 

public "except at a current public offering price described in
 

the prospectus." For many years, the Commission viewed the
 

imposition of any charge for transactions in shares of no-load
 

funds as a violation of section 22 (d) because of prospectus
 

representations concerning no-load status. In 1974, however, the
 

Commission authorized the Division of Investment Management staff
 to view favorably interpretative requests with respect to 

proposals that brokers that act independently of funds and their
 

underwriters be permitted, under certain circumstances, to charge
 

reasonable fees for sales-related services rendered in connection
 

with transactions in shares of no-load funds. The Commission
 

stated that permitting such charges would provide brokers with an
 

incenti ve to recommend no- load fund shares somewhat comparable to
 

that existing with other securities, and would compensate brokers
 

for services rendered in connection with no-load purchases.Y
 

Because the broker would be compensated for the purchase or sale
 

of shares by their customers, not by the fund or its distributor,
 

Y See SEC Announces Mutual Fund Distribution Proqram, 

Investment Company Act Release No. 8570 (November 4, 1974).
 
KIRKATRCK & LOCKHT 

Dorothy M. Donohue
 

June 6, 1994
 

Page 5
 

the Commission concluded that they would be acting as brokers,
 not as dealers in violation of section 22 (d) . 

Thereafter, the Commission staff advised various brokers
 

that it would not recommend enforcement action if the brokers
 

charged transaction fees for services in connection with the
 

purchase and redemption of no-load fund shares.Y In at least
 

one letter, the staff has taken the position that it would not
 

recommend enforcement action if a broker charged a transaction
 

fee for sales-related services in connection with the purchase
 

and redemption of low-load fund shares where no load reallowance
 

was paid to the broker. See Charles Schwab & Co. (pub. avail.
 

Feb. 2, 1987). Recently, the staff also took the position that it
 

would not recommend enforcement action if a broker-dealer charged
 

certain active traders in investment company shares transaction
 

fees for effecting purchases and redemptions of the shares while
 

also receiving fees pursuant to Rule 12b-1 plans from those
 

investment companies designed to compensate the broker-dealer for
 

non-sales-related services, such as shareholder recordkeeping and
 

transfer agent services. Charles Schwab & Co. (pub. avail. Aug.
 

6, 1992) ("schwab IV").
 

Selling dealers~and others in a mutual fund's distribution


network would be prohibited under section 22 (d) from charging a 

sales-related fee that was not disclosed in the fund's
 

prospectus. Thus, in each of these no-action letters, the staff
 

has emphasized that the broker must be independent of the fund's
 

regular distribution network in order to ensure that the sales-


related transaction fee imposed by the broker would not be viewed
 

as being related to the distribution of the fund shares. See,
 

~, Kidder, Peabody & Co. (pub. avail. Mar. 30, 1987). The
 

staff has also emphasized that an investor should not be charged
 

twice for the same services (i. e., "double dipping"), which could
 

occur if the investor both paid for distribution costs through a
 

sales load or distribution-related 12b-1 fees and paid an
 

additional sales-related transaction fee that covered the same
 

distribution costs. See,~, Olde & Co., Inc. (pub. avail.
 

Aug. 31, 1984).
 

Under LPL's proposal, LPL would enter into agreements with
 

the funds in accordance with Rule 12b-1, pursuant to which LPL
 

would provide in-house trade processing, account recordkeeping,
 

Y See,~, Charles Schwab & Co. (pub. avail. Feb 8, 1982); 

Fahnstock & Co. (pub. avaiL. Dec. 22, 1974)'; Rose & Company
 

Investment Brokers, Inc. (pub. avail. June 23, 1986); First
 

American Investment, Inc. (pub. avail. Dec. 18, 1985).
 
KIRKATRCK & LOCKHT 

Dorothy M. Donohue
 

June 6, 1994
 

Page 6
 

and administrative services, and promotional and educational
 

information to its investment representatives and their


customers. LPL also may have selling dealer agreements with a 

number of the funds available for purchase through SAM accounts
 

that provide sales load waivers for SAM account purchases, as
 

well as with load funds whose shares have been transferred into
 

SAM accounts by customers. Thus, LPL might be considered a part
 

of the distribution network for at least some of the mutual funds
 

offered through the SAM accounts. LPL's proposal, however, will
 

be consistent with section 22 (d) and the above-mentioned no-


action letters because LPL will not charge any additional sales-


related transaction fee on purchases and sales of fund shares in
 

the SAM accounts and will not engage in double dipping.
 

The support Services Fee charged by LPL will be paid
 

entirely to Pershing for its clearing, custodial, and customer-


level accounting services. The amount of the Support Services
 

Fee would remain fixed at the same per transaction rate for all
 

SAM account customers regardless of the size or frequency of a
 

customer's transactions. It is calculated on a per transaction
 

basis because the clearing, custodial, and customer-level
 

accounting services provided by Pershing are generally triggered
 

by activity within an account. Thus, a customer is charged for
 

Pershing's services only to the extent that the customer, through
 

purchase or redemption acti vi ty wi thin its account, requires the
 

clearing, custodial, and customer-level accounting services that


Pershing provides. 

The support Services Fee in no way resembles a commission or
 

sales charge paid to a broker for sales-related services, since
 

no portion of the fee will cover sales-related activities.
 

Although, in performing its clearing services for the SAM
 

accounts, PerShing receives from LPL's central in-house trade
 

processing facility customer buy and sell orders, transmits them
 

to the funds, and undertakes to ensure that deli very and payment
 

are properly carried out, Pershing does not sell or redeem fund
 

shares on behalf of SAM customers. LPL performs the fundamental
 

sales- and redemption-related services for the SAM accounts. For
 

example, LPL, through its various investment representatives,
 

markets the mutual funds available through the SAM accounts,
 

gathers investment information from the customers, recommends and
 

implements the appropriate mutual fund investments for the
 

customers, takes customer buy and sell orders, and processes all
 

orders through its trade desk and execution system for ultimate
 

clearance through Pershing. LPL will not charge its customers


any sales-related transaction fee for these' services or retain 

any portion of the support Services Fee paid to Pershing.
 
KIRKATRCK & LOCKHT 

Dorothy M. Donohue
 

June 6, 1994
 

Page 7
 

Furthermore, under the proposal, LPL would not receive
 

compensation that would constitute double payment for the same
 

services. The 12b-1 Fees received by LPL would compensate LPL
 

for performance reporting, in-house trade processing,
 

recordkeeping, and the promotional and educational materials
 

provided to its investment representatives and their customers.
 

The support Services Fee charged to SAM account investors would
 

be paid entirely to pershing to cover its clearing, custodial,
 

and customer-level accounting services. Although the support
 

Services Fee would be calculated on a per transaction basis, it
 

does not cover any services already paid for as part of a fund's
 

sales load or 12b-1 fees. See Schwab iv. Thus, LPL's proposal
 

to charge a Support Services Fee and accept 12b-1 Fees would not
 

result in LPL being compensated twice for the same sales-related
 services. 

In granting no-action relief in Schwab iV, the staff allowed
 

Schwab to charge transaction fees for effecting purchases and
 

redemption of mutual fund transactions on behalf of certain
 

customers, while receiving 12b-1 fees from those funds. The
 

staff did not "view the shareholder subaccounting, and transfer
 

agency services (provided by Schwab in return for 12b-1 fees) as
 

being incompatible with Schwab acting solely as broker." Thus,
 

the staff did not consider such services to be equivalent to the
 

sales-related services offered by dealers. LPL believes that the
 

same analysis permits LPL to both accept 12b-1 Fees to cover its
 

recordkeeping, in-house trade processing, and sales-related
 

promotional and educational services and to charge its customers
 

a per transaction support Services Fee to cover the non-salesrelated clearing, custodial, and customer-level accounting
 

services provided by Pershing.
 

CONCLUSION 

LPL's SAM account program provides LPL's customers with a
 

much more efficient means of buying and selling mutual fund
 

shares than can be obtained by dealing directly with the funds
 

themselves. In addition, it offers investors special services
 

that more easily allow development of personal financial
 

portfolios directed toward fulfilling customers' particular
 

investment needs. The acceptance of 12b-1 Fees from the funds
 

will result in lower transaction costs for the SAM accounts;
 

therefore, under the proposed fee arrangement, LPL will be able
 

to provide SAM account customers, at lower cost, with services


equivalent to those they currently enjoy. Ìf LPL is denied
 

reasonable compensation for managing the program and ensuring
 

that investors receive efficient and effective clearing,
 
KIRKATRCK & LOCKHT 

Dorothy M. Donohue
 

June 6, 1994
 

Page 8
 

custodial, and customer-level accounting services with respect to
 

mutual fund share transactions, it may be compelled to limit the
 

full range of services it provides to SAM account customers.
 

Such a result would in no way further the cause of investor
 

protection that the 1940 Act, including section 22 (d) thereunder,
 

was designed to promote.
 

LPL hereby respectfully requests that the staff advise that
 

it would not recommend to the commission that any action be taken
 

if LPL institutes the fee arrangement described above. If you
 

have any questions, require further clarification, or are
 

disinclined to issue the requested no-action letter, please call
 

the undersigned at (202) 778-9016. Thank you for your attention
 

to this matter.
 

Sincerely,

~~ 

Robert c. Hacker