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OCT 28 '986 .

( OUr Ref. ll). 86-264-CC

Clover capi tal Management, Inc.

File ~. 801-27041

RES~SE OF THE OFFICE OF CHIEF CXXJNSEL

DIVISION OF INVES'lMENT MANAGEMENT

Your letter of June 3, 1986, requests our assurance that lile would not

ACOIIIDend any enforcement action to the Cori1nission under Rule 206(4)-1(a)(5)

of the Investment Advisers Act of 1940 ("Act") if Clover capital Management,

Inc. ("Clover"), a registered investment adviser, uses investment results

derived from a "model" portfolio in advertisements (hereinafter "model results").

As described mre fully in your letter, the model portfolio was established by

Clover on January 1, 1985, and consists of the same securities that Clover

reconmended to clients during that time period. As your letter notes, Clover's

investment approach incorporates the philosophy that all of its clients

should invest in the same securities, with variances in specific client

objectives being addressed via the asset allocation process (Le., the relative

lileighting of stocks, bonds, and caf¡h equivalents in each accoünt). 1'hus,

while the D:X3el results do not correspond directly to the results achieved by

any actual client account, Clover has managed the inc:idel portfolio with the same

investment philosophy it uses for client accounts. Because of the significant

degree of interest in this issue, and in the related issue of advisers usiD3

actual investment results of client accounts under management in advertisements

(hereinafter "actual results"), w wish to take this opportunity to set forth

the staff's views on these issues.

(i. section 206 of the 

Act prohibits ,certain transactions by any invesbnent

adviser, whether registered or exeinptfrom registration pursuant to section

203(b) of the Act. Under paragraph (4) of section 206, the COIrmission has

authority to adopt rules defining acts, practices, and courses of business

that are fraudulent, deceptive, or manipulative. Pursuant to this authority,

the Commission adopted Rule 206(4)-1, which defines .the use of certain specific

types of advertisements 1/ by advisers as fraudulent, deceptive, or manipulative. 2/ Although the-rule does not specifically Prohibit an adviser from

using ioodel,. ,or actual results, or. prescribe the manner of advertising these

results, paragraph .'(5) of the rule makés it a ,fraudUlent, deceptive, or manipulative act for any:investment adviser to, distribute, . directly or indirectly,

any advertisement ~at co.ntains apy untrue statement of a material fact or that

1/ Rule 206(4)-Úb)gen~r~lly de',fines än "adverti~ment" to include

any cámiunieation addresaed:to riDre ~than one persan tilat offers any

investment adviaory service ~th regard to secur~ties. - " . ' ..; '. ';' , :. - . -" . ~ - ' '

y For 'e~~e, :Ru1~~206(4)-l'p~lii#its :'an,adviserfJ;'Qrn using advertisements

thatiricludè. teåtilOOníals (paragraph. (an or that ,refer to past specific

recoriinendations unless cer~ln informatioñ 'is provided (paragraph (b)).

1tiestaff is currently"xeviewtD;i Rule 206(4)-~ ~ detennine whether it

needs to.be revised or updated. See Investment Adviàers Act ReL. ~.

1033 (Auej: 6, ''¡986). -' '., ,.' - )-

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Effective November 4, 2022, This Letter is Withdrawn. Please consult the 

following web page for more information: 

https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
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is otherwise false or misleading. Y Accordingly, the applicable legal

standard governing the advertising of model or actual results is that contained

in paragraph (5) of the rule, Le., whether the particular advertisement is

falae or misleading. 4/ - -

The staff no longer takes the position, as it did a number of years

ago, that the use of DDdel or actual results in an advertisement is J2!E ~

fraudulent under section 206 ( 4) and the rules thereunder, particularly Rule

206(4)-1(a)(5). 5/ Rather, this determination is one of fact, and we believe

the use of model-or actual resul ts in an advertisement would be false or -=

misleading under Rule 206(4)-l(a)(5) if it implies, or a reader would infer

from it, something about the adviser's competence or about future investment

results that would not be true had the advertisement included all material.----- -

facts. 6/ Any adviser using such an advertisement must ensure that the 1:'-

advertiãement discloses all material facts concerning the m::x3el or actual

results so as i:oavoid-these unwarrañte'd'implications or inferences. 7/

Because of the factual nature of the deterriiination, the staff, as a matter of

policy, does not review any specific advertisements. 8/ 1'herefore, we express

no opinion regarding your proposed advertisements. - ,

In order to assist advisers who advertise ioodel or actual results, we

wish to take this opportunity to set forth certain advertising practices the

staff believes are inappropriate under Rule 206(4)-1(a)(5). The list is not

ï

'li As a general matter, whether any advertisement is false or misleading will

depend on the particular facts and circumstances surrounding its use,

including (1) the form as wll as the content of the 'advertisement, (2)

the implications or inferences arising 'out of the advertiBment in its total

context, and (3) the sophistication of the prospective client. see,

!..g,., Covato/Lipsitz, Inc. (pub. avaiL. OCt. 23, 1981)("COvato") ~ Edward F. O'Keefe (pub._~vaii. ,Apr. l3,.. 1978)("O'K~fe"b. Anametrics Investment

Management (pub. avail'" May 5, 1977)(.flAnametrics").

4/ Of course, if an' advertisement containïng iOOdel or...:actual results also

includes any of the sPecific advertising practices addressed by paragraphs

(a)(1)-(a)(4) of Rule 206(4)-1, the advertisement would have to comply

with the ,requirements, of these paragraphs. ~ - ::.. '.. , -:,.:.: -,' .~ ~ '-,...; ..

§l ~/ e.2,'" -A.R.- sa.hmeidler & 'CO. '(Í:iub. avail...' .June J, 1976)~, 'SChield Stock .s~rvices" .~c. (~., ,av:aiL Felj. ~6, :,~972). , '

§/ ~,' !.'~:i':, Arlametricí:ï, cOvato, ãtid Ô''Keefe, 'supra riÒt~ ~.

7/ Id.

8/ .§!!, !..g,., Anametrics, supra note 3.

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intended. to address all advertising practices prohibited by Rule 206(4)-l(a) (5)

and does not create a -safe harbor" that may be relied upon by an adviser as

an exclusive list of the factors that must be considered in determining the

type of disclosure necessary when advertisiD3 model or actual results. Items

(1)-(6) below apply to both mdel and actual results~ Items (7)-(lO) apply to

mdel resul ts ~ and Item (11) applies to actual results.

In the staff's view, Rule 206(4)-1(a)(5) prohibits an advertisement

that:

Model and Actual Results

(1) Fails to disclose the effect of material market or economic

Ai .:,..., ,', ,condit~ons.On ,~' resul~,portra~e3 (!..s.., an adver~ise~nt" stating that the accounts of the adviser's clients appre- ¿ r

ciated in value 25% without disclosing that the market

generally appreciated ~oi during the same per'iod) ~ 9/

¡:w'(2) includes model or actual ~sultsthat do not reflect the deduction \

of advisory fees', 'brokerage or other coimiissions, ánd any other )

expenses that a client would have paid or actually paid~

.....

(3) Fails to disclose whether and to what extent the results portrayed )

reflect thereinvesbnent of dividends ~nd oth.e.r earnings~ r'O .' ,j' ,'; ,

(4) Suggests or makes claims about the potential for profit without

also disclosing the possibili ty of loss ~ lO/

-::.. ,(5) Ckimpares IOOdel or actual resul ts to an .index wi thout disclosing all \

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material facts relevant to the comparison (!.s.. an advertisement

that canpares rodel results to an index without disclosing that

the volatility of the index is materially different from that of

the model portfolio) ~ 11/:-,' · ' ,

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,(6) Fails to disclose any material cond.itions, objectives, or

investment strategi~su~ to ob,tain the results portrayed (!..s.., "

the model portfolio contains equity stocks that are managed wi th i

a view towards capi tal appi::eciation) ~ I '. ~ !. \

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!!li .§!! F. Eberstadt & Co., Inc. (pUb. avail. July 2, 1978).

11/ see,!.. 9,.' Anametrics, supra note 3~ Multinational Investments, Inc (pub.

avail., sept'. 17, 1977)-. ',- .-.

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ft)del Results

(7) Fails to disclose prominently the limitations inherent in model

results, 12/ particularly the fact that such results do not

representactual trading and that they may not reflect the impact

that material economic and market factors might have had on the

adviser's decision-making if the adviser wre actually managing

clients' money~

(8) Fails to disclose, if applicable, that the conditions i objectives,

or investment strategies of the model portfolio changed materially

during the time period portrayed in the advertisement and, if so,

the effect of any such change on the results portrayed;

(9) Fails to disclose, if applicable, that any of the securities

contained in, or the investment strategies followed with respect

'1:0, the mdel portfolio do not relate, or only partially relate,

to the type of advisory services currently offered by the adviser

(.!.s.., the model includes some types of securities that the

adviser no longer recooinends for its clients) ~ l3/

(10) Fails to disclose, if applicable, that the adviser's clients

had investment results materially different from the results

portraYed in the model ~

Actual Resul ts

(11) Fails to disclose prominently, if applicable, that the results

portraYed relate only to a select group of the adviser's clients,

the basis on which the selection was made', and the effect of this

practice on the results portrayed, if material. 14/

12/ Wi th respect to, I'IDdel -resul ts, the staff recognizes' tha t advisers may

,wish to advertise model results derived from model portfolios that

differ in form and structure from that presented by your letter. we

believe that to the extent it is, more difficult"to verify or objectively

, , - test the criteria underlying the nodel portfolio in question, the disclosure obl-igation of the adviser would correspond~ngly increase. - '

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W .§!!., .!.,9..:' Oovato, supra note 3.

!!I ~, !..,9.." O'Keefe, supra note 3.

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We wish to emphasize that: (l) it is the responsibility of every

adviser using model or actual results to ensure that the advertisement is not

false or m1sleading~ (2) the list set forth above of advertising practices

the staff believes are prohibited by Rule 206(4)-l(a) (5) is not intended to

be all-inclusive or to provide a safe harbor~ and (3) the staff, as a matter

of policy, will not review specific advertisements.

As we agreed, this response will be made public immediately. ~f~

'lhomas P. Lemke

Chief COunsel

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CAPITAL

~1Ai~AGEl\1ENT

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June 3, 1986

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vallob1l1ty / ~/2!..t:'!.f.-..",-,*- .... Mr. Thoiaas P. Leake

Chief Counsel

Division of Investment Management

Securities & Exchange Commission

450 5th Street N.W.

Washington, D.C. 20549

Dear Mr. Lemke:

Clover Capital Management, Inc. is an investment counseling

firm registered with the S.E.C. under the Investment Advisors

Act of 1940. I have enclosed a copy of a letter we recently

received from Mr. Frank Morrison of the S.E.C. 's New York

City office informing us that our use of a Model Pertfolio

for tracking the firm's investment record viòlate~ule 206

(4 )-1(a)(5). In a subsequent telephone conversation with Mr.

Dolan, an associate of Mr . Morrison's, we were made aware

that yòur office has the authority to rule on such matters on

a case-by-case basis and to issue "No Action Letters", where

warranted. Please consider our case based on the following

information:

1. Clover Capital Manageme'nt, Inc. is an investment

management firm founded in October, 1984 by Michael E. Jones,

CFA and Geoffrey Rosenberger, CFA. We had several very

successful years experience as investment analysts and

portfolio 'managers at the firm of Manning and Napier'

Advisors, Inc.. In starting ~ur new. firm~ we were faced with

the dilemma of providing prospective clients with an

understanding' otour prior and current investment results and

style of management. In dealing with this problem, we

aspired ~o maintain the highèst possible ethical standards.

Thus, we have not represented our previous firm's record as

__ _ _ our own or..&8 an indic:.ation.of-Clover Capital

Management's ability. We have choosen to forego discussion

~ d of our specific results on clients prior to forming Clover Capital.., '...' - - I

...~:.

However, as ,y~u, know, the issue of demonstrating the firm's

~.. . competence' and style of management is important in presenting

='''our service'to prospective clients. Our problem is to find a

way to show what we are doing in our research and management

effort at Clover Capital Management, Inc., without violating

client confidentiality and without misrepresenting our

performance to the public. ,

Clover Capitil1 Management, Inc. . 5 Tobey Village Office Park · Pittsford, New York 14534 · (716) 385-6090
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One approach to this problem involves presenting the performance

achieved among our account base. However, the securities markets

have been quite volatile in the past 18 months and our client

base has grown consistently each month. As a result, a

portfolio that started in January, 1985 has different results

than one we began in September, 1985. To take an arithmetic

average of each client's actual results and present that as the

firm's track record would be misleading due to the significant

standard deviation from client to client based on date of entry

to our firm's management.

On the other hand, to jus t pick one or two client portfolios

would be equally misleading because of differences in the timing

of cash flows, specific client objectives and other

considerations which may be unique to a small sample of accounts.

We recognized at the outset that this would be the case. We also

recognized this presentation of results would not satisfy

questions on portfolio construction and investment style with

respect to diversification, portfolio beta,' asset allocation and

related items. The raw results would also be impossible to

verify without violating client confidentiality.

The most accurate, verifiable reflection of our true investment

product, in light of these circumstances, was to establish a

Model Portfolio as of January 1, 1985, 'which we would manage

exactly as we would a tax-exempt client portfolio with no

restrictions as to income and without any cash flows into or out

of the fund.

2. The securities purchased and sold in the Model Portfolio are

also purchased and sold in our client accounts under management

at the time of the transaction. It is important to note that our

investment approach incorporates the philosophy that all of our

clients should own the same stock selections, with variances in

specific client objectives being addressed via the asset

allocation: process (the relative' weightings of stocks, bonds and

cash equivalents in each account). For example, when we make a

decision to invest in a common 'stock, we also decide what

percentage of' each client's assets we wish to commit to that

particular ~quity; Differences ,in client objectives are

reflected'ln' the weight1li8s pla'êed for" each' account. 'Most of our

accounts are tax exeupt retirement funds with conservative

. objeetives, and tbereforereceive similar weightings. However

, some clients have differing objectives due to current income

_-,' requirementa-,~ .oral-considerations, tax considerations, "equities

only" restrictions, and other factors which may alter the

weightings in specific investments. The Model Portfolio

weightings are determined according to it's stated hypothetical

structure as a conservative pension fund.

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3. We have taken extensive steps to insure that the reporting

format is an objective one. The independent accounting firm of

Davie. Kaplan & Braverman was hired to audit our efforts in this

effort. To place a purchase or sale transaction. we call Davie.

Kaplan & Braverman prior to the 9:30 a.m. market opening. All

transactions are assumed to occur at the prior day's closing

price as listed in the Wall Street Journal. which Davie Kaplan &

Braverman can easily verify. Commissions are charged against

each transaction based on a 35% discount from the Cowen & Co.

commission schedule. which is roughly the same commission expense

level we incur in our client accounts. Investment management

fees are also charged against the portfolio in line with our

standard client fee schedule.

4. In addition to monitoring the purchase and sale transactions

in the Model Portfolio. Davie. Kaplan & Braverman also accounts

for the dividend and interest income. commission charges and

investment management fee reimbursement in the portfolio. The

quarterly investment performance reports are also compiled and

issued by Davie Kaplan & Braverman. not by Clover Capital

Management. Inc. There is a measure of independence and

objectivity to our Model Portfolio Report and its calculations

which may be lacking in the investment performance figures

reported by other investment management firms.

5. We feel it is important that prospective clients see how the

investment returns being presented to them were achieved. Use of

the Model Portfolio allows people to see what stocks we hold and

what the recent transaction activity in the account has been.

They can develop a feel for our investment style that would

otherwise be difficult to achieve prior to entering into a

relationship with our firm.

6. The only reference the report makes to investment results is

on an absolute return basis. The report only records a

percentage increase in asset value. It makes ~ comparisons to

any stock or bond market indexes.

We believe that. for the above reasons. our Model Portfolio

report provides an excellent proxy for our investment approach

and track record. However. we also understand the Commission's

concern about the potential for misunderstanding of the Kodel' s

purpose on the part of the public. Therefore. we are willing to

incorporate the following statement (or a similar version which

you may prefer) into our report:

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"The Clover Capital Management, Inc. Model Portfolio

represents a fictional account which Clover Capital

Management. Inc. ("CCM") attempts to manage in a manner

similar to that of a tax-exempt client fund with no need for

special portfolio considerations. The investment objective

for this portfolio over a four year time period is to

exceed, by at least 3%. the compound annual rate of return

available on a Treasury Note with a four year maturity and

at the same time to limit volatility in such a way as to

avoid the incurrance of a negative return during any calendar

year.

It is CCM's intention to own the same securities in each

client portfolio with similar objectives. Securities

transactions will not be undertaken in the Model Portfolio

until at least half the eXisting accounts under management

have completed the contemplated transaction. However,

circumstances such as market fluctuations may exist which

may prevent an individual CCM client from owning one or more

of the specific securities held in the Model Portfolio.

Since the account is fictional, there can be no assurance

that a CCM client would have achieved similar rates of return

over the same time frame. In addition, since the time period

in question is a historical one, there can be no assurance

that future results achieved by the firm's clients will in

any way resemble those represented by the Model Portfolio."

We believe that use of the Model Portfolio is the most valid

approximation we can provide a prospective client as to what our

investment activity has been since January 1, 1985. While no

form of investment performance measutement 1s entirely without

fault, of all those available to us this approach is the one

which provides the least amount of bias. We therefore

respectfully request that you confirm that _you will not recommend

enforcement action if we continue to use the Model Portfolio in

the manner stated in this letter and with the explanatory and

disclaimer language found in -the enelosed Model Portfolio copy.

Your assistance'in this matter is most appreciated. If you have

any questions. :-please, eall either 1Ie',or Kichael E. 'Jones, at

716-385-6090. ~ - :.

3Z7~ . /2t-~l~~y~ Clover caPit~M4nagement, Inc.

by Geoffrey Rosenberger, President,

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